Medicare: Past, Present and Future

Policy Reports | Health

No. 299
Sunday, July 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving



This paper illustrates the growing reality that serious consideration of Medicare reform is on the short-term horizon.  It illustrates the implications of paying for Medicare's funding shortfalls through increased general taxation, increased payroll taxes, increased premium payments from retirees and a combination of increased payroll taxes and increased premiums:  None of the options appear attractive.  But these funding options illustrate the need for fundamental rethinking of how Medicare is delivered to retirees. 

“The government or seniors themselves must ration health care.”

The implications of rationing care were also outlined.  Rationing raises the specter of waiting lines, denial of care, and the like.  A type of rationing that limits the growth rate of the amount transferred to retirees was discussed.  This is really a kind of rationing that makes the Medicare transfer a defined benefit with a defined rate of growth.  If retirees want more health care than they can purchase with the "rationed" defined benefit, they would be free to pay the additional cost. 

Another type of reform was also discussed.  It would make Medicare beneficiaries "ration" their own consumption of health care by using prices to more fully reflect the cost of the health care they consume.  Such rationing occurs in every market.  Cars, appliances, services, energy, entertainment and food are all rationed through the price system.  Consumers weigh the pros and cons of each purchase by evaluating the relative prices of each product.  The effects of moving Medicare toward a high-deductible policy in which spending below the deductible is paid for through a Health Savings Account were also illustrated.  This kind of reform holds great promise.  Insurance can still be provided for catastrophic events, but the market and the price system play increasing roles over time.  Importantly, moving to a Medicare program in which workers prepay part of their retirement health care will produce numerous benefits and can be designed in such a way to have broad appeal. 

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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