Medicare is unsustainable in current form
Commentary: Fiscal cliff negotiations are a good place to start
Source: Market Watch
WASHNGTON (MarketWatch) — Entitlement reform is a major sticking point in fiscal cliff negotiations. Republican House Speaker John Boehner has proposed cutting $900 billion in entitlement spending over the next decade, and President Barack Obama’s plan doesn’t include entitlement reform.
My colleague Rex Nutting wrote earlier this week that “rushing into entitlement ‘reform’ would be particularly foolish,” although America needs to keep health care costs down by changing the way doctors and hospitals are paid, just as Obamacare is going to do. Read Nutting column “How to fix Medicare the right way.”
Medicare is clearly unsustainable. Rather than Obamacare, which is criticized for its system of rationing care, and paying doctors on the basis of outcomes, we need to inject more choice into Medicare, turning it into a system of competitive managed care.
Here's a sensitive management question: Is there a better way to enforce mandatory evacuation orders in advance of a hurricane, for the safety of those living near water and those who later have to rescue them?
Medicare is the toughest nut to crack. Social Security trust fund deficits can be solved by gradually raising the retirement age for future generations, means-testing benefits, and changing the growth path of benefits from an index based on wage growth to one based on price growth.
As for Medicaid, several states, such as Indiana and Rhode Island, have successfully reduced its growth through personal accounts and competition.
But Medicare presents the most daunting challenges. The Office of the Actuary of the Center for Medicare and Medicaid Services has estimated that without the projected Medicare spending cuts under the Affordable Care Act — cuts that may never, if history is any guide, occur — Medicare expenditures as a percent of GDP would grow from 3.7% today to 7.7% in 2050, to 10% in 2080. With the cuts, Medicare spending would be 6.7% of GDP in 2080.
Despite its shaky financial future, Medicare has become an easy target for politicians to plunder revenue for other purposes. On Jan. 1, under the Affordable Care Act, Medicare taxes will rise on income and capital, reducing incentives to work and to invest. Singles with earnings over $200,000 and joint filers who earn more than $250,000 will see Medicare taxes increase to 2.35% from 1.45%, and they will pay a new 3.8% tax on unearned income.
These receipts won’t be used to shore up Medicare, but will pay for subsidies for health insurance for those below 400 percent of the poverty line. In addition, $500 billion over the next decade will be “saved” from Medicare and spent on the new program. When Congress robs Peter to pay Paul, Peter is often Medicare.
Meanwhile, Medicare reimbursements are lower than in most insurance plans, and Medicare patients complain that many doctors refuse to take them. In some areas, Medicare patients face shortages of doctors and long waits for appointments.
A doctor in suburban Maryland told me that Medicare’s reimbursement covers only a small fraction of his fee. With prospective cuts in reimbursement rates, it will not be worth taking Medicare patients. In addition, many private insurance companies calculate reimbursement rates from Medicare’s rates, so these will decline also.
Plus, the doctor told me, if, following new Medicare guidelines, he is paid on the outcome of his treatment, then his incentive is to focus on healthy patients and exclude sick ones. Another measure is the number of patients seen, but seeing more patients leaves him less time for existing patients and their problems. If he should make a medical error caused by rushing too many patients into one day, Medicare gives him no protection against lawsuits.
A better way to combine fiscal responsibility with health care reform is to empower seniors to choose from private plans competing for their business. It works with the prescription drug benefit and it could work for all of Medicare. Outside Medicare, competition has lowered prices for Lasik eye surgery and cosmetic procedures.
One way to inject competition into Medicare is premium support, an idea dating back to the 1997 National Bipartisan Commission on the Future of Medicare, chaired by two retired members of Congress, Rep. Bill Thomas (R-CA) and Senator John Breaux (D-LA).
Thomas and Breaux have retired from Congress, but the Medicare Commission’s premium support idea is now found in the House 2013 budget. Read it here on page 96 of the Concurrent Resolution on the Budget Fiscal Year 2013.
Modeled after the Federal Employee Benefits Program, it would allow Americans 55 and under, beginning in 2023, to choose from a variety of government-approved competing comprehensive health insurance plans, at different prices with different levels of service. Current Medicare recipients would not be affected.
Plans could include high-deductible plans carrying lower premiums combined with health savings accounts, or more traditional managed care or fee-for-service plans. Traditional Medicare would continue to be one option.
This would lower health care costs because when people are aware of prices, they spend less. Now, as economist John Goodman has explained in his recent book, “Priceless:Curing the Healthcare Crisis,” those who see the prices are third-party payers, such as insurance companies and the government, who have put themselves in the position of telling people what care they should have.
But, as Goodman shows, the incentives of third-party payers and patients are very different.
A test for cervical cancer might cost $12,000 per life saved if women received the test every four years, and $1.5 million per life saved if women were tested annually. So, from society’s perspective, testing women every four years is the most cost-efficient outcome, even though many more women might die.
What makes the most sense is for women to manage their own routine health care dollars out of health savings accounts, so they can decide if they want to spend $100 on the test every year, every two years, or every four years.
Another approach comes from Texas A & M University economists Andrew Rettenmaier and Thomas Saving, who have proposed Health Insurance Retirement Accounts, or HIRAs. Read “A Medicare Reform Proposal Everyone Can Love” from the National Center for Policy Analysis.
Workers would deposit 4% of their paychecks into their HIRAs, while current Medicare payroll taxes deducted from their paychecks would be used to pay for current and future Medicare expenditures.
When workers retired, the HIRA would be used to purchase a lifetime annuity. Annual income from that annuity would be available each year to pay medical costs above an initial deductible of $2,500.
If there was money left over in the account at the end of a year, retirees could keep it and spend it on whatever they wanted. If, on the other hand, medical expenses exceeded the annuity amount and the base deductible, the difference would be paid by Medicare.
Since low-income workers would have smaller HIRAs, the federal government, from tax revenues, might make a supplemental contribution and perhaps lower the $2,500 deductible. Workers of all income levels would shop around for medical services, a process that would help stem the increase in medical costs.
Current retirees now on Medicare would continue to pay Medicare premiums under the present arrangement.
Because the size of the annuity is determined by past wages, those with higher incomes pay a larger fraction of their medical care with their larger annuities before dipping into the common Medicare pot.
Why should Americans want a plan with an additional 4% HIRA contribution and a $2,500 initial deductible rather than the current Medicare plan? Because the current system is unsustainable. A 4% contribution to purchase an annuity, with some annual proceeds returning to cost-conscious beneficiaries, is better than rationing or forced tax increases.
As it stands now, Medicare cannot keep its promises to future seniors. It is the job of those elected politicians who said they would tackle the deficit to offer alternatives for debate and discussion. The fiscal cliff negotiations are the place to start.
Diana Furchtgott-Roth, a former chief economist of the U.S. Department of Labor, is a senior fellow with the Manhattan Institute.