Rep. Paul Ryan’s Medicare privatization plan increases costs, budget office says

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When House Budget Committee Chairman Paul D. Ryan unveiled his blueprint this week for cutting federal spending by $5.8 trillion over the next decade, he argued that a revamping of the government’s health safety net would rein in skyrocketing costs.

But because commercial insurers cost more to run than government plans, the Wisconsin Republican’s proposal to privatize Medicare starting in 2022 would actually spark a dramatic increase in how much the nation spends on healthcare for the elderly, according to an independent analysis by the nonpartisan Congressional Budget Office.

Even as the federal government cut its own spending, seniors would end up paying almost twice as much out of their own pockets — or more than $12,510 a year, the CBO estimates. Altogether, the total cost of insurance would be higher.


Ryan’s office did not respond to repeated requests for comment about the CBO analysis. But the congressman has repeatedly said that applying what he calls “free-market principles” to the insurance market is the best way to control costs.

“We can drive innovation, productivity improvements and performance in healthcare,” Ryan said Tuesday in a presentation to the conservative American Enterprise Institute in Washington.

Under Ryan’s proposal, seniors and others on Medicare would begin receiving a set amount of money, starting in 2022, to offset the cost of buying a private insurance plan that would replace the federal government’s Medicare plan.

Wealthier and healthier seniors would receive less, while poorer and sicker beneficiaries would get more.

This voucher system — or “premium support,” as Ryan calls it — would give the typical 65-year-old American $8,000 annually to buy a health plan, about the same amount of money that analysts expect the Medicare program would spend on that senior in 2022 under the current program.

But the CBO report says the money won’t be enough. The cost to buy private insurance, plus the projected out-of-pocket spending that the 65-year-old would have to pay for medical care in 2022, would total about $20,510 per year, according to the CBO, which both Republicans and Democrats rely on to independently evaluate the effects of proposed legislation.


That would leave the senior to pay the difference, an estimated $12,510.

By comparison, if the current Medicare program is continued, the CBO estimated that it would cost about $14,770 to provide insurance to that same 65-year old in 2022, assuming Congress did not dramatically slash payments to doctors.

That would leave the senior to pay just $6,150 out of pocket.

“A typical beneficiary would spend more for healthcare,” the CBO concluded about Ryan’s proposal.

A major factor in the price difference is the relative inefficiency of private health plans. Even though commercial insurers may do a better job of managing their customers’ care, they are not as efficient as Medicare at controlling costs. “Both administrative costs [including profits] and payment rates to providers are higher for private plans than for Medicare,” the CBO noted.

That is consistent with previous research by the budget office and the independent Government Accountability Office, which found that private plans that contract with the federal government to provide Medicare Advantage plans to seniors have higher administrative costs.

Because Medicare covers about 48 million Americans, it is also able to use its unrivaled market clout to pay lower prices to hospitals and doctors, saving money.

The new healthcare law signed by President Obama last year relies on that market power by using Medicare to encourage hospitals and doctors to become more efficient and work more closely together, which many healthcare experts believe is crucial to controlling healthcare costs.


The Ryan proposal would eliminate that by repealing the healthcare overhaul.

That is “exactly the wrong direction, the opposite from what you want to do,” said Robert Greenstein, president of the left-leaning Center on Budget and Policy Priorities, which also analyzed the Ryan budget. “What you want to do is cover more people and reduce costs.”