BRIEF: Medicare Reform

Background: Enacted in 1965, Medicare is a government program that provides health insurance coverage for 57 million persons: almost all retired Americans aged 65 and older, as well as some disabled populations. Largely because of lower than expected revenues resulting from a sluggish wage growth, the Medicare Hospital Insurance (HI) program will become insolvent by 2028. The declining status of the HI trust is, of course, only one marker of Medicare’s growing financial problems. The biggest problem is the rapid rise in Medicare spending.

Fiscal and Demographic Problems: Medicare has been the fastest growing program in the federal budget. Total Medicare spending will jump from $613 billion in 2014 to more than $1.2 trillion by 2024. As a result, seniors and taxpayers will both pay more. By 2040, 22 percent of the program’s total cost will come from payroll taxes but almost 61 percent will be financed out of general revenues. Meanwhile, the entitlement is generating huge debt for current and future taxpayers. The Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS), the agency that runs Medicare, estimates that Medicare’s unfunded liability—the dollar value of promised benefits that are not paid for—will range between $32 trillion and $44 trillion over the next 75 years.

Meanwhile, Medicare is burdened by a whole range of separate problems. For example, the program is annually burdened by massive levels of waste, fraud, and abuse totaling $60 billion in 2014. At the same time, Obamacare is imposing an estimated $715 billion cut in payments for Medicare services, which jeopardize senior’s existing access to medical care. And while more and more seniors are relying on the program, its capacity to deliver future benefits is being undermined by changing demographics, rising life expectancies, and fewer current workers funding the program. By 2040, the Congressional Budget Office (CBO) projects that the number of Americans aged 65 and older will increase by 76 percent, and by 2030, average life expectancy will increase to 81. Today, there are roughly three workers for each Medicare beneficiary, and by 2030, that will decline to 2.3 workers for each beneficiary. Medicare must pay for more seniors, for a longer time, with less revenue.

Structural Problems: Traditional Medicare is governed by central planning and price controls and the Medicare bureaucracy issues tens of thousands of pages of rules, regulations, and guidelines that impose large administration costs on doctors and other medical professionals. At the same time, traditional Medicare (Parts A and B), fails to provide efficient, high-quality health care and violates the personal freedom of patients and the professional independence of doctors by preventing them from entering into private agreements outside of Medicare for Medicare-covered services without penalty. Under current law, physicians who engage in such private contracts with patients, for whatever reason, must give up all other Medicare patients for two years.

Solutions: Traditional Medicare’s inefficient, outdated and centralized structure fails to deliver efficient, patient-centered, and cost-effective health care. Congress can pursue a step by step process of reform.

First, Congress can reform traditional Medicare. This can be done by combining Medicare Parts A and B into a single health plan covering both hospital and physician services, as well as protection from catastrophic illness. Congress should also allow balance billing in traditional Medicare, and repeal the 1997 statutory restrictions on the rights of physicians and patients to enter into private contracts for any medical services they wish, regardless of whether or not those services are reimbursed by Medicare.

Congress can also phase in an increase in the age of normal Medicare eligibility. Over a ten year period, Congress could make that normal age of eligibility 68, reflecting Americans’ increased life expectancy and greater work capacity. Congress should also maintain and expand the existing policy of limiting taxpayer subsidies for the wealthiest Medicare recipients.

Second, Congress can expand defined contribution financing (premium support) that already characterizes the Medicare Advantage and Medicare Part D programs. This means that the government would make a defined contribution to the plan of the patient’s choice – whether the patient chooses traditional Medicare or a private plan or a retiree’s employer-sponsored plan, including a health savings account plan. This would unleash an intense competition among health plans, control costs, and spur innovation in health care delivery. Prices for medical services would be set by the market, not by the government.

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