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.