Ryan's "premium support" proposal for Medicare: Myths and facts

By Ida Hellander, M.D.
PNHP, August 14, 2012


“Premium support” or voucher proposals for Medicare are a mainstay of conservative health policy. They have been defeated for over three decades, starting with President Reagan’s FY 1981 budget proposal. They are a key feature of “managed competition”-type reform proposals. Although President Clinton embraced managed competition in his ill-fated health reform bill, he vetoed the 1995 Balanced Budget Act which would have turned Medicare into a voucher program. Premium support proposals were defeated again in 1997 and 2003.

Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee and candidate for vice president on the presumptive GOP ticket with Mitt Romney, resurrected the idea of a premium support proposal for Medicare in April 2011 with his “Path to Prosperity” budget proposal. Seniors would receive a fixed federal contribution or “defined contribution” to apply towards the cost of a private plan, and traditional Medicare, with its guaranteed coverage, or “defined benefits,” would be eliminated. The plan also called for increasing the age of Medicare eligibility from 65 to 67.

A so-called bipartisan variant of this scheme was proposed by Ryan in November 2011, with Sen. Ron Wyden (D-Ore.); in this version traditional Medicare would continue to be an option alongside private plans, and subsidy levels would be set at the cost of the next-to-cheapest plan, as determined by competitive bidding rather than be set by CMS. Medicare growth would be capped at GDP + 1 percent.

The latest version of “premium support” promoted by Rep. Ryan is the virtually the same as this more recent proposal with one major change; it sets the cap on Medicare growth lower, at GDP + ½ percent.
With the exception of the choice of traditional Medicare, the scheme is similar to the Affordable Care Act’s exchanges.

At the heart of all premium support proposals – and indeed the Affordable Care Act itself - are a number of myths:

1.  Myth: Private health insurance is more efficient than Medicare. Fact: Medicare has controlled costs better than private insurance and has much lower administrative overhead. According to CMS, Medicare spending rose by an average of 4.3 percent each year between 1997 and 2009, while private insurance premiums grew at a rate of 6.5 percent each year. The CBO has estimated that the private insurance equivalent of Medicare would cost almost 40 percent more in 2022 for a typical 65-year-old. Administrative costs in Medicare are less than 2 percent of expenditures, compared to 17 percent of revenues for private insurers.

2.  Myth: Expanding private plans in Medicare will reduce Medicare’s costs. Fact: Private Medicare Advantage plans have raised Medicare costs. Private insurers profit by selectively enrolling the healthy and shunning the sick, as documented in a New England Journal of Medicine article subtitled “The healthy go in and the sick go out.” Hence, they collect premiums paid by the Medicare program, and provide little care. As a result, the Congressional Budget Office estimates that Medicare Advantage plans cost Medicare 12 percent more per enrollee than the traditional program. New research from the National Bureau of Economic Research indicates that the true cost of private plans to Medicare may be much higher than the CBO estimate. Since Medicare launched a new risk adjustment scheme based on 70 diagnostic codes in 2004, overpayments to private plans have increased dramatically and accounted for $30 billion in excess spending, or 8 percent of total Medicare spending, in 2006 alone. Since then the overpayments have likely risen as the proportion of Medicare recipients in private plans has jumped from 16 percent to 24 percent.

3.  Myth: Premium support will reduce Medicare’s costs. Fact: Premium support plans don’t reduce costs, they shift them onto the patient. The rising cost of premiums will quickly outstrip the value of the fixed federal contribution, and seniors will have to pay more in either premiums or out-of-pocket payments for care. The Congressional Budget Office estimates that Ryan’s original Medicare proposal would raise out-of-pocket costs for the typical 65-year-old Medicare beneficiary in 2022 by $6,240. They haven’t estimated the cost of the latest plan yet.

4.  Myth: Competition among private plans will control costs. Fact: Private plans profit by competing to enroll the healthy and shun the sick. The industry is so consolidated that there is no effective competition in most regions of the country.

