Medicare Part III: Congressman Ryan’s Medicare Plan

August 23, 2012 J

By: Nicole Kaeding

Like President Obama, Congressman Ryan has a plan to reform the Medicare system. Unlike President Obama’s plan, Ryan’s plan works by creating greater flexibility for seniors, utilizes market forces to achieve savings and has bipartisan support. Ryan’s plans have been co-sponsored by Senator Ron Wyden, Democrat from Oregon.

As discussed yesterday, President Obama’s Medicare plan “cuts” $716 billion from Medicare over the next ten years. Ryan’s plan keeps these cuts, but instead of using the cuts to fund a vast new entitlement system, he uses the money to shore-up Medicare’s finances. Those savings are left in the Medicare trust fund to alleviate (although not solve) the pressure of millions of new retirees.

Ryan’s plan also overhauls the Medicare system for younger Americans. Current Medicare enrollees and those 55 years old and above will continue to participate traditional Medicare. No changes. Starting in 2022, Ryan would transform the Medicare system into a market-driven approach.

Premium Support

The key feature of Congressman Ryan’s Medicare Plan and the Ryan-Wyden Plan is premium support. Premium support provides seniors with a fixed dollar amount payment to purchase insurance. When they hit age 65, seniors will have a choice of traditional Medicare or using their premium support payment to purchase from a group of pre-approved Medicare insurance plans. Seniors will have the ability to select a plan that meets their specific desires and needs instead of the current one-size-fits-all Medicare system.

Moving Medicare to this approach will bring market forces into this single-payer-esque health insurance system. Allowing health insurance plans to compete for customers promotes innovation, better quality and lower prices.

The plan will also allow for some variations in premium support payments to reflect a seniors’ health. The nature of the insurance process means that those with higher risk of claims will be charged more; Ryan’s plan accounts for these variances. Additional controls are included to maintain the current means-testing for wealthier seniors.

Competitive Bidding

Competitive bidding is the process by which the price of the premium support payment is determined. Under Ryan’s plan, insurers will submit bids to Medicare for the cost to provide insurance to seniors in a geographic area. Medicare will rank the bids based on price and coverage. The second cheapest approved plan’s price–plans will be required to cover certain elements–will be used to determine the premium support payment.

Afterwards, seniors will choose which insurance plan to purchase and will receive a premium support payment equal to the amount determined above. If the plan the senior purchases is less expensive than the support payment, the senior will keep the difference. If it is more expensive, the senior will be required to make up the difference out-of-pocket. This encourages seniors to be cost conscious in making their health insurance choices.  That introduction of consumer choice and cost consciousness is what will drive down costs in the system.


Insurance Cost Premium Support Payment* Seniors’ Out-of-Pocket Cost
$10,000 $8,000 $2,000
$9,000 $8,000 $1,000
$8,000 $8,000 $0
$7,000 $8,000 Refund of $1,000

*Premium support payment equals the cost of the second cheapest plan available.

Other Changes

Ryan also makes several changes to Medicare to undo the damage from the President’s plan. Ryan proposes to repeal the Independent Payment Advisory Board, and repeal the $300 billion in Medicare tax hikes.

Further, Ryan plans to cap the future growth in Medicare spending to growth in the national economy (Gross Domestic Product) + 0.5%. The President’s plan assumes growth at the same rate.


Congressman Ryan uses the same reduction in future spending increase—dubbed “cuts” in the news. Instead of the President’s approach of using the money to further federalize the health care delivery system in America, Ryan uses these “cuts” to pay for larger Medicare reforms. Transitioning to a plan with current choice and flexibility will encourage insurers to innovate and divert Medicare from its current unsustainable path.

For more information on Medicare and the President’s changes, see parts I and II of our series on Medicare.

Part I: What is Medicare?

Part II: President Obama’s Medicare Plan

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