The Retooling of Medicare

For a long time, I've thought that Medicare would have to be changed to reduce its costs, or it would bankrupt us. Here is a description of the Rivlin/Ryan proposal that is starting to be considered, which would change Medicare from a 'defined benefit' to a 'defined contribution' plan. Something like this, as difficult as it will be, has got to happen.

For more than a decade, there have been calls for “restructuring Medicare,” the federal health insurance program for Americans 65 and older, which is projected to absorb an ever-increasing fraction of the federal budget.

Making that call for restructuring on the campaign trail or in television interviews makes for good political copy. Unfortunately, few politicians have had the temerity to be specific on the proposal, because doing so would identify winners and losers, a clarity that is not helpful in political campaigns.

The notable exception has been Representative Paul Ryan, Republican of Wisconsin, who, with Alice Rivlin of the Brookings Institution, has proposed a radical departure from the current Medicare.

Under the Rivlin-Ryan Plan, as it has come to be known, Medicare would be changed from the defined-benefit plan it has been since its inception to a defined contribution plan.

Under the defined-benefit plan, the government promised to procure specified medical goods and services for Medicare beneficiaries, as medical necessities assessed by the beneficiary’s physician. That puts the risk of escalating costs for that health care mainly onto the shoulders of taxpayers, although Medicare beneficiaries share in these costs through premiums for Part B of Medicare (chiefly physician services) and co-payments at the time of service.

Under the defined contribution approach envisaged by the Rivlin-Ryan plan, most of the risk of future health-care cost increases would be shifted onto the shoulders of Medicare beneficiaries. This feature makes the proposal radical.