Last year, the oldest members of the baby-boom generation turned 65, leading the demographic bulge that will come to dominate the nation’s entitlement programs, federal budgets, and political debates for years to come. Every day until 2030, 10,000 Americans will age into Medicare and Social Security, even as the proportion of young working people paying into the programs shrinks.
The graying of the population presents some difficult math, and it is complicated even more by the economic downturn’s hit on income-based entitlement programs, including Medicaid and food stamps, that have seen their enrollments surge. The Congressional Budget Office estimates that Social Security will grow from 5 percent of gross domestic product to 6.2 percent in 25 years, while Medicare will rise from 3.7 percent of GDP to 6 percent. Recent updates from the Medicare and Social Security trustees estimate that the retirement fund will be insolvent in 2033 and that Medicare will go broke even sooner; the hospital trust fund is expected to start owing more than it collects in 2024.
Mitt Romney sees those numbers and concludes that Washington must overhaul the entitlement programs to prevent a fiscal calamity. Taking his lead from House Budget Committee Chairman Paul Ryan, R-Wis., the presumptive GOP nominee proposes big changes in Medicare and Medicaid that he says will improve the budget picture without robbing the country of a crucial safety net.
President Obama’s reform proposals sidestep sweeping change. He would retain the basic structure of the entitlement programs but hope, in the case of Medicare, that changes already enacted will reduce health care costs. His 2010 Affordable Care Act actually expands benefits for seniors and offers tax credits to middle-income Americans to buy health insurance. But it also commences a series of behind-the-scenes initiatives designed to hold down spending.
On their face, the two candidates’ visions for entitlement reform look quite different. And they would likely feel very different for beneficiaries. But both are based on the notion that Medicare spending, at least, can no longer be open-ended. Obama plans to use government oversight to enforce new budget targets in the program. Romney would use consumer choice and market pressure to achieve quite similar goals.
“The on-the-ground differences between the two approaches are quite profound,” said James Capretta, a fellow at the Ethics and Public Policy Center who focuses on entitlement policy. “What happens as a result of the two approaches of moving Medicare toward a more moderated spending rate is likely to be really different.”
Both candidates are mindful of the political risks involved in suggesting changes to entitlement programs, particularly those affecting the elderly. Regardless of their political leanings, older Americans are typically wary of changes to the benefits they have come to rely on—or expect to receive when they retire. A recent poll by the Kaiser Family Foundation, which tracks attitudes on health care issues, found that 70 percent of seniors—including 53 percent of Republicans—would reject any change to Medicare’s benefit structure. They are similarly unenthusiastic about cuts to Social Security.
Democrats from Obama on down the ballot hope to win in November by decrying the Ryan budget as “ending Medicare as we know it.” (Indeed, Rep. Steve Israel of New York, chairman of the Democratic Congressional Campaign Committee, has said that the top three issues in the 2012 election will be “Medicare, Medicare, Medicare.”) Meanwhile, Republicans are fond of pointing out that Obama’s health care law cuts Medicare spending by $500 billion and gives an unelected panel of experts the authority to change payments to doctors.
It’s worth noting that, despite the attacks and counterattacks, neither candidate’s plan completely addresses the demographic pressure facing entitlements. On Social Security, Obama and Romney have remained fuzzy, despite widespread agreement among experts that the long-term viability of the program will likely require reduced benefits and higher taxes for some recipients, as well as increases in the eligibility age. When it comes to Medicare, both men have focused their policies on reducing spending per beneficiary, a strategy that will lower costs but probably not enough to compensate for all of the program’s coming enrollees.
The president has already chosen his main path for entitlement reform. It’s called the Affordable Care Act. The health care law included Medicare and Medicaid reforms that Obama believes will transform the medical system, driving down spending without reducing benefits to seniors. The concept behind the law is that by making the health care system nationwide more efficient, the government can moderate spending on seniors, whose consumption of health care has consistently risen faster than the growth of the economy, even before their numbers swelled.
“My own deficit plan would strengthen Medicare and Medicaid for the long haul by slowing the growth of health care costs—not shifting them to seniors and vulnerable families,” Obama said last week in a speech on the economy.
The law includes pilot and incentive programs to move Medicare payments away from the current model, where doctors and hospitals are paid for every service they offer, to one that rewards providers for keeping patients healthy at low cost. But it also includes some budget cuts and payment ceilings that will theoretically slow spending even if the experiments don’t work.
On the goodies side, the law expands certain benefits for seniors. Over time, it closes the so-called doughnut hole, the gap in coverage that obliges seniors to pay out of pocket for prescription drugs. It requires insurers to cover a set of preventive services without co-payments. And it creates a system of tax credits to help non-elderly middle-income Americans buy private plans.
The law slows the reimbursement increases that Medicare offers hospitals each year, makes substantial cuts in special payments to safety-net providers, and establishes a board of experts with the authority to change payment formulas if Medicare spending grows faster than the gross domestic product plus 1 percent, a historically low rate of growth. It also slashes subsidies to private insurers that participate in the alternative Medicare Advantage program. Those cuts enabled the Congressional Budget Office to “score” the law as a money saver and spurred the Medicare trustees to estimate that the law gives the program eight more years of solvency. Critics, including Medicare’s chief actuary, say that the assumptions about Medicare cost savings are unrealistic.
