A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers

Studies | Health

No. 306
Saturday, December 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving


Introduction

Is there such a thing as a Medicare reform proposal everyone can love? Probably not, but individuals from across the ideological spectrum must admit that, under reasonable assumptions, the share of the nation's income devoted to retirees' health care will increase dramatically over the next two decades.  Since Medicare pays most of retirees' health care bills, taxpayers will end up paying for much of the projected increase in spending.  In order to avert substantial tax increases, Medicare reform must be addressed in advance of the baby boomers' retirement.

“Medicare reform must address both spending and funding.”

The Funding Warning.  This year, reforming Medicare will be high on the policy agenda because of a “warning” about the projected deterioration of the program's finances in the 2007 Medicare Trustees report.  By law, the President must submit a Medicare reform proposal to Congress within 15 days of submitting the 2009 budget, and Congress must consider it in an expedited manner. 1 This means that Medicare reform must be addressed by Congress in February 2008.

What has triggered this series of events is a finding by the Medicare Trustees.  Medicare's funding from general