Yesterday’s announcement that Democratic senator Ron Wyden and House Budget Committee chairman Paul Ryan have teamed up on a bill that would shift Medicare to a “premium support” model — instead of getting insurance from the government, seniors could receive a subsidy to spend on a private plan — is a bombshell with far-reaching implications.


To begin with, this is very bad news for Democratic political consultants. For months now, they have been salivating at the prospect of turning the 2012 election into a referendum on the evil “Ryan plan” to “end Medicare as we know it.” The president, to his everlasting shame, signaled that this was the Democratic game plan when he attacked Ryan and all House Republicans for having the courage to advance entitlement reform. Among other things, the president essentially accused the GOP of pushing an un-American reform model that would deny health care to poor and sick seniors.

That’s going to be a much harder sell now that Senator Wyden — a liberal from a deep-blue state — has signed on to Ryan’s vision for Medicare.


And make no mistake, that’s exactly what Senator Wyden has done. Ryan understands better than anyone in Congress that the key to solving our long-term budget problem is a market-based reform of American health care, most especially Medicare. And the key to a functioning marketplace in health care is cost-conscious consumers. That’s the essence of what Ryan and his fellow Republicans proposed last April, and it’s the essence of the Wyden-Ryan reform plan too.

Senator Wyden is joined by both Mitt Romney and Newt Gingrich in supporting a premium-support model: Romney had earlier proposed a similar plan, which Gingrich described at Thursday’s debate as a “very good variation” on the program. President Obama is unlikely to find a Republican fissure on the issue to exploit.


Under either version of “premium support,” Medicare enrollees would get a fixed level of support from the government to purchase one of several competing insurance plans. Most important, beneficiaries who select more expensive options would pay the extra premiums themselves.


The earlier version of premium support, sponsored by Ryan and his Republican colleagues, would have established the level of support through a predetermined statutory formula. The first year, the amount would have been equivalent to what Medicare would have spent on the average enrollee under today’s program; after that, the government’s payment would have risen commensurate with the rise in general consumer prices, as measured by the CPI.

Wyden-Ryan substitutes competitive bidding for a pre-determined formula, which is an improvement. Each year, plans wishing to sign up Medicare beneficiaries for coverage would submit a bid reflecting the premium they would charge to provide Medicare’s benefits. The government’s payment would be tied to the second-lowest bid or the cost of enrolling in traditional Medicare, whichever is less, and traditional Medicare would be retained as an option that enrollees could choose. This is very similar to the approach used in the Medicare drug benefit, which has come in more than 40 percent below expected costs. Competitive bidding opens the door to aggressive cost-cutting, because plans that find ways to delivery more with less will be able to attract enrollment with low premiums. So, unlike the earlier version of premium support passed by the House, the Wyden-Ryan plan has the potential to reduce costs faster and further than estimates might indicate.


Ryan has made two apparent concessions to bring Wyden on board. The first is to retain traditional Medicare as one option for seniors, though the details are scarce on how this will work. The danger is that such a “public option” will distort the marketplace. For years, Medicare has used its size as leverage to reimburse doctors at low rates, forcing them to charge higher prices to non-Medicare patients — or, as many have chosen to do, stop taking Medicare patients entirely. Low reimbursement rates could make the traditional program look artificially attractive to enrollees, especially if it is able to undercut the private bids, leaving seniors with a subsidy too small to cover private insurance.


The Medicare drug benefit has no similar “public option” distorting the choices beneficiaries face each year, which has greatly improved the operation of the program. If traditional Medicare is retained as an option in a reform program, it must truly compete on a level playing field. That means breaking it up into regional plans with premiums sufficient to cover full costs and payments to providers that reflect local market rates. With these modifications, the retention of traditional Medicare should not be a deal-breaker, as it could ease passage of the entire concept through Congress.

Ryan also agreed to a backstop on competitive bidding, with the annual rise in the government’s contribution limited to no more than the rise in GDP plus one percentage point. That’s a far higher growth rate than the CPI, but it shouldn’t matter; in the drug benefit, the competitive process has limited premium increases to rates well below this level.

More troubling is how the plan would enforce such a cap should competition not keep costs below it. Again details are scarce, but the authors suggest that Congress will somehow intervene and target cost reduction on the underlying causes of excess growth. That would seem to put far too much faith in the ability of Congress to identify those causes and address them, and it opens the door to the kinds of distorting price controls this kind of reform is intended to avoid.

Nonetheless, there’s far more to like than to dislike in what Senator Wyden and Representative Ryan have proposed. The most pressing economic challenge of our time is the rising costs of entitlement programs, with Medicare topping the list. The program must be reformed soon. Representative Ryan understands this better than anyone else and has made Medicare reform his highest priority. The introduction of the Wyden-Ryan plan is an indication that history is moving his way.