Economics, Health Care

How to save Medicare

Image Credit: Shutterstock

Image Credit: Shutterstock

Here are some key facts from AEI scholar Joe Antos’s new report, Saving Medicare: A Market Cure for an Ailing Program.

  • The Medicare program spent nearly $600 billion in 2012, caring for over 50 million Americans. That means that one dollar out of every five spent on health care was spent by the Medicare program.
  • Since 1980, Medicare spending grew twice as fast as the economy, measured on a per capita basis. Over the same period, Medicare nearly tripled as a share of the federal budget.
  • Between 2010 and 2020, Medicare enrollment will increase by more than 34%, and program spending will increase by nearly 80%.
  • By 2035, the population over age 65 will nearly double and federal spending will expand by 40% compared to 2007.
  • Between 2011 and 2030, average Medicare spending for new enrollees will increase by about 50% in inflation-adjusted terms. By 2050, spending per new enrollee should nearly double in real terms compared to 2030.

Note that all the numbers above are from the CBO’s baseline scenario, which assumes that current law is implemented as written. For a variety of factors, it’s very unlikely that this baseline scenario will actually occur. Under the CBO’s alternative scenario, which assumes a more politically-realistic future, the problem is even worse:

What is driving these massive spending increases? A big part of it is the fee-for-service system, which encourages doctors and patients to consume more health care than they actually need. A second part is the fact that most Americans will receive far more in lifetime Medicare benefits than they paid into the system, as the chart below shows.

So what can be done to solve this crisis? Everyone agrees that costs must be gotten under control—the disagreement is over how. President Obama and the Democrats have placed their bets on the Independent Payment Advisory Board (IPAB) contained within the Affordable Care Act. IPAB cuts costs by controlling payment rates.

A better solution according to Antos would be a premium support system, which basically means changing Medicare from a defined-benefit to a defined-contribution program. Premium support changes the incentives that surround health care instead of chipping away at the edges of the problem with price controls.

Premium support would provide seniors with a subsidy to purchase insurance from competing health plans, each one offering at least a core set of benefits.

Antos envisions a government-operated bidding process among private health insurers that would determine the level of subsidy, with more money going to beneficiaries with greater financial and health needs. The subsidy’s size would be based on the lowest-bidding health plans, ensuring that nobody is priced out of the market.

Premium support differs from a voucher plan because the health care market would still be overseen by the government—seniors wouldn’t simply be handed a check and told to fend for themselves. Indeed, Antos calls for traditional Medicare to remain as an option for seniors, although he suggests several reforms to make the traditional program more cost effective.

Please be sure to read Antos’s report. The section on premium support (p. 37) is particularly important, as he outlines the plan in more detail than I am able to here.

Ultimately, it’s clear that Medicare is going to require serious changes in the future. The question is whether we will induce those changes through government-directed price controls or through changing health care incentives to harness free-market forces.

2 thoughts on “How to save Medicare

  1. Again – in order to make informed suggestions as to how to improve/”save” Medicare you have to start with basic facts from which to base ideas on.

    There are 4 Medicares not one.

    A, B, C, D

    Each one does something different. ALL are entirely voluntary, You have to sign up and pay premiums to receive Medicare.

    A is funded from FICA Taxes – this is a legitimate “entitlement” if you paid into it your entire working career.

    The other three, B,C and D you have to purchase and the only thing you are really “entitled” to is the right to purchase. Anyone over 65 has the right to purchase.

    B is for Medical providers and costs about 210 billion a year in taxpayer subsidies

    C – is Advantage/GAp that is not only subsidized but basically removed the 20% co-pay that original Medicare required of all beneficiaries.

    D – is subsidized drugs

    C/D were both voted on by Republicans and together they cost more than B – the original Medicare.

    Medicare overall requires a 75% subsidy with beneficiaries paying 25% and even though it is means-tested – the thresholds are ridiculous – 200K in income for single and unlimited assets.

    so someone who owns 3 homes and 6 cars will pay $100
    a month for 100% coverage as long as their retirement income does not exceed 200K a year.

    If you got rid of C and D all together except for the truly indigent and lowered the means-testing for B to be 50K a year in income and half a million in assets – then Medicare would likely be entirely self-funded.

    The problem we have with Medicare is ignorance of the program and further ignorance of which parts of the program need to be fixed and the end result is that there is no shortage of people who don’t know squat about the program – advocating essential destruction of it.

    Medicare can be reformed to preserve the most important and vital parts of it by getting serious about the co-pay and reasonable payment for drugs without using a machete to all of it.

    what we lack is reasonable ideas and what we’ve got is ham-fisted ones.

  2. If you want to know who blew up Medicare – it was the GOP under Tom Delay and George Bush who rammed through Part C and Part D. Until then, Medicare was not an out of control program. It was actually doing a better job of keeping costs under control than private plans for younger people were.

    Before the change, Medicare not only would not pay for optical, hearing or long term nursing care, it required a 20% co-pay that required seniors to have some skin in the game.

    After Part C and D were changed – senior could buy gap plans that dissolved the 20% co-pay for things like knee replacements so you had people who had up to 200K of annual income and owned 2, 3 houses paying 100.00 a month for health care that included discretionary 15K operations – paid for 100%.

    It’s ironic that now the GOP says the only way to save Medicare is to eviscerate it – as opposed to going back to revisit the Part C problem.

    I’m convinced that the vast majority of GOP who blather on and on about Medicare being out of control don’t know the first thing about the specifics much less the Tom Delay role in ramming through the Medicare additions that ultimately have contributed to the problems.

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