Mitt Romney’s selection of U.S. Rep. Paul Ryan, R-Wis., as running mate brought the future of Medicare to the forefront of political debate.
Medicare has problems, but they are not major.
The per-capita cost of the program is dropping. Administrative costs are well below that of most insurance companies. The aging of the Baby Boomer population is its main threat, but even that is less dramatic than it might be because the program does not cover nursing home stays.
While it is true that President Barack Obama’s plan would cut Medicare costs by $716 billion, the claim is misleading. The projected reduction in Medicare costs do not come from a drop in benefits. In fact, his plan expands benefits by covering preventive services and filling the prescription drug donut hole.
The Affordable Care Act reduces projected Medicare payments to some insurance companies and health care providers, in part by focusing on health-care quality rather than procedures. The law also creates a Medicare cost control board.
Thus, the Obama plan finds savings without reducing benefits to Medicare recipients.
Both Romney and Ryan promise they will seek repeal of the Affordable Care Act, including the provisions designed to control Medicare costs.
Despite ending these cost controls, Ryan’s plan incorporates the law’s $716 billion in Medicare cuts. Romney has distanced himself from this part of the Ryan plan.
The GOP plan to reduce Medicare costs would transform the program from a defined-benefit plan to a defined-contribution plan. Instead of assuring people specified medical benefits when they reach 65, the program would provide them with vouchers they could use to purchase private insurance.
The Romney-Ryan plan is analogous to a change many employers are making away from pensions for their employees. Employers prefer 401(k) defined-contribution retirement plans because the risk of poor-performing investments is carried by the employee, not the employer.
Taxpayers are potential winners under the Romney-Ryan plan, because they are shifting financial risk to retirees. Insurance companies also are winners, as they gain a huge market.
The losers in the plan are Medicare recipients, who would bear the risk that medical costs rise faster than the value of the vouchers.
In that scenario, seniors would either have to pay for health care out of their pocket or do without.
Both the Obama and Romney plans reduce Medicare costs. Obama’s plan does so without cutting benefits. Romney’s plan places those benefits at risk.
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