Proposed GOP 2012 Budget Turns Medicare Into Subsidy Program

April 05, 2011

April 5, 2011 — House Republicans today unveiled an ambitiously frugal budget for fiscal 2012 that they say will save the Medicare program in part by eventually giving beneficiaries subsidies to purchase private health plans.

The GOP budget, released by Rep. Paul Ryan (R-WI), chair of the House Budget Committee, would attempt to save Medicaid as well by turning it into a simple block-grant program. More Medicaid and Medicare savings would be achieved by capping noneconomic (pain and suffering) damages in medical malpractice cases — a tort reform designed to reduce the number frivolous lawsuits and jackpot jury awards.

The proposal also addresses the 29.5% cut in Medicare reimbursement for physicians next year by instituting an unspecified 10-year "fix" of the payment formula. The cost of that fix must not add to the federal deficit, however.

House Budget Committee Chairman Paul Ryan (R-WI) touts his 2012 federal budget during a news conference on Capitol Hill today. AP Photo/J. Scott Applewhite

Overall, the GOP budget for the fiscal year beginning October 1 would reduce the federal budget deficit by $6.2 trillion over 10 years based on the current federal budget — which is not fully funded — and by $5.8 trillion based on current spending policies. Either reduction is considerably more than the $3.9 trillion in cuts proposed by a bipartisan fiscal commission that President Barack Obama had convened. Similar to the commission, Republicans advocate deep cuts for entitlement programs such as Medicare and Medicaid, which they say threaten to bankrupt the nation. However, unlike the fiscal commission's report, the proposed GOP budget did not pare down Social Security spending. Instead, it called for the president and Congress to devise a plan to ensure the program's solvency.

The debut of the 2012 budget proposal comes as Republicans joust with Congressional Democrats this week about an appropriations bill to keep the government running after Friday, April 8, and through the end of the 2011 fiscal year, which ends September 30. Congress has not yet approved an appropriations bill funding the government through all of fiscal 2011, forcing the passage of stopgap measures such as one in mid-March, which expires at the end of Friday.

Republicans have wanted to slice some $60 billion from current spending levels for the remainder of the fiscal year. Democrats are attempting to win agreement for a package of $33 billion in cuts. If the 2 sides cannot concur on a continuing resolution to fund the government beyond Friday, governmental operations deemed nonessential will shut down.

Premium Subsidies Would Be Adjusted Based on Income

Under the restructured Medicare program, anyone who turns age 65 beginning in 2022 would choose a private health plan paid for with an adjustable subsidy from the government. The subsidy would be lower for wealthier Americans and higher for sick beneficiaries whose conditions worsen. Low-income beneficiaries would receive extra assistance to cover out-of-pocket expenses. Beneficiaries enrolled in the traditional Medicare program before 2022 can stay there.

The plan closely resembles one set forth last year by Paul Ryan and Alice Rivlin, who was the director of the Office of Management and Budget under President Bill Clinton. According to an analysis of the plan by the Congressional Budget Office (CBO), the government would calculate the premium subsidy by taking the average federal cost per Medicare enrollee in 2012 and increasing it at the annual rate of growth of the gross domestic product plus 1%.

An even earlier proposal by Ryan would have given vouchers to Medicare beneficiaries to buy insurance on the private market. Ryan describes the current proposal as a "premium-support" system, contending that it differs from a voucher system because the government pays the subsidy directly to the private insurer.

When the CBO evaluated the premium-support system devised by Ryan and Rivlin, it described it as a voucher system. Going beyond semantics, the CBO said the system would save money because premium subsidies would tend to grow more slowly than projected health costs per enrollee. However, premiums charged by private insurers for current levels of Medicare benefits are likely to exceed subsidy amounts, forcing beneficiaries to either pay more out of pocket to buy equivalent coverage or settle for less.

Seizing on this dilemma, Congressional Democrats have warned that the current GOP plan will "shift the risk and burden of rising healthcare costs to seniors," in the words of Rep. Chris Van Hollen (D-MD), the ranking Democrat on the House Budget Committee. "You're on your own with the insurance industry," said Van Hollen.

The premium-support proposal that the CBO analyzed last year did not lower premiums for beneficiaries who became sicker or help low-income beneficiaries pay out-of-pocket expenses, as the current proposal does. How much risk and financial burden seniors will bear under the current proposal is a question for another CBO analysis.

Congressional Democrats also decry the idea of the federal government funding its share of state Medicaid programs with block grants, with states continuing to fund their share. The block grant approach would cap the federal contribution to state Medicaid programs and give states more flexibility in operating them. However, it also shifts more of the fiscal responsibility to states in an era of rising demand for services. That would leave states, the Democratic argument goes, with the choice of increasing taxes or reducing Medicaid benefits, eligibility, and provider payments.

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