The Severe Economic Danger of Replacing Medicare with Vouchers

The so-called “Ryan budget plan” —as recently as last year considered a radical, fringe proposal, even by top Republicans, but in 2011 approved by the Republican House majority as their official legislative plan for the nation’s fiscal policy— calls for eliminating Medicare and replacing it with a system of vouchers to lower the cost of buying private insurance.

The plan has already stirred a nationwide revolt in public opinion against the new Republican majority, and turned one Congressional district, not lost by the party in over a century, decidedly Democratic, despite the disproportionately Republican makeup of the interim electorate. But the ire of seniors and the non-affluent generally is just one of the perils of the plan.

There is real economic peril built into the Ryan Medicare voucher plan. First of all, it is expected that for anyone under the age of 55, the out-of-pocket cost of maintaining coverage and getting treatment would at least double. With the Patient Protection and Affordable Care Act’s ban on denying coverage, this cost squeeze would also hit insurers hard.

Medicare is currently a social insurance plan, pooling risk among the widest population possible, and backed up by the full faith and credit of the United States. It optimizes the cost-saving potential of spreading the cost across a wider population, and significantly reduces the upward pressure on healthcare spending costs. (Rates of Medicare spending are increasing by about half the rate of increase in the private, for-profit insurance market.)

The private insurance market cannot do what it does, by way of competition, if any one of its players gets too big, and there is no private insurer big enough or wealthy enough to compete with Medicare. What this means is that to cover Medicare beneficiaries would be more expensive for private insurers than it is for the government.

Add that to the doubling of out-of-pocket costs for seniors, our continuing extension of human life expectancy, and the possibility of never getting paid enough to cover all costs, and there is a potential for bankrupting some of the smaller insurers, forcing anti-competitive consolidation and the decay of cost-saving benefits of private insurance for the rest of the marketplace.

Though the issue has not yet come to light, it may be that insurers would ultimately be the economic group most directly harmed by the Medicare voucher plan—after seniors deprived of affordable care. A simple legislative step would make this clear: a ban on government assistance to insurers that take vouchers but fail to provide equal quality of care at out-of-pocket rates on par with Medicare as it is now.

The Medicare, budget and health insurance reform debates can all be expected to evolve substantially, when this aspect of the Ryan plan is better understood by major stakeholders, including the for-profit insurance industry itself, and its major financial backers. Solving the twin problems of unaffordably high budgets and affordably high health insurance costs, by making both Medicare and private insurers insolvent.

The ripple effect, on the wider economy, would be devastating, as first of all emergency medical costs resulting from seniors’ inability to afford high-cost private health insurance flood the healthcare market, and second, the dissolution of Medicare results in the emergency expansion of Medicaid, diverting funding away from other crucial areas of government funding.

Were that transfer of cost from hospitals to Medicaid not undertaken, hospitals would begin to close, reducing the number of beds available, and again putting major upward pressure on health costs. It would also force insurers to cover costs they are not currently structured to deal with, making the rest of the private insurance market still less affordable than it already is.

This would hamper small business investment, hiring and job creation, and that would again put added pressure on public spending to cover emergency health costs for the uninsured. The Ryan plan to replace Medicare with vouchers is, succinctly, totally contrary to the stated purpose of both parties of reining in long-term deficits and debt. It would slow down the economy and put the long-term solvency of either (or both) the United States government and the private health insurance industry at risk.

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Originally published July 9, 2011, at

Respond to The Severe Economic Danger of Replacing Medicare with Vouchers

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