How the Affordable Care Act Paved the Way for GOP Medicare Reform

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Some time in the next few weeks, Paul Ryan, chairman of the House budget committee, is expected to unveil a plan to significantly cut the federal budget for the fiscal year 2012. It will be the centerpiece of a political fight that could eclipse most everything else in Washington.

A linchpin of Ryan’s plan will be a proposal to make major changes to Social Security, Medicaid and Medicare. We won’t know all the details of Ryan’s plan until he makes it public, but based on what he’s proposed before, we have a pretty good idea of what the budget chairman wants to do to Medicare:

* Raise the Medicare Retirement Age to 67.

* Turn Medicare into a means-tested voucher program that gives beneficiaries a set amount of money every year to purchase private health insurance.

Neither of these are new ideas. Here’s a Health Affairs article about Medicare vouchers from 1981. Here’s a 2000 article from the Social Security Bulletin on raising the retirement age in Medicare to 67.

What makes Ryan’s Medicare proposal different than earlier, similar attempts at such reform is the existence of the Affordable Care Act. At least one major tenet of the new law makes Ryan’s plan far more feasible than before. Here’s why:

In the past, a major problem with kicking 65- and 66-year-olds out of Medicare – i.e. raising the retirement age – was that they could never buy insurance on the open market. It would be way too expensive, if not completely unavailable. But the ACA changes this situation completely. Under the ACA, beginning in 2014, no private insurer will be able to refuse coverage to anyone and they won’t be able to set premiums based on risk. This means even the oldest (and sickest) privately insurable Americans will have new access to coverage. And they could have this access via the new state-based insurance exchanges called for under the ACA.

This is health care, so of course there are lots of caveats. First, it’s unlikely Ryan’s final proposal will fully incorporate the ACA or use a baseline that assumes the law will continue to get implemented as intended. Ryan, for instance, is not a fan of the prescribed benefit designs called for in the ACA. Secondly, even under the ACA, insurers will be able to vary premiums based on age; they will be permitted to charge the oldest buyers of a policy four times as much as the youngest buyers. And adding millions of 65- and 66-year-olds to the exchanges would raise premiums for everyone else.

For its critics, the most glaring flaw in Ryan’s plan – and also its most important cost saver for the government – is the cap on Medicare voucher amounts. Under Ryan’s plan, according to the Congressional Budget Office, the voucher amount would be based on the federal cost of a Medicare beneficiary in 2012. This amount would be indexed to GDP plus one percentage point. Bottomline: Because medical costs increase faster than GDP, the vouchers will become less valuable in terms of purchasing power over time. Ryan’s plan reduces costs for the federal government. But these costs don’t go away – they just get shifted to seniors, among others.

A new analysis by the non-partisan Kaiser Family Foundation, which assumes the Medicare retirement age would be raised to 67 and the ACA would be fully implemented in 2014, found that 5 million 65- and 66-year-olds would be affected. (It did not consider the voucher proposal.) KFF says 42% would enroll in employer-sponsored plans as workers or retirees; 38% would buy private individual private insurance policies through the exchanges and 20% would get coverage under Medicaid.

In 2014, under this scenario, three-fourths of these folks would pay more out-of-pocket under the new plan than they would without it. (Here’s where the cost-shifting comes in.) Premiums for everyone younger than 65 shopping in the exchanges would increase by 3% on average. Costs to employers would increase by $4.5 billion in 2014. (More cost shifting.) And states would see their Medicaid tabs significantly increase. (Yet more cost shifting.) But overall, federal spending would be reduced by $7.6 billion in 2014.

This is an analysis based only on half of Ryan’s plan. But it shows something important. Through its exchanges and coverage requirements, health care reform paves the way for raising the Medicare retirement age, a reform that politicians have been talking about for a long, long time. And even if you’re a huge fan of the ACA, you have to admit that Medicare, which is a significant driver of long-term federal deficits, still needs massive reform. I’m skeptical Ryan’s voucher plan will get traction in the upcoming budget fight. But the Medicare eligibility age – that’s a different story now.