On the Record

Creator of Premium Support Says Ryan Has “Vouchers, Not Premium Support”

Henry J. Aaron

This interview by Ezra Klein appeared in The Washington Post on April 11, 2011:

Brookings’ Henry Aaron is one of Washington’s most respected social policy experts. He’s served as a Social Security trustee, vice president of the American Economic Association and much more. It was Aaron, alongside the Urban Institute’s Bob Reischauer, who coined the term “premium support” to describe a model in which you’d open Medicare to competition but install certain safeguards to protect beneficiaries from cost shifting. Now, Paul Ryan has adopted that model and included it in his budget. There’s only one problem, according to Aaron. Ryan may be calling his reforms “premium support,” but that’s not what they are.

Ezra Klein: I think a lot of us have been confused by Paul Ryan’s insistence that his Medicare plan be called “premium support” rather than vouchers. It looks like vouchers. The Congressional Budget Office thought it was vouchers. So what’s the truth here?

Henry Aaron: Me and Bob Reischauer jointly created the idea of “premium-support” in the mid-1990s. It was a response to what we saw as legitimate criticisms of using market forces to rein in the growth of federal health spending. The worry was the reliable savings would come from shifting costs onto patients. The savings from competition were just something we hoped would show up. So the key element was linking the amount that individuals receive to the growth of health-care spending, not to some other index that would grow less rapidly than health-care costs. The other two elements were aggressive regulation of health-care insurance offerings to prevent insurers from overwhelming people’s capacities to sift alternative plans and risk adjustment.

Now Ryan is associated with at least three different plans. There was Rivlin-Ryan, plain old Ryan, and now there’s the Path to Prosperity. They’re all different. In some ways, the Path to Prosperity plan improves on previous version, because the role of exchanges and risk adjustment is nearer to what we had in mind. But it is hands down the worst because it links premiums to consumer prices, which is the slowest growing index.

And what would happen if it was implemented and the government’s premium contributions grew that much more slowly than health-care costs?

If one does the arithmetic, income grows a few percentage points faster than prices. Health-care spending grows faster than income by a couple of percentage points. So we’re looking at linking to an index that grows less rapidly than health-care costs by three to four percentage points a year. Piled up over 10 years, and that’s a huge erosion of coverage. It’s vouchers, not premium support.

The argument Ryan would give you, I think, is that he can use inflation because making seniors into consumers will make them much more conscientious shoppers and they’ll hold down costs in ways that government could never dream of doing. Is he wrong?

Read the rest of this interview at the Washington Post website »