NCPA - National Center for Policy Analysis

Premium Support in Medicare

April 3, 2012

Policymakers are increasingly looking toward the federal government's entitlement programs as a means of cutting deficits and returning spending to sustainable levels.  To that end, substantial reform of the Medicare program, which provides health care to the elderly and disabled, is under consideration, especially when lawmakers take into account the imminent enrollment of retiring baby boomers, says Health Affairs.

To this end, Representative Paul Ryan (R-Wisc.) and Senator Ron Wyden (D-Ore.) have proposed an innovative plan that would more or less supplant the traditional fee-for-service system of Medicare in favor of a subsidy program.

  • The plan would encourage participants to seek out health insurance options that fit their specific needs.
  • The government would then provide participants a fixed contribution to help them pay for that insurance's premiums.
  • If the amount of the contribution were less than the premium, the individual policyholder would make up the difference.
  • The government would control its aggregate spending through a predetermined growth formula that recognizes the historical inflation of premium rates.

The Ryan-Wyden plan would eliminate current Medicare almost entirely, allowing continued access only for a small number of participants.  Additionally, the plan has set its growth formula at the rate of gross domestic product growth plus one.  It is believed that this growth rate will allow for government savings while providing ample support for retirees so that their premiums do not become unaffordable.

Reports vary on how the plan will affect government spending in the area, but most conclude that it will create significant savings:

  • The Congressional Budget Office estimated that the 2011 Ryan proposal would probably reduce federal spending by 2030 by 8 to 11 percent.
  • A more recent analysis by Roger Feldman suggests that a fully implemented competitive bidding system would reduce federal spending on Medicare by about 5.6 percent through 2020.

Additionally, the financial effects for program participants are largely mild:

  • Forty-three percent of beneficiaries would see no change in their costs.
  • Twenty-two percent would face higher payments of less than $40 per month.
  • Only about 1 percent would experience higher costs as much as $352 per month.

Source: "Health Policy Brief: Premium Support in Medicare," Health Affairs, March 22, 2012.

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