Economics, Health Care

One step closer to a Medicare reform that can work

The Medicare reform proposal released today by Representative Paul Ryan (R-Wisconsin) and Senator Ron Wyden (D-Oregon) recognizes that even the federal government cannot guarantee to pay for health services, or anything else, without limit. The new proposal is more realistic in some respects than the Medicare reform advanced by Ryan in the House budget resolution, but it leaves many questions unanswered. Those details, and the public’s reaction to them, will determine whether the premium support concept that caps the federal subsidy will be adopted.

Under the new proposal, traditional fee-for-service Medicare would continue to be available to future generations of seniors, but it must now compete head-to-head with private plans. That is very similar to the competitive bidding model advanced by AEI experts Robert Coulam, Roger Feldman, and Bryan Dowd. In contrast, the House plan would have made traditional Medicare unavailable to new beneficiaries as of 2022—clearly unpopular with seniors, who view this as undermining their program and are likely to express their displeasure at the polls.

Some conservatives will criticize this change as backsliding. They correctly see the traditional Medicare program in its current form as inefficient and anti-competitive. But pretending that the program will disappear in ten years feeds the worst tendencies of politicians, who would avoid making important but difficult decisions needed to set traditional Medicare on a fiscally sustainable path.

The reality is that traditional fee-for-service Medicare likely will have some 50 million enrollees in 2022, and will remain a dominant force in the health sector for decades. Ryan and Wyden hint at the need for common-sense reforms to traditional Medicare, including a new structure of deductibles and copayments, a cap on catastrophic costs, and a new physician payment system. They skirt the central problem: disorganized fee-for-service and top-down limits on prices paid for services drive up the use of more, and more complicated, services. The program’s survival depends on our willingness to make substantial changes over the next few years so that traditional Medicare can provide cost-effective care without draining the Treasury.

With the massive baby boom generation beginning to turn 65, we have almost run out of time to put Medicare on a sustainable basis. Fortunately, the influx of baby boomers slows the growth of Medicare spending for a few years because younger beneficiaries need less healthcare. That buys Congress a little more time to face financial reality and reform the program.

Between 2005 and 2010, Medicare spending per beneficiary increased 39 percent, but between 2010 and 2015 the increase is projected to be about 7.5 percent. However, that assumes Congress will allow a 27.4 percent cut in physician fees to take effect in January. Under the more reasonable assumption that a doc fix is enacted, I estimate that Medicare spending between 2010 and 2015 is likely to increase by about 16 percent—still much lower than the preceding five-year period. Soon after that, costs begin to rise steeply as the boomers begin to reach their 70s.

That leaves Congress with barely enough time to truly reform Medicare. The Ryan-Wyden plan hints at that, and backs it up with a cap on Medicare spending limited to the growth in GDP plus 1 percent after 2022. That is a weaker constraint on spending than under the House proposal, but more likely to garner political support.

Waiting another decade to bend Medicare’s cost curve is not an option. If the president and the new Congress fail to take decisive action early in the new term, the corrective fiscal surgery will be far more severe. Paul Ryan and Ron Wyden have set out a useful marker that could be the basis for real Medicare reform in 2013.

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