04/13/2011 10:00 am ET Updated Jun 13, 2011

Show Me the Money -- Obama vs. Ryan

Now that a government shutdown has been avoided, the debate in Washington is turning to what else can be cut from the federal budget. Both the president and the Republicans have to show us the money. The president is making a major policy proposal this week, and the Republican proposal, "The Path to Prosperity", to which I alluded in a previous post about Medicaid last week, has now been released as well. The two approaches could not be more different.

Republicans will talk a big game about their solutions, but the reality is that the prosperity they promise will be for those who already have it. Their proposals keep tax cuts for the wealthy but slash and privatize programs for the old and the poor. In contrast, the president will ask those of us who have more to give more. Some will undoubtedly call it socialism. But it could just as easily be labeled as tax reform or means testing, something we're already doing it in Medicare, which has a means tested Part B premium. More importantly, the president's proposal will include cutbacks in military spending and reforms in both the Medicare and Medicaid programs that will attempt to address the root of the problem, instead of blaming the beneficiaries and shifting costs to them.

What are the Republicans proposing? The two aspects of the Republican proposal that are the most controversial are their proposals to cut Medicare and Medicaid. As I explained last week, Medicare is the insurance program for people over 65 and the disabled. Medicaid is the insurance program for some types of poor people, not all, and mostly children and people in nursing homes. These programs are becoming more and more costly, mainly because of the way we pay doctors and hospitals (the more they do they more we pay) and partly because of the aging and chronically ill population that uses these programs.

What we will hear most about is Rep. Ryan's idea of turning Medicare into a voucher program. This is not a new idea. Ryan calls it "premium support" but according to those who originally defined the terms (i.e. Robert Reischauer and Henry Aaron), it's really just a cross-dressing voucher program.

Reischauer and Aaron recommended years ago that Medicare become what is called a "defined contribution" program with "premium support". That simply means that government provides a fixed amount for your insurance and you pay the rest. But while the Reischauer/Aaron "premium support" idea was indexed to health care costs and inflation, so that the lowest cost plan would actually cover you for something as costs went up, the Republican plan sets the government support using an economic index, not the cost of health care. And guess which index increases faster? Most folks don't realize that current Medicare beneficiaries already pay for a quarter of their health care costs. Under the Ryan and Republican plan:

The CBO estimates that by 2030 the House Budget Committee plan would increase the out-of-pocket share of health care spending for a typical Medicare beneficiary from the current 25-to-30% range to 68%.

To turn Medicare into a voucher program would be to toss the elderly into a very cold pool indeed, where their vouchers would soon be outstripped by rising health care costs. And the potential for fraud and abuse by insurance companies and providers would be significant.

Dr. Aaron now concludes:

I now believe that even with the protections we set forth, vouchers have serious shortcomings. Only systemic health care reform holds out real promise of slowing the growth of Medicare spending. Predicted savings from vouchers or premium support are speculative. Cost shifting to the elderly, disabled, and poor and to states is not... (the) success of premium support depends on sustained and rigorous regulation of plan offerings and marketing that the current Congress shows no disposition to establish and maintain.

As Ezra Klein points out, we are actually having a debate over the wrong issue. It's not all about insurance. It's about keeping costs down in the way health care is delivered. For all the hoopla about health reform, the Affordable Care Act has many features embedded in the Medicare provisions about how to do exactly that, and the Republican proposals would repeal ALL of those.

The basic theory of Ryan's plan is that you can control costs by focusing on the insurance system. Seniors become consumers and their decision-making holds down costs. The Affordable Care Act has a lot of the same insurance-system reforms that Ryan does, but the basic theory of that plan is you control costs through the care delivery system. It's about knowing what treatments work and what treatments don't, paying for value rather than quantity, cutting down on unnecessary readmissions and errors, doing more to manage chronic diseases, etc.

It's only once you can do all that that exchanges really become useful, because then and only then will insurers -- be they private or public -- really be able to control costs. The reason none of them really do it right now is that none of them can force hospitals and doctors to hold down costs. It's not like there'd be no competitive advantage in being the cheapest, best insurer in the country. But you can't find one example of the model Ryan proposes slowing costs to even half what Ryan predicts. That's why his plan really isn't a plan -- it's just a way to make the numbers work so he can "balance the budget" without tax increases and make some conservative changes to entitlements.

As for Medicaid, the Republican proposal for Medicaid reform is based on the idea of "block grants" that would give the federal portion of Medicaid to the states to administer in pretty much any way they see fit. This approach is based on the myth that Medicaid is a "one size fits all" plan which the federal government is imposing on the states. That is simply untrue. The current Medicaid program has hundreds if not thousands of flowers blooming in it. States are already getting waivers to try innovative new ways to deliver care, and they have a fair amount of flexibility to do that. There could certainly be more flexibility, but there has to be some protection against the kind of "flexibility" that would would allow some states to cut services for children or the disabled or the elderly.

William Galston in The New Republic piece titled "A Deficit Hawk's Case Against Paul Ryan" writes:

Ryan's plan has one incontestable virtue: It recognizes, as do many analysts outside the conservative fold, that health care costs lie at the heart of our long-term fiscal problems. But the question is what to do about them. Turning Medicaid into a block grant to the states--a key Ryan proposal--is a genuinely bad idea, because it will lead inevitably to cutbacks in care for low-income people who have nowhere else to turn, contradicting Ryan's own pledge of a "secure safety net." Under his proposal, CBO estimates, federal spending for Medicaid would be 35 percent lower in 2022 and 49 percent lower in 2030 than currently projected. What are the odds that hard-pressed states could pick up the slack? And if not, how many poor children would go without health care? How many elderly Americans without personal resources would go without decent nursing homes?

One other aspect of block grants deserves a little more attention -- in times of recession, when people who depend on Medicaid need it the most -- with block grants, the federal government would have less revenues to give to the states because of a shrinking tax base (and some of the formulas in the Ryan proposal), so the states would have less revenues to support the program at a time when more people were actually in need of coverage. According to modeling by the Urban Institute, a one percentage-point increase in the unemployment rate results in a 1 million person increase in Medicaid enrollment among children and non-elderly adults. It's not difficult to figure out the result: fewer people enrolled in the program when they need it most, less money for the doctors and hospitals who treat these patients, and fewer services covered.

While it is highly unlikely that 'The Path to Prosperity' will ever pass the Senate, much less garner the president's signature, there are elements of it that are just dangerous enough to cause some havoc in these programs. You can be sure that the Republicans will insert some of those elements into the debate to hold the Democrats hostage to the larger goals. Watch for the Republican rhetoric around "premium support" and "block grants" this week as the House votes on some of these extreme measures. It will all sound somewhat rational and logical until you realize that the Republican proposal doesn't really control costs in the health care system, it just shifts them to the rest of us. It doesn't acknowledge that it repeals the aspects of health reform that actually have a chance of bringing down costs. It keeps the wealthy wealthy by making tax cuts for the upper 2% permanent and lowering the upper tax rate to 25%. And it does not propose the kind of comprehensive approach to budgeting that the president's proposal includes, such as cuts in military spending. Which approach do you favor?

UPDATE: By the way, I wrote this blog before the President spoke. He said exactly what I thought he would say. I know and Obama knows that Medicare needs reform and the Affordable Care Act provides a lot of opportunities for that kind of fundamental payment reform. But you don't have to do that by shifting costs to the beneficiaries.