Candidates propose Medicare shift to defined contribution

February 1, 2012

GOP candidate Mitt Romney argues that his proposal to convert Medicare from a defined-benefit program to a defined-contribution program will rescue Medicare by creating competition among plans and drive down costs. Republican Paul Ryan and Democratic Senator Ron Wyden have a similar proposal.

Key Points

WASHINGTON-Regardless of who occupies the Oval Office, the next administration will have to face the uncomfortable questions surrounding Medicare's solvency.

Leading Republican presidential candidate Mitt Romney wants to offer seniors a flat sum of money to buy health coverage either through traditional fee-for-service Medicare or a private health plan, thus converting Medicare from a defined-benefit to a defined-contribution program.

He argues that his proposal-which resembles another new proposal by Republican House Budget Committee chair Paul Ryan and Democratic Sen. Ron Wyden-would rescue Medicare by creating competition among plans, which would drive down costs. Supporters say the lower-than-expected growth in Medicare Part D drug premiums proves that competition among private insurers works. Romney's radical restructuring model has the political sweetener of continuing to offer seniors the popular choice of the traditional Medicare plan.

But critics say both the Romney and Ryan-Wyden proposals would unravel Medicare by shifting costs to beneficiaries, reducing benefits, exposing seniors to marketing abuses, ending the national uniformity of premiums and benefits, and eroding the traditional fee-for-service program. They also say there's no good evidence that competition among plans controls costs.

The stable Part D premiums are deceptive, they contend, because overall drug costs have fallen in recent years because of major branded drugs going off patent and because the government heavily backstops the private plans.

Like the Ryan-Wyden proposal, Romney's plan would apply only to Americans younger than age 55. While both count on competition to drive down costs, the Ryan-Wyden plan-which Romney has praised-also would cap annual Medicare spending growth at the rate of increase in gross domestic product (GDP) plus 1%, or about 1.7% less than the currently projected Medicare growth rate.

That's less restrictive than Ryan's previous proposal, which was approved by the House on party lines last year and endorsed by Romney. The proposal sought to limit annual Medicare growth to the increase in the urban Consumer Price Index.

Romney also would gradually raise the Medicare eligibility age, though he didn't say by how much. A report released last month by the Congressional Budget Office indicates that raising the eligibility age to 67 could save $148 billion over 10 years.

In addition, Romney wants to repeal the Patient Protection and Affordable Care Act (PPACA), ending guaranteed coverage for people with pre-existing conditions, who under his plan, would have to wait longer for Medicare.

Henry Aaron, a senior fellow at the Brookings Institute who co-authored the original Medicare premium support proposal in 1995, says it's impossible to evaluate the Romney or Ryan-Wyden plans at this point because neither offers much detail. He points out that during the last presidential campaign, both Barack Obama and Hillary Clinton presented lengthy, detailed healthcare reform plans 18 months before the election. Even so, Aaron is skeptical about the new Medicare proposals.

"How do you lower the growth of healthcare spending without shifting costs to enrollees?" he asks. "What kind of risk adjustment system would you use? Everything, literally everything, depends on the specifics."

Aaron says, for example, that Rep. Ryan's staff wasn't sure in recent conversations whether the proposed spending cap in the Ryan-Wyden plan would apply to total spending or per capita spending. Taking into account enrollment increases of about 2.7% a year for the next 20 years, he says, would make a 2% per year difference in the allowed rate of growth.