08/13/2012 03:44 pm ET Updated Aug 14, 2012

Peter Orzag: Paul Ryan's Ideas Don't Make Any Sense

Bloomberg View:

As a fellow budget wonk, I like Paul Ryan a lot. But his policy proposals fall far short of his winning personality.

Ryan, the Wisconsin representative Republican presidential candidate Mitt Romney announced today as his running mate, is both thoughtful and prolific. I could have many policy debates with him on a range of issues. Today, though, I’m going to focus on health care. Ryan’s approach to health care is somewhat akin to a doctor observing that an arm is finally showing some signs of healing -- and then deciding to amputate it.

Over the past several years, health-care costs have decelerated dramatically -- suggesting our broken arm may slowly be starting to heal. But rather than reinforcing that progress, Ryan would chart a drastically different course, one that would not only shift substantial risk to beneficiaries but also, according to the Congressional Budget Office, actually raise health-care costs.

First, the good news. A report released last week by the Altarum Institute estimates that health-care costs have risen less than 4 percent over the past 12 months. The conventional wisdom to date has been that this slowdown, which has persisted for years now, is due to the weak economy. As the economy recovers, under this view, cost increases will spike again -- and if so, Ryan’s toxic medicine could be seen as worth a try.

Doubt Cast

A growing body of evidence, though, casts doubt on this cyclical explanation. Altarum Institute researchers, in a separate report published last week in the New England Journal of Medicine, note that the slowdown predates the recession, making it difficult to argue it is solely due to the downturn. Evidence from Medicare suggests the same thing: A simple analysis shows no statistically significant relationship between Medicare spending trends across states between 2007 and 2010 and the rise of unemployment in each state over that period, suggesting something other than just the economy is at play.

Instead, as I have written, a number of structural changes -- including actual and anticipated payment reform, and the expanded use of information technology to drive clinical decisions -- are playing at least some role in slowing the growth of health-care costs. Along with others, I have put forward numerous proposals to reinforce these trends.

Our proposals have three core attributes: They build on recent progress, they recognize there is no one simple solution to increase value in health care, and they emphasize the role of providers rather than insurance companies in improving that value.

Ryan, by contrast, ignores the recent progress -- which in some sense is understandable, lest he diminish the energy for his own radically different course. Ryan is enamored with one big but wrong idea: that all we need to do is reshuffle risks and health-care costs will magically decelerate. He would shift risk onto Medicare beneficiaries through his premium support proposal and onto state governments by block-granting Medicaid. Both would rely substantially on insurance companies to make them work, and neither is likely to turn out the way he says.

Let’s start with the Medicaid proposal. Under the Ryan budget, states would receive a fixed grant to run Medicaid programs, rather than sharing in the cost with the federal government. The grants would not keep pace with economic growth, let alone with projected health-care costs. Voila! Problem fixed, right? Under current law, federal Medicaid spending is projected to rise from about 2 percent of GDP today to about 4 percent by 2040. Under the Ryan budget, it is instead projected to fall from 2 percent of GDP today to about 1 percent by 2040.

Spending Reduced

But how will this change reduce total Medicaid spending by anything like 75 percent of projected expenses? One explanation is that states will turn to insurance companies to help manage more of their beneficiaries. That is unlikely to produce anything like the necessary savings. And if it doesn’t, states will find themselves ever more on the hook for the difference.
Ryan provides no explanation for how state governments, already facing threatening fiscal gaps, will be able to handle the growing gap.

One more point: A substantial share of the apparent federal deficit reduction over the next few decades under the Ryan budget is due to this Medicaid risk shift. Without any details about how implausibly large reductions will be achieved in practice, the whole Medicaid proposal appears as a massive magic asterisk rather than a bold idea.

What about Medicare? Under the Ryan budget, after some time, the government would issue payments that would allow new Medicare beneficiaries to purchase insurance from private firms. The payments would not keep pace with currently projected health-care spending (notice a theme here?), and as a result would appear to reduce costs for the federal government.

We don’t have a full analysis from the CBO of the most recent rendition of the Ryan plan, so I’m forced to rely on CBO’s analysis of his plan from 2011. (If Ryan believes that changes to his plan since then would result in any different conclusions, he should request that CBO publish an updated analysis.)

CBO’s analysis, not surprisingly, confirms that federal expenditures under the Ryan Medicare plan would be reduced sharply. Federal payments for a typical beneficiary by 2030, for example, would be more than 20 percent lower than current projections.

But CBO also analyzed a more relevant question: What would happen to total health-care costs, including the extra costs for the beneficiaries as the federal share was reduced? Total costs are what matters, since simply shifting costs around without altering the total does not accomplish much.

Costs Shared

According to CBO, Ryan’s plan would not reduce total health-care costs. Instead, it would increase the total, because more cost-sharing for consumers doesn’t do that much to constrain spending and because private plans have higher administrative costs and less negotiating leverage than the federal Medicare program.

You read that right: According to CBO, the Ryan Medicare plan would increase health-care spending. In 2030, total health- care spending for the typical beneficiary would be more than 40 percent higher under the Ryan plan than under existing Medicare.

Again, I like Paul Ryan. But that doesn’t mean his Medicare and Medicaid ideas make any sense. They’d shift too much risk to individuals and states at a time when we’re finally making solid progress in slowing health-care costs, and the rhetoric surrounding them claims savings that are never going to materialize. That makes Ryan’s proposals problematic, unnecessary and misleading.

Read more opinion online from Bloomberg View: Does a Romney-Ryan Ticket Really Ensure Clash Of Visions? and Romney-Ryan Could Be Just the Ticket for a Useful Debate.



Romney-Ryan 2012 Soundtrack