Surprise! Republicans Could Be on the Verge of Dismantling Medicare

By Matthew Frankel Markets Fool.com

House Speaker Paul Ryan and other Republican leaders have big plans to save Medicare that would involve a major overhaul to the program, including privatization. Even though most Republicans are on board, Ryan and others in favor of his plans are likely to face significant opposition to such a sweeping overhaul.

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With a Republican president about to take office and a majority in both the House and Senate, could Medicare privatization become a reality within the next few years?

Image source: Getty Images.

Why does Medicare need to be changed at all?

In a nutshell, Medicare is heading toward a serious funding problem. It's not really in trouble just yet -- at the end of 2015, the Medicare Hospital Insurance Trust Fund had $197.3 billion in reserves, and the vast majority of the program's expenses for the year were covered by incoming payroll taxes. What's more, the Medicare Hospital Insurance program is actually expected to run a surplus from 2016 through 2020.

It's what's expected after 2020 that's concerning. After that time, the program is expected to run deficits for the foreseeable future. With the ongoing retirement of the baby boomer generation, there are simply going to be too many people drawing benefits from Medicare and not enough workers paying in. Historically, there have been about four workers paying into Medicare for every beneficiary. Today, that ratio is just over 3-to-1. By 2030, the workers-to-beneficiaries ratio will be closer to two.

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Data source: 2016 Medicare Trustees' Report.

Incorporating the latest projections from the 2016 Medicare Trustees' Report, the Medicare Hospital Insurance Trust Fund will be completely depleted by 2028. After this point, the incoming tax revenue will only be enough to cover about 87% of the programs costs, making across-the-board cuts necessary at that time, unless something is done.

Paul Ryan's "Better Way"

Ryan and other Republican leaders have proposed healthcare reform, which they call the "Better Way" plan. You can read the entire plan here, but it is built on five key principles:

  1. Repeal Obamacare.
  2. Provide Americans with more choices, lower costs, and greater flexibility. It is the GOP belief that the healthcare system has too much bureaucracy and has become much too expensive.
  3. Protect the most vulnerable Americans. This means finding insurance options for people with pre-existing conditions and complex health problems.
  4. Spur innovation in healthcare. This includes making it less expensive and time-consuming to bring new drugs to market.
  5. Preserve and protect Medicare.

When it comes to preserving and protecting Medicare, Ryan's platform is proposing about a dozen different changes to Medicare, all of which fall under three main categories: immediate relief from Obamacare, structural reforms, and preserving Medicare for future generations.

The platform aims to strengthen Medicare Advantage, repeal the ban on physician-owned hospitals, and repeal other Obamacare-related provisions. It would also make major structural changes to Medicare, such as combining Medicare Parts A and B and creating a unified deductible and a uniform 20% cost-sharing requirement for all services. In addition, Medicare's retirement age would be adjusted to match Social Security's full retirement age.

Premium support: The biggest change

The biggest change the Better Way is proposing is known as "premium support," which would take effect in 2024 and would be a massive transformation to Medicare benefits as we know them. Simply put, Ryan wants to phase in a privatization of Medicare by 2024, shifting the health insurance of millions of people to the private sector. In addition, President-elect Donald Trump's nominee for secretary of health and human services, Rep. Tom Price (R-Ga.), has also been in favor of premium support, which could help the House Republicans pass legislation to achieve this goal.

Starting sometime that year, Medicare beneficiaries would be able to choose among private healthcare plans, which would compete alongside the traditional Medicare program on a newly created Medicare Exchange. Medicare would then provide a "premium support" payment that would either pay for all or some of the chosen plan.

Essentially, the idea is that this would create competition for elderly Americans' healthcare business where no competition presently exists. By doing so, skyrocketing healthcare costs and wasteful spending would be naturally kept in check (at least in theory).

According to a 2013 analysis by the nonpartisan Congressional Budget Office, premium support would indeed reduce federal spending for Medicare, and the increased competition would not only improve affordability but would allow seniors to choose healthcare plans that best meet their needs.

It's important to note that these changes wouldn't affect people in or near retirement, but these people could choose to enroll in the new program.

What could get in the way?

As you might expect, Ryan's plan is supported by the vast majority of Republicans, but some are concerned about trying to do too much too fast.

For example, Sen. Lamar Alexander (R-Tenn.), chairman of the Senate Committee on Health, Education, Labor, and Pensions, has made it clear that his priority is repealing the Affordable Care Act, not completely overhauling Medicare. As Sen. Alexander put it, "We want to begin immediately to repeal Obamacare... Trying to deal with the solvency issues with Medicare at the same time falls into the category of biting off more than you can chew." However, he did express that Medicare's long-term issues do need to be addressed at some point.

And although Rep. Price is pro-privatization, Trump himself has been adamant during his campaign about not cutting Medicare. However, he may have to compromise if he wants to get his tax cuts pushed through without adding a huge amount to the deficit.

In addition, most Democrats (also as you might expect) are adamantly opposed to Ryan's plans. In fact, the incoming Senate minority leader, Sen. Charles E. Schumer (D-N.Y.), has even gone so far as to accuse Republicans of "plotting a war on seniors" and has pledged to fight tooth and nail against any attempt to privatize Medicare.

Because of this, the U.S. Senate is likely Ryan's biggest roadblock to getting Medicare privatization done. In the Senate, 60 votes are typically needed to pass major legislation like this would be. However, as The Washington Post recently reported, it may be possible to pass Medicare legislation with a simple majority through the budget reconciliation process, which the Republicans have.

In other words, there's a real chance that we could see Medicare privatization become a reality in the not-too-distant future.

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