During a major speech today at the Hoover Institution at Stanford University, Paul Ryan laid out his vision of health care reform, saying, “Choice and competition are critical to controlling costs…[and] improving quality….And yet, across the federal landscape, choice and competition are undermined by poorly designed programs and tax policies.” In other words, to fix our health care system, we need to undo the problems the government has created, rather than further empowering the government.

Ryan began by challenging his own party: “[W]hile Republicans have advanced many good ideas on health care, it is my candid opinion that the party as a whole has yet to coalesce around a complete reform agenda aimed at dealing with the underlying problem — which is runaway inflation in the cost of health care.”

Still, he offered “three pieces of good news”:

First, “The urgent need to repeal and replace the president’s health care law, coupled with the urgent need to deal with the drivers of our debt, will present us with an unavoidable time for choosing, allowing us to confront health care inflation head-on…"

Second, “[W]e know what works and what doesn’t…”

Third, “Though the political hurdles are high, we know we can win these fights.” He added, “The challenge will be to summon the courage and the ability to offer Americans a true choice of two futures,” a “defining choice:” “Who is in charge: The government or the patient?”

Ryan then explained how “[t]he health care sector lacks most of the basic building blocks of a functioning market”:

“For one thing, markets require transparent prices, so that consumers can discover value. But in health care, the ‘consumer’ is usually either a big insurance company, or the government. Health care providers have no incentive to provide transparent prices to their patients, because their patients don’t pay directly — it’s the government bureaucrat or the insurance company bureaucrat who pays the bills.

“Second, markets do not function well when consumers are insulated from marginal costs. We’re all paying more for health care, through much higher premiums and taxes. But the share we pay at the doctor’s office has plunged. The system that shields us from the cost of services, has actually left us paying much more.”

This could hardly be truer. In the private market, Americans paid for 62 percent of their health care expenditures out of pocket in 1970 (according to government figures). By 2007, that share had dropped to just 26 percent. During that time, health costs rose dramatically. Paying far less out of pocket coincided with paying far more overall.

Proponents of government-run health care like to compare the rise in private insurance costs with the rise in cost of government-run care, while completely overlooking the fact that private insurance now pays for about twice the percentage of private care that it used to (in lieu of people paying out of pocket). But if you don’t cherry pick the data, and instead compare all private costs with all public costs, the comparison is a rout: From 1970 through 2008, the per patient costs of Medicare and Medicaid rose 89 and 91 percent more than GDP, respectively — nearly doubling versus GDP — while the per patient costs of all other health care in a America rose 41 percent versus GDP.

Sensibly, Ryan’s plan would make Medicare operate a lot more like private care: “Simply put, badly designed government policies are to blame for much of what is wrong with health care today, and the solution is clear: We need to transition from the open-ended, defined-benefit approach of the past…to market-oriented, defined-contribution reforms that promote choice and competition.”

A “defined contribution” doesn’t mean that Medicare beneficiaries would receive only a given allotment of care — nor that once a certain amount of money has been spent on their care, that’s it. Rather, they’d get a certain amount of money withwhich to purchase private insurance, choosing from a list of competing insurers (rather than dealing with insurers directly). Under such a “premium support” model, seniors would get generous taxpayer support toward their insurance premiums — and far more if they are ill or poor — and they would get to pick the plan that best suits them. By increasing competition and choice — and providing incentives to offer, and to shop for, value — such a plan would lower costs without sacrificing quality.

Ryan quoted the Medicare chief actuary, who said in congressional testimony, “We’ve estimated for many years that competition among plans in a premium-support setting like this…can get you to the lowest cost consistent with good quality of care.”

As for Medicaid, Ryan said he would block-grant federal funding to the states. As for the overall health care market, he said that “patient-centered reform means replacing the inefficient tax treatment of employer-provided health care with a portable, refundable tax credit that you can take with you from job to job, allowing you to hang onto your insurance even during those tough times when a job might be hard to find.

Ryan concluded his speech by calling on Republicans to “combine political courage and clarity of purpose with faith in the American people.” He encouraged the GOP not to fear “false attacks”—“Fear and demagoguery are the last refuges of an intellectually bankrupt party.”

He summarized his proposals: “The three reforms I’ve just outlined — premium support for Medicare, block grants for Medicaid, and tax reform to correct the inefficient tax treatment of health insurance — must be present in our ‘replace’ agenda.” He added, “If we end up with a replace agenda that fails to fix the problem, then we will lose hard-won credibility on the health care issue as a result.”

Ryan emphasized, “The first step toward true, patient-centered health care reform must be a full repeal of the president’s disastrous new law.” But Republicans must also offer a workable replacement. “What will work,” Ryan said, “is empowered consumers looking for value. Giving patients and consumers control over health care resources would make all Americans less dependent on big business and big government for our health security…give us more control over the care we get…and force health care providers to compete for our business.”

Increasing competition and choice, lowering costs, and making people less dependent not only on big government but also on big business — that sounds like a winning message for the GOP in 2012.

Now, who will deliver it?

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