Republicans revive Medicare subsidy plan

paul ryan medicare
Rep. Paul Ryan supports giving seniors subsidies to pay for Medicare premiums.

How does Rep. Paul Ryan want to save Medicare? Offer seniors subsidies to cover their premiums.

Here we go again.

Ryan's proposal, unveiled Tuesday, is essentially the same as others the House Budget Committee chair has proposed in previous years. This plan formed the heart of the Republicans' entitlement reform platform during last year's election, when Ryan ran as the GOP vice presidential candidate.

Ryan argues that the Republican Medicare proposal keeps costs under control through competition and more choices for patients. President Obama and other Democrats deride it as a voucher program that will leave seniors with higher health care costs.

Here's a summary of the key aspects of the Ryan plan:

Workers who turn 65 in 2024 or later would be able to choose between a variety of private health insurance plans, along with the traditional Medicare option. They receive a subsidy from the federal government to cover or offset the cost of their Medicare premium.

The subsidy would cover the cost of the second-least-expensive private plan or the Medicare option, whichever is less, in the first year. So if seniors select pricier coverage, they would have to pay the difference in cost. And they would receive a rebate if they selected a cheaper plan.

After that, the subsidy increase would be based on a competitive bidding process, but the per capita hike would be no more than nominal GDP growth plus 0.5%. That currently works out to about 4.5% based on figures for 2012.

Lower-income seniors would be protected, while wealthier ones would pay a higher share of their premiums.

Related: What's in Paul Ryan's budget?

The release of the Ryan budget kicks off the latest battle on the touchy subject of entitlement reform. Obama, who strongly opposes premium subsidies, wants to overhaul Medicare by cutting payments to drug companies and providers, while also making richer seniors and certain new enrollees pay more.

Many liberals are concerned that seniors will wind up paying a lot more under the Ryan plan. Health care costs already account for a significant share of income for many beneficiaries, said Edwin Park, vice president for health policy at the Center on Budget and Policy Priorities.

Because the Ryan plan is designed to restrain the growth of Medicare spending, subsidy increases may not keep up with premium increases over time, even for the second lowest-cost plan. So seniors may have to pay more in the future.

"The value of the voucher will erode and people will face less comprehensive coverage over time," Park said.

Dueling over Paul Ryan's Medicare plan
Dueling over Paul Ryan's Medicare plan

Conservatives, however, say the premium subsidies are a key way to bring Medicare spending under control.

"Moving to a patient-centered model would free retirees from relying on the unstable and unsustainable government-run Medicare program and restrain costs through the competition rather than price-fixing," said Alison Acosta Fraser, director of economic policy studies at The Heritage Foundation. "The sooner this transition is made, the better."

Noting that the Baby Boomers are quickly inflating the Medicare rolls, Fraser would like to see the shift start in five years, rather than 10 years, as Ryan proposes. That would still give seniors enough time to prepare for the changes in the senior health insurance program, she said.

But there's no disagreement that Medicare needs to be addressed -- the program is projected to eat up 5.3% of the economy in 2030, up from 3.7% in 2012.

Personal Finance


CNNMoney Sponsors