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By Jacob Geiger April 30, 2011

Gerry Connolly says GOP Medicare plan would line the pockets of private insurance companies

Rep. Paul Ryan’s recent proposal to overhaul Medicare opened a round of partisan debate over how to control the costs of popular entitlement programs that are driving the U.S. deep into debt.

The plan, part of the House GOP’s 2012 budget, passed the chamber with no Democratic support. Although it is certain to die in the Senate or on Obama’s desk, Ryan’s effort to reduce the government’s role in providing health insurance to seniors is likely to remain an issue in the 2012 elections. Ryan, R-Wis., is chairman of the House Budget Committee.

Rep. Gerry Connolly, a Democrat from Fairfax County, recently assailed Ryan’s plan to privatize much of Medicare. Under the proposal, seniors would buy private insurance policies and Uncle Sam would make a fixed payment to insurers to help cover the plans. The system would start in 2022 for everyone who is 65 or younger that year.

"Not one dollar of the increased costs to seniors would be used to reduce the deficit," Connolly said in a press release. "Instead, the Republican plan lines the pockets of the private insurance companies."

Are Connolly’s comments true?

George Burke, Connolly’s communications director, said the claim was based on projections from the Congressional Budget Office that Ryan’s plan would require seniors to pay more for health coverage but not really reduce government expenses. He said the plan "lines the pockets" of insurers because seniors would have to buy private insurance, something they don’t have to do now.

First, let’s discuss how Ryan’s plan would work.

Under the legislation, people who turn 65 after 2022 would get a "premium support payment" from Medicare, paid directly to an insurer they select towards the cost of buying private health insurance. The payment is projected to be about $8,000 in 2022 for someone turning 65 that year. As people grow older, the subsidy would increase. That’s because health care costs increase with age.

Ryan’s plan would raise the baseline payment each year by the increase in the Consumer Price Index. That would allow the payment to keep up with overall inflation, although medical costs have been climbing much faster than total inflation.
One result, the CBO said, would be that future Medicare recipients "would pay more for their health care than they would pay under the current Medicare system."

Let’s go back to Connolly now. We’ll start by addressing the second part of his claim, that requiring seniors to buy private health insurance would "line the pockets" of private insurers.

Although Connolly’s language might be dramatic, he’s right about the basic detail. If Americans over 65 start buying private insurance, with their own money or with government funds, total premium levels will climb for private health insurers. And because the largest health insurance companies are publicly traded and seek profits, it is a good bet that they won’t offer money-losing Medicare plans.

The insurers would have to meet standards set by the federal government, however. They would have to charge the same premium to everyone who is the same age, and could not deny coverage to seniors based on pre-existing health conditions.

The Ryan plan would provide higher insurance subsidies to low-income people; those in the top 8 percent of earnings would receive smaller government payments.

So Connolly’s right on part of his claim. The Ryan plan would increase revenues from premiums revenues at private insurers. We won’t pass judgment on whether this is "lining the pockets" of these companies, since there is little chance of predicting what profit margins would be like under these plans in 10 years.

Now let’s examine Connolly’s claim that "not one dollar of the increased costs to seniors would be used to reduce the deficit."

As we mentioned, the CBO believes that seniors would pay more from their own pockets for health care under Ryan’s plan. So the increased costs to seniors makes sense. But as Joe Antos, an economist at the conservative American Enterprise Institute points out, if seniors have to pay more, government should end up paying less.

The CBO estimates that health costs would be higher under the Ryan plan than under traditional Medicare for a 65-year-old in 2022. The reason for the increase, it says, is that "both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare."

Antos and Marc Goldwein, an economist at the non-partisan New America Foundation, said the government’s premium payments under the Ryan plan would grow more slowly than Medicare’s expenses under the current set-up. So while there may be little savings initially, over time the government’s share of Medicare spending would fall. Those savings would be available for other programs, including deficit reduction.

Antos also said the payments would encourage health insurers and providers to economize because seniors would not have blank checks to pay for tests and treatments. Health-care insurers and providers would have incentive to "increase profits through more efficient care, delivered in a more efficient manner."

Paul Van de Water at the liberal Center on Budget and Policy Priorities used the CBO information and his own calculations to estimate the cost difference between Ryan’s plan and the current system.

Under the current system, Van de Water says a typical 65-year-old pays $6,150 for premiums and out-of-pocket costs on Medicare and supplemental coverage. The government pays about $8,600.

In 2022, he said, a 65-year-old would see out-of-pocket costs double to $12,500, while the government’s share of costs would fall by $600, to $8,000. So while the government would see some savings, Ryan’s plan "increases the total health costs for beneficiaries by vastly more than it reduces the federal government’s spending," Van de Water said.

Dean Baker, another left-leaning economist, said the plan could save the government money over time, but only at the cost of much higher payments from seniors. He, like Van de Water and the CBO, said using private insurers will mean higher costs and more inefficiencies. Those inefficiencies cost money.

Let’s review:

The liberal economists don’t like Ryan’s plan and say it would harm seniors, but they concede it would lead to lower government spending on health care costs, at least over time. That contradicts Connolly’s assertion that no money from these increased costs would help pay down the deficit. It’s true that the new payments by seniors would go towards private insurers, but savings from lower government spending could go towards deficit reductions.

We rate Connolly’s claim Half True.

Our Sources

Rep. Gerry Connolly, Connolly votes no on GOP budget bill dismantling Medicare, April 15, 2011.

House of Representatives Budget Committee, Concurrent resolution on the budget, April 5, 2011.

Congressional Budget Office, Long-term analysis of a budget proposal by Chairman Ryan, April 5, 2011.

Rep. Paul Ryan, Path to prosperity, accessed April 27, 2011.

Center for Budget and Policy Priorities, Ryan budget would increase health care spending for Medicare beneficiaries, April 8, 2011.

Center for Economic and Policy Research, Rep. Ryan’s $30 trillion Medicare waste tax, April 2011.

PolitiFact, Paul Ryan says CBO model of economy self-destructs due to rising deficits in 2037, March 21, 2011.

PolitiFact Wisconsin, says House Republican budget abolishes Medicare within 10 years, April 11, 2011.

Interview with George Burke, director of communications, Rep. Gerry Connolly, April 26, 2011.

Interview with Joe Antos, American Enterprise Institute, April 27, 2011.

E-mail interview with Marc Goldwein, New America Foundation, April 27, 2011.

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