5.  Myth: Paying private plans in Medicare via “competitive bidding” will lower costs. Fact: There’s no evidence for this. Private plans compete by selectively enrolling healthier beneficiaries. Private insurers have been competing on price in the under 65 market for decades, yet costs and premiums have skyrocketed even as benefits and choices have been reduced.

6.  Myth: Premium support will increase choice for seniors: Fact: Premium support will decrease choice for seniors. Private plans with limited networks dictate which physicians seniors may see and which hospitals they may use. Medicare gives beneficiaries completely free choice of physician and hospital.

7.  Myth: Competition among private insurers will reduce administrative costs. Fact: Premium support will likely boost administrative costs since patients will move from the low-overhead traditional Medicare program to private plans with far higher overhead.

8.  Myth: There are no alternatives to reduce Medicare spending besides premium support. False: There are many better options for reducing Medicare spending, including the 9 listed below. Ultimately, the only way to preserve Medicare is to replace it with a single payer program with comprehensive benefits and effective cost controls. Currently Medicare is only one payer among thousands of different plans. Only a true single payer covering the entire population can slash administrative costs and control costs with budgets, negotiated fee schedules and drug prices, and health planning. Separate budgets for hospital operating costs and capital investment will permit the real health planning needed to reduce the costly and dangerous proliferation of expensive high-tech facilities.

Nine ways to reduce Medicare costs now -

  1. Eliminate Medicare Advantage plans.
  2. Give Medicare the power to negotiate drug prices.
  3. Eliminate private Part D plans, which have high overhead, and replace them with a public drug benefit along traditional Medicare principles
  4. Proscribe participation by for-profit providers, and mandate that participating providers (like hospitals) not pay any individual more than the president of the U.S.
  5. Extend the self-referral ban to include doctors who refer patients to their own MRI, CT, PET, and other complex imaging equipment (about half of total cardiologists income currently comes from imaging studies that they order and perform).
  6. Ban participating physicians from prescribing medications or medical devices (including orthopedic and cardiac implants) produced by drug or device makers from whom they receive payments.
  7. Reduce fees paid to the highest paid specialists, generally those who prescribe or use expensive drugs and devices. Doctors should be paid for the time they actually put in.
  8. Revamp Medicare's payment policies for subacute hospital care and so called "long-term acute care" (LTAC). Hospitals currently collect a set fee based on diagnosis for the acute hospital stay, and quickly transfer Medicare patients to a second inpatient facility that collects an additional fee. The result of this financial incentive has been a huge upswing in subacute and LTAC utilization, without any evidence that patients benefit. A colleague who is knowledgeable on this issue informs us that the proportion of Medicare patients with a subacute or LTAC admission after discharge from an acute care hospital has gone from 10 percent to 28 percent since these financial incentives came into effect, with about 600 LTACs appearing de novo.
  9. Abolish the Medicare pay-for-performance and ACO schemes, which are causing increases in administrative costs without any evidence of benefit.

9.  Myth: Medicare is already a single payer system. Fact: Currently Medicare is only one payer among thousands of different plans. Only a true single payer covering the entire population can slash administrative costs, implement effective cost-control methods like globally budgeting hospitals, negotiating fees, and doing real health planning with teeth to reduce the costly and dangerous proliferation of expensive high-tech facilities.

10.  Myth: Premium support will provide all seniors with the security that quality, affordable coverage will always be there. False: Premium support eliminates traditional Medicare with its defined benefits and substitutes a fixed contribution that, over time, will cover less care. Only a single payer plan can control costs while eliminating financial barriers to care for all. Ultimately, the only way to preserve Medicare is to replace it with a single payer program with comprehensive benefits and effective cost controls.

Outline of Rep. Ryan’s proposal for Medicare and Medicaid reform


  1. Starting in 2023, transforms Medicare from a program that entitles seniors to “defined benefits” to one in which beneficiaries receive a “defined contribution” or “premium support” towards the purchase of private coverage or traditional fee-for-service Medicare.
  2. Although Ryan has claimed that people 55 and older would not be affected by his changes to Medicare, today’s seniors would be hard hit by Ryan’s $800 billion in proposed cuts to Medicaid because that program funds nursing home care. Few seniors have the resources to pay for nursing home care, and the cost of even a short stay in a nursing home can lead to impoverishment. Today’s Medicaid program allows the surviving spouse to protect a home and some assets so they may live out the rest of their lives with dignity. When Medicaid’s funding is slashed and benefits are determined by the states, that may no longer be the case.
  3. The plan gradually raises the eligibility age of Medicare from 65 to 67 by 2034. Private coverage is prohibitively expensive for many at this age. Research shows that the uninsured have worse health before they gain access to Medicare, and have more medical expenses for the first few years they are in the program, than their insured counterparts. Lengthening their wait by two years would lead to even greater health disparities before gaining coverage and higher unmet medical needs and higher costs among this cohort once they are on Medicare.
  4. Private Medicare plans would compete with traditional Medicare on a Medicare exchange. Seniors would be responsible for the additional premiums of any plan (including traditional Medicare) costing more than the next-to-cheapest plan. Private plans have been shown to selectively enroll healthier seniors while shunning the sick. Thus, the cheapest plans would be those private plans most effectively able to cherry pick the healthy (e.g. by offering gym memberships as a covered benefit), while other plans and traditional Medicare’s costs would rise. The cost of the additional premiums on top of cost-sharing could quickly add up to many thousands of dollars per year. The result would be a massive shift of the burden of health care costs to beneficiaries, particularly anyone with serious health needs.
  5. There is no evidence that private plans will reduce Medicare’s costs, and a lot of evidence they will raise them. Private plans have already been shown to cherry-pick healthier patients, raising costs by 12 percent compared to the cost of caring for the same patients in traditional Medicare. Administrative costs are much higher in private plans (about 17 percent) than in Medicare (under two percent), shifting funds from clinical care to bureaucracy.
  6. The plan calls for “risk adjusting” plan premium payments so that plans with healthier patients receive less funding. However, there is no evidence that risk-adjustment can work in the dynamic reality of profit seeking health care insurers/providers. Private plans quickly learned to game Medicare’s new risk-adjustment system to garner an extra $15 billion annually, about 4 percent of total Medicare spending. Interestingly, private plans were able to obtain more lucrative overpayments after the newly enhanced risk adjustment was put into place.
  7. The plan calls for capping overall Medicare growth at GDP plus 1/2 percent. This limits the financial exposure of the federal government, but exposes beneficiaries to increasing risk and larger out-of-pocket costs over time.
  8. In sum, this is a plan to eliminate Medicare as we know it, including traditional Medicare (since the voucher only has to cover the cost of the second-cheapest plan, not today’s Medicare) and replace it with a private system beholden to Wall Street. Seniors would bear the burden of rising health care costs themselves. In contrast, a single payer system could provide comprehensive coverage to everyone.


  1. Ryan’s plan would turn the joint federal-state program covering 62 million low-income Americans into a federal block grant program starting in 2013 and slash the federal contribution by $800 billion (35 percent) in 2022 and by 49 percent in 2030. States would have flexibility in determining who they cover and what benefits are provided with the remaining funds.
  2. According to the CBO, “states would need to increase their spending on these programs, make considerable cutbacks in them, or both.”
  3. Between 14 million and 27 million fewer people would be covered in 2021 than under Medicaid as it currently exists, according to the Urban Institute. Beneficiaries might also see reductions in benefits and increases in cost sharing.
  4. An additional 11 million people would not gain new Medicaid coverage if the federal health reform law were repealed, as Ryan has proposed, according to the Congressional Budget Office.