Ethics & Public Policy Center

The New Ryan Budget

Published in National Review Online on March 20, 2012



Last year, House Budget Committee chairman Paul Ryan transformed the Republican domestic policy debate with a budget proposal that showed conservatives where they should want the Republican party to be on the key fiscal issues confronting the country: entitlement reform, tax reform, and federal spending. The success he achieved has been nothing short of extraordinary. These days, it’s hard to find anyone on the right who disagrees with Ryan’s prescription for our fiscal ills—and (which was not true a year ago) even with his proposal for Medicare reform, which is the most needful and essential of his prescriptions.

Today, Ryan has released his new budget proposal for 2013, and what he offers is no less remarkable—and in some key respects even more remarkable. The outlines are similar to last year’s budget of course. What was the right way forward then remains so: repealing Obamacare, restraining federal spending, reforming the tax code to broaden the base and lower the rates, fixing and modernizing the safety net so that it helps make the poor more independent rather than making the middle class less so, and reforming our entitlement programs—averting fiscal catastrophe by advancing the novel idea that markets work and consumer choice is better than bureaucratic mandates. The budget cuts spending by $5 trillion over the next decade (compared to Obama’s budget), reduces deficits by $3 trillion, begins to reduce the debt as a share of the economy very quickly, and (especially thanks to its Medicare reform) averts a disastrous debt crisis beyond that.

But the details of this year’s budget are in some key respects significantly better than last year’s. Its tax proposal is more specific (though still not specific enough, since decisions about how to handle individual exemptions, credits, and deductions would have to be made by the House Ways and Means Committee). On defense it offers a responsible alternative to President Obama’s attempt to squeeze our military to buy an unreformed liberal welfare state a few more years. And on Medicare, it moves even further in the direction of enabling efficiency in health care through real market competition but at the same time makes the politics of Medicare reform easier rather than harder for Republicans—significantly easier, I think.

A few words on that last point. On Medicare, where he has already made perhaps the greatest difference of all in moving Republican thinking in the right direction, Ryan has proposed some meaningful improvements to last year’s proposal. As with last year’s proposal, he would leave current seniors and people who are now over 55 untouched and for all younger Americans would transform Medicare into a premium-support system in which the government would provide a fixed amount per recipient each year and individuals could use that amount to choose from a menu of insurance options. Unlike last year’s proposal, however, the insurance options would include one public fee-for-service option, and (most important) the level of the premium-support benefit each year would be set by competitive bidding among insurers, rather than just by a pre-determined formula set to inflation.

Essentially, the government would define the minimum insurance benefit it would seek to provide to all covered seniors, based on the level of coverage Medicare now provides, and then there would be a process each year in which the competing insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment would be set at the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer. Thus, there would be at least one option that would cost less than the premium-support benefit, and seniors choosing that option would get the difference back; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose. Poorer and sicker seniors would get additional help, while the wealthiest seniors would get less. Medicare would continue to guarantee a comprehensive insurance benefit with limited out-of-pocket costs for seniors, but the cost of the program would be dramatically restrained by consumer pressure and competition that would drive providers and insurers to find ways to offer better and less costly care. This idea basically combines the best elements of a defined-contribution and defined-benefit program and avoids the downsides of both.(I laid out how such an approach could work and why I think it’s a very appealing idea in The Weekly Standard a few months ago, here).

To help CBO score such a proposal, and to make sure the government’s maximum costs are reasonably predictable, the competitive bidding process would also be backed up by a maximum growth index (of nominal GDP plus 0.5 percent per year)—the same rate the Obama administration proposes for the program’s growth. But unlike Obama, Ryan does not assign the task of meeting that goal to a panel of 15 numinous bureaucrats who are somehow expected to finally make price controls work but rather to market competition and consumer pressure, which actually do work.

That index (or cap on Medicare’s growth) is made necessary by the scoring conventions of this kind of debate, but the key to this reform is the competitive bidding process, which would allow the premium-support benefit to grow exactly as slowly as possible while providing a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a pre-set formula. Information about costs and prices would flow from those who had more direct on-the-ground knowledge (insurers, doctors, and hospitals) to those with less (Medicare administrators) rather than the other way around, as now happens. Insurers and providers would have a strong incentive to innovate, to improve efficiency, and to cut costs while offering high-quality services to consumers, and the broader health-care system would be liberated from the stranglehold of the economically obtuse fee-for-service system. This is the essential ingredient for any effective health-care reform, and Ryan has found a way to make it both politically palatable and substantively meaningful.

Ryan himself seems inclined to downplay the differences between this year’s Medicare proposal and last year’s, but the differences are significant, and all to the better. Between the fee-for-service option (which would have to compete for consumers on a level playing field with private insurers) and the competitive bidding process (which eliminates many of the political and practical drawbacks of other kinds of defined-contribution Medicare reform) they make mincemeat of the Democrats’ demagoguery of the past year. This reform is an even more wholehearted statement of confidence in the potential of markets to improve the quality, efficiency, and accessibility of American health care. It is the solution we need.

It would have been nice if the budget offered a specific alternative to Obamacare, and it would have been nice if (now that it is has been redesigned to get going more gradually) the Medicare reform would have started sooner than ten years out. But otherwise, it’s pretty hard to find much fault with the budget. It is the most coherent, responsible, and serious conservative governing document we have ever seen from elected Republican officeholders. And it helps us to see why the coming
election matters. The idea that this could be the agenda of the next president and Congress, rather than more of the same blind march to a self-inflicted and entirely avoidable economic and fiscal catastrophe, is a genuine cause for hope. Let us hope, too, that the Republican presidential candidate can see that.

Yuval Levin is the Hertog fellow at the Ethics and Public Policy Center and the editor of National Affairs.

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