In Medicaid, the president has endorsed a massive expansion of the program as part of the law’s larger plan to achieve universal health coverage. Beginning in 2014, Medicaid will grow to cover all individuals earning up to 133 percent of the federal poverty line—about 16 million more people in total. Although the federal government will initially pick up the tab for the new patients, the change will be a massive undertaking for most states, many of which currently bar coverage for many nondisabled adults. Over time, the program is likely to shift more costs to state governments that are already feeling the budget pinch from rapidly rising Medicaid bills.
Still, the president has recently acknowledged that the reforms in the Affordable Care Act may not be enough to address persistently high budget deficits. In his fiscal 2013 budget, Obama proposed a series of additional cuts, including reductions in the prices paid to drug companies for certain patients, increases in co-payments for home health services, and fees on supplemental health insurance purchased by seniors to cover certain costs. He says that his proposals would save more than $300 billion over 10 years. Obama was also reported to have considered supporting an increase in the Medicare eligibility age while negotiating with House Speaker John Boehner during debt-ceiling negotiations last year, although he has never endorsed that policy publicly.
Romney’s reforms are rooted in the philosophy that competition will do more to lower health care costs than government oversight and price controls. Instead of squeezing Medicare from within, he proposes to remake it as a private voucher program where seniors shop around for coverage that best suits their needs. The Romney plan would preserve the traditional fee-for-service system as one of the options and would use its benefits package as the benchmark for competing plans. But Romney would not guarantee that the government program would remain affordable for all seniors. His campaign has said that the size of the voucher would be determined through competitive bidding.
The most recent Medicare proposal from Ryan and Sen. Ron Wyden, D-Ore., would set a fixed growth target for the voucher, one quite similar to the rate sought by the independent board that is part of Obama’s health care law. The Romney camp, however, has been vague about whether it would follow this approach or use yearly bidding to set the voucher’s value. Because health care inflation is typically much higher than growth in the overall economy, annual bidding would mean a more generous benefit over time; a fixed target could shift more costs to seniors. The latter would reduce the budget more, but the former is likely to play better, politically.
Romney would slowly raise the eligibility age by indexing it to increasing longevity in the population. He would also subject Medicare benefits to a means test, so that wealthier seniors might get a skimpier voucher and have to pay out more of their own money for their coverage.
For Medicaid, too, he would promote big changes. Instead of the current system, where the federal government and states split the cost of each medical claim and the federal government sets many of the rules for eligibility and benefits, Romney would convert the program into a block grant. States would get a lump sum and permission to organize their program as they wish. The grant would increase by a fixed target of gross domestic product growth plus 1 percent. That would be a strict diet for Medicaid, which has grown rapidly—especially in recent years, when the economic downturn has thrown more people into poverty. A recent report from the National Governors Association found that state Medicaid spending had risen at twice the rate of education spending in the past 10 years—and by 20 percent in the last year alone.
Romney has said that a block-grant system would give states more flexibility to innovate and more incentive to design efficient, fraud-free programs. “Let states care for their own people in the way they think best,” he said in a speech this month. Some states have welcomed the idea of reduced federal control. But critics say that Romney’s program couldn’t keep pace with the increased enrollment that comes as the result of demographic changes or recession and could result in slashed benefits.
When he was governor of Massachusetts, Romney was less enthusiastic about slashing Medicaid payments. As part of his health reform law there, he maxed out the state’s federal Medicaid match by expanding his program as much as the law allowed. The Massachusetts law also relied on additional Medicaid funds, granted as a waiver.
On Social Security, both candidates are rather vague, but they appear to be fairly close in their thinking. Unlike President George W. Bush, Romney has not endorsed a privatized approach to the pension program. Obama and Romney have said they would be open to raising the retirement age, which is already on a slow climb to 67. Both also say that richer beneficiaries should get less from the system, although they differ slightly in how they would accomplish that: Romney has said that wealthier seniors should get smaller benefits; Obama has indicated that he might like higher earners to pay more into the system. Neither has spelled out specifics.
Andrew Biggs, a resident scholar at the American Enterprise Institute who advised Bush on Social Security, said it’s not surprising that the candidates are avoiding concrete proposals. Unlike health care, which is complicated, Social Security has only a limited number of levers.
“A little bit of fuzziness is good for political purposes,” he said.
Entitlement reform, whether it involves Social Security or Medicare, poses political challenges for any candidate. On one hand, neither Obama nor Romney wants to appear cavalier about the prospect of entitlement programs consuming an ever-larger share of the federal budget, driving up deficits, and crowding out spending on other programs. On the other hand, specific plans can scare seniors and offer targets of opportunity for opponents.
Obama still hasn’t convinced many Americans that his health care law, which makes significant changes to Medicare and Medicaid, was necessary or prudent. Romney, by embracing Ryan’s plan for sweeping changes in Medicare and Medicaid, has left himself open to criticism that the government will shrink its support for seniors. Entitlement reform is likely to be an issue where each candidate will try to score points by accusing his rival of advocating a cure that is worse than the disease—particularly for older Americans.
“This is the highest turnout group that you have in American politics,” said Robert Blendon, a pollster and a professor at the Harvard School of Public Health who studies attitudes on health policy. “It will be a significant election issue.”
This article appears in the June 23, 2012 edition of National Journal Magazine.