The following is a crude effort to make sense of the debate over the various plans for addressing the fiscal landscape:
(a) (i) Chairman Ryan wants to turn Medicare into a system of limited defined contributions towards the purchase of private health insurance and he intends to increase these limited defined contributions in line with the CPI. (ii) His goal, as I understand it, is to restrain the growth of overall federal expenditures so that they’ll roughly match federal tax revenues in the neighborhood of 19 percent, a level that tracks the postwar historical average.
(b) There is another view is that an aging population and a high level of medical inflation demonstrate the profound unseriousness of Chairman Ryan’s approach. This view maintains that we should bake in an assumption of rising medical inflation and a federal tax take high enough to match it.
(c) Then there is the view — let’s call it the mainstream Democratic view — that the federal government needs to take active measures to address the high level of medical inflation rather than rely on price signals and cost-conscious consumers to do the work of spurring business-model innovation. (i) Many who embrace the mainstream Democratic view maintain that PPACA takes precisely this approach. Essentially, the new health law, under this favorable interpretation, secured political buy-in from the left for tough Medicare reforms, including a wide array of pilot programs designed to reform the payment system, by expanding access to subsidized coverage. PPACA adds a new tranche to the patchwork U.S. health system for non-poor under-65s in order to ease the transition away from employer-sponsored insurance. Indeed, one of the central political arguments for PPACA is that it would leave ESI virtually untouched. (ii) This view also accepts the need for higher taxes, though advocates of this view tend to suggest that middle-income households, and indeed most upper-middle-income households, can be insulated from tax increases. Instead, gentle upward increases in marginal tax rates for households in the top 2 percent will prove adequate to the task of increasing revenues to match rising expenditures.
What I’m hearing from my left-of-center colleagues is that (c) is politically realistic, serious, and humane while (a) is none of these things. No one gives (b) much consideration, in light of the unpopularity of the tax increases it would entail.
To summarize, I’d suggest the following:
(1) (a)(i) would be far more realistic of Chairman Ryan embraced the blended GDP +1% growth rate he’s advocated in the past and I buy the idea that there could be more flexibility on (a)(ii). The historical postwar average reflects a very different demographic picture. I also think that Chairman Ryan’s Path to Prosperity proposal would have benefited from more detail regarding the health system for non-poor under-65s. The section on tax reform offers a bare preliminary sketch on how to take on various tax expenditures, and this is where right-of-center policymakers could fill in the blanks by transforming the tax exclusion for employer-provided health insurance into something saner.
Overall, I think it’s best to think of the PTP as an opening bid: You think his Medicare proposal is unrealistic? Tell us how much more Medicare spending you’d like to layer on and why, and then tell us how you intend to pay for it. This isn’t rocket science. A PTP that simply used GDP +1% and used the elimination of tax expenditures to match higher Medicare expenditures rather than to finance other tax reductions wouldn’t be an entirely different animal.
(2) I’m on the record as believing that (c)(ii) is either extremely naïve or disingenuous. And as for (c)(i), there is a lot to say. I think that there is a slightly glib view that if the ESI model collapses faster than the CBO assumed, it would be totally fine because tax revenues would swell enough to pay for the more generous subsidies offered on the exchanges. I’d like to see a rigorous treatment of this question. What we do know is that PPACA will sharply increase the number of households in an unreformed Medicaid system plagued by misaligned incentives. Then there is the question of whether a centralized process of driving payment reform will work better than a decentralized, fast-moving trial-and-error process in which for-profit providers have a strong incentive to expand successful low-cost business models. Here we have a pretty deep disagreement about how the world works. All of this leaves aside concerns about implicit marginal tax rates, etc.