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A Tale of Two Budgets

Paul Ryan draws the contrast Republicans will need this fall.

Apr 2, 2012, Vol. 17, No. 28 • By YUVAL LEVIN
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The most profound transformations of the welfare state in the Ryan budget, however, are directed to the federal programs most responsible for our current fiscal straits and for our coming debt disaster: our health care entitlement programs. Conservatives are in the habit of seeing reductions in domestic discretionary spending as the gold standard of reining in government, but in fact health-entitlement spending is the essence of the problem to be solved, and to a degree that few Americans appreciate. In 1971, federal health spending accounted for 1 percent of GDP, and all other government spending combined (excluding interest on the debt) accounted for 17.1 percent of GDP, according to the Congressional Budget Office. Forty years later, in 2011, health spending accounted for 5.6 percent of GDP and all other spending combined (excluding interest) accounted for 17.1 percent of GDP​—​exactly the same portion of the economy as it had four decades earlier (having fluctuated rather little over that time). In essence, the net growth in government as a percentage of the economy in these 40 years has been entirely a function of federal health spending.

And without meaningful reform, this problem will only grow worse. In its latest long-term projections, the Congressional Budget Office forecasted that, between now and 2050, spending on the federal health care entitlements (especially Medicare and Medicaid) will more than double as a percentage of the economy, while all other federal spending combined will actually decline as a share of the economy. The health care entitlements are, in essence, responsible for our disastrous long-term debt problem.

In his budget, President Obama proposes to see this trend continue unabated. Under Obamacare, 16 million more Americans would be shoved into an unreformed Medicaid program that is already failing to provide ready access to quality care. Millions more would enter a whole new poorly designed federal health entitlement created to subsidize coverage in new state exchanges. And the most powerful driver of American health care costs​—​the fee-for-service design of the Medicare system​—​would be left essentially untouched, with a board of price controllers expected to finally make it efficient but not empowered to actually change it.


It is on this front​—​health care, where he claims to have marked his greatest achievement​—​that President Obama has in fact failed most decisively. And it is on this front that Republicans have an opportunity to offer the starkest contrast with that failure of leadership. The Ryan budget goes a long way toward doing that, though it does not go all the way.

Ryan proposes a much-needed reform of Medicaid​—​ending the open-ended federal/state funding structure that creates an enormous incentive for overspending and transforming the program into a federal block grant that would allow states the flexibility to pursue greater efficiency and provide more options to the poor. And most important, he proposes to transform Medicare into a premium-support program​—​and in a way that draws an even more effective contrast with Obama’s approach than last year’s Republican budget did.

As with last year’s plan, none of Ryan’s proposed changes would apply to current seniors and people who are now over 55. For people who retire more than 10 years from now, Medicare would become a system in which the government would provide a fixed amount per recipient each year to pay for insurance that each senior would choose from a menu of comprehensive options. Unlike last year’s proposal, however, the private insurance options would be joined by one government-run fee-for-service option resembling the current Medicare system, and the level of the premium-support benefit each year would be set by competitive bidding among insurers, rather than just by a predetermined formula fixed to inflation.

Both of these new elements would tend to make the transition to the new system more gradual and orderly, and to complicate Democratic efforts to scare voters about it. The fee-for-service option would have a version of “Medicare as we know it” compete for consumers in the new system on something like a level playing field with private insurers, while the competitive bidding system would combine the best elements of defined-benefit and defined-contribution coverage.

A defined-benefit system, like today’s Medicare system, is one in which the government commits to provide a certain set of benefits and then pays whatever they cost. This assures recipients of a guaranteed benefit but encourages cost inflation, since providers of care have a huge incentive to perform more services and thus earn more fees. A defined-contribution system, like the one Ryan proposed last year, would have the government provide a predetermined amount to individuals to spend on insurance. They would choose the coverage they wanted; if it cost more than the preset amount they would pay the difference, and if it cost less they would keep the difference. This would make consumers more cost conscious, driving providers to seek ways to offer quality care at lower prices, but it risks leaving beneficiaries with more out-of-pocket expenses if health costs still grow faster than the premium-support benefit.

Ryan’s new proposal is a bit of both: The government would define the minimum insurance benefit to be provided to all covered seniors, based on the level of coverage Medicare now provides, and then there would be a process each year in which competing insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment given to seniors would be set at the level of the second-lowest of the bids; poorer and sicker seniors would get additional help, while the wealthiest would get less. Thus, there would be a defined benefit, but payments to providers would not be open-ended. And there would be a defined contribution (with providers competing to win over consumers), but its value would be automatically set to a level that makes premiums affordable, since at least one option would always cost less than the government subsidy.

Because CBO refuses to score the effects of market competition, and a budget resolution has to be scored by CBO, Ryan had to back up his competitive bidding process with a blunt cap on Medicare’s overall growth (CBO then simply scores the proposal as meeting the cap). To sharpen the contrast with Obama, he chose to just give CBO the same cap Obama proposes for the IPAB​—​keeping the annual growth of costs below GDP growth plus 0.5 percent. Both caps are of course just scoring conventions; they are goals, not reforms. They raise the question of how costs would be kept below the cap, and the differing answers to that question clarify once again the choice before voters this year.

On one hand are Obama’s 15 numinous know-it-alls, charged with setting prices, rationing care, and finding just the right balance between quality and access from Washington, and without the power to change Medicare’s payment system. And on the other hand is a system that seeks efficiency by having 50 million consumers in search of the quality they want at the lowest price they can find pressuring 15 million insurance and health care providers to find innovative ways to meet their demands and make a good living. One involves sheer faith in expert managers, and the other involves using real economics to lift the burden of the oppressive fee-for-service system and enable a new era of innovation, efficiency, and quality in American health care. It is hard to imagine a clearer contrast for voters than that between the two visions of government, and of American life, at the heart of these two proposals​—​and indeed, at the heart of these two budgets.

The Ryan budget could certainly have taken a further step on health care and offered a specific alternative to Obamacare beyond its Medicaid and Medicare components. It could also have launched its Medicare reform sooner than a decade from now, especially since the two new elements in this year’s proposal would make the transition significantly easier for new beneficiaries. And it could have taken a more aggressive approach to cutting domestic discretionary spending in its first year. While such spending is not the driver of our fiscal problems, it has grown vastly in recent years, and trimming it back would make the larger task of fiscal responsibility a little easier. By not being quite as aggressive as it might have been, the Ryan budget has earned some critics on the right​—​some of whom are no doubt also unhappy with its move to avert steep defense cuts.

But seen in the context of the Ryan budget as a whole, and of the demands of this election year, such criticism seems to lack proportion. There is, of course, no chance that the House Republican budget will be adopted by the Democratic Senate this year, and no chance that President Obama will adopt it. Its purpose, rather, is to put before the public an agenda and a vision​—​to contrast Republican priorities with those of the president on the most important economic issues before the country. Its purpose is to remind voters that, as things now stand, we are headed toward a perfectly predictable yet thoroughly avertable calamity, that the president prefers to do nothing to prevent it, and that Republicans have a plausible, coherent plan to address it.

President Obama has successfully turned voters’ attention away from our most significant problems in recent months, and he surely hopes to keep them distracted through the election. But just as they did last year, House Republicans have the opportunity to recapture the agenda​—​not by distracting voters from our problems but by offering real solutions and daring the Democrats to offer their own. We can only hope that the Republican presidential candidate has the good sense to follow their lead.

Yuval Levin is a contributing editor to The Weekly Standard, Hertog fellow at the Ethics and Public Policy Center, and editor of National Affairs.

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