Paul Ryan Takes On the Medicare (and Medicaid) Industrial Complex

There will be howls of outrage on Capitol Hill today when House Budget Chairman Paul Ryan unveils a comprehensive federal-budget-reform package that cuts $6.2 trillion in government spending over the next ten years. Most importantly, Ryan’s plan will fundamentally rewrite the rules for entitlement spending for the government’s massive health-care programs, Medicare and Medicaid, that are on track to wreck the nation’s finances.  

Ryan is taking on the trillion-dollar Medicare/Medicaid industrial complex at no small political risk to himself. (President Obama won’t go near it, and didn’t propose any serious entitlement reforms in his most recent budget package.) 

Here’s the first, and most important thing to understand about both programs: Spending is completely uncapped. If a state spends more money on Medicaid services, the feds kick in more money to pay for it (on average federal government pays about 57 percent Medicaid costs, with higher federal matching rates for poorer states), regardless of quality or actual access for Medicaid recipients. This formula also means that richer states that can afford to spend more (like New York) get billions more in federal Medicaid funds than poorer states (like Mississippi). 

Medicare operates similarly: The more doctors and hospitals spend on seniors, the more they get paid, regardless of quality. Medicare is in deep financial trouble, with spending outstripping revenue, and the hospital insurance trust fund going bankrupt by 2020.

Historically, states and the federal government have tried to use price controls to restrain entitlement spending — a tactic that has failed miserably. In Medicare, providers respond to price controls by performing more services, or more highly reimbursed services. In Medicaid, reimbursement rates for patients are so low, says one physician in New Orleans, “having a Medicaid card in no way assures access to care.” 

Worse yet, to compensate for hundreds of billions in new federal spending under Obamacare, over the long term the federal government would slash provider rates for Medicare to below Medicaid rates, putting seniors into the same miserable basket as Medicaid patients.

Ryan’s reform proposals are bold, but fundamentally fair-minded. For Medicaid, he’d cap federal spending through block grants but liberate states from federal red tape that prevents them from finding more efficient ways to provide high-quality care for the poor. Capping federal contributions is a critical step, because without some kind of spending discipline states have little incentive to press providers to offer higher quality care at lower cost.

On the Medicare side, Ryan would shift to a premium support system for buying private health insurance by 2022 — modeled after the health-care system congressional members enjoy now. Sicker and poorer seniors would get more support. It’s a plan that has been endorsed by a majority of the Democrat-led Breaux Commission of 1999, and by Clinton-era budget guru Alice Rivlin last year.   

Ryan’s approach would maintain a viable safety net for the poor and elderly, while “bending the curve” of federal health-care spending. Still, he’ll undoubtedly be savaged from every group that benefits from runaway government health-care spending. It’s a sign that he’s on the right track.

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