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The Democrats’ Fuzzy Math

Yes, Paul Ryan’s Medicare plan would lower costs.

Jul 18, 2011, Vol. 16, No. 41 • By JEFFREY H. ANDERSON
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President Obama and the Democrats claim that the Medicare reforms proposed by Paul Ryan and the Republicans would shift the burden of health costs onto the backs of seniors. This has been the central—and essentially the only—argument the Democrats have made against the GOP plan. But the Democrats’ claim is contradicted by four decades’ worth of empirical evidence. 

Paul Ryan Picture

Dave Clegg

Under Ryan’s proposal, the government would provide premium support to future seniors (who are now under 55) to help them purchase a private health plan of their choice. Participating insurers would have to cover all comers and couldn’t vary premiums based on health status. The poor would get additional help. The reforms are designed to facilitate competition and choice, without having government bureaucrats ration care.

The Congressional Budget Office (CBO), however, projects that increasing competition and choice would actually raise costs. While saying it “is hard to predict,” the CBO projects that spending under Ryan’s plan “would grow faster than such spending for the same beneficiary in traditional Medicare.” But experience suggests the opposite.

A Pacific Research Institute study I authored found that the costs of the two flagship federal health care programs—Medicare and Medicaid—have risen far more than the costs of all other health care in the United States. From 1970 through 2008, the costs of Medicare and Medicaid each rose one-third more, per patient, than the costs of all other health care in America—the vast majority of which is purchased privately. And that’s without counting the Medicare prescription drug program.

In fact, if Medicare’s costs had risen only at the rate of non-Medicare, non-Medicaid costs, the program would have spent $7,197 per beneficiary in 2008 instead of $9,634. That 34 percent difference adds over $100 billion to Americans’ annual tax burden. 

Even more tellingly, as a percentage of the gross domestic product (GDP), Medicare’s and Medicaid’s costs have each risen more than twice as much as the costs of all other health care in America. Health costs apart from Medicare and Medicaid have grown 41 percent per patient, in relation to GDP, while Medicare’s and Medicaid’s costs have grown 89 percent and 91 percent—nearly doubling—as a share of GDP. 

So why would the CBO claim that allowing seniors to choose among private plans would increase Medicare’s costs? In recent congressional testimony, CBO director Douglas Elmendorf admitted that his agency doesn’t have “the tools, the analysis we would need to do a quantitative evaluation of the importance” of injecting more competition and choice into the health care system. 

Likewise, when assessing the dramatic reduction in payment rates to Medicare providers, which is slated to happen as a result of colossal sums of money being siphoned out of Medicare and spent on Obamacare, Elmendorf says the CBO doesn’t attempt to “model the access to care or quality of care” that would result. Instead, the CBO simply assumes that providers would continue to treat just as many Medicare patients, giving them exactly the same quality of care, despite being paid far less for their services—less even (eventually) than for treating Medicaid patients. 

Elmendorf recognizes the problem, saying, “That is a gap in our tool kit and a gap we are trying to fill.” In the meantime, however, the CBO is clearly—and admittedly—scoring government-based proposals (cutting payment rates, imposing price controls) far too favorably while similarly understating the benefits of market-based solutions.

In addition to these admitted shortcomings in its analysis, the CBO is likely relying on frequently cited studies that look only at the rise of private insurance costs, while ignoring the profound shift in the private health care market away from out-of-pocket spending. According to figures from the Centers for Medicare and Medicaid Services (CMS), in 1970, private insurance expenditures accounted for just 38 percent of all private health costs. In 2007, they accounted for 74 percent. Correspondingly, out-of-pocket expenditures dropped from 62 percent to 26 percent. Imagine if Medicare used to cover only 38 percent of seniors’ care and now covered 74 percent, yet that change wasn’t taken into account in gauging its success in controlling costs. 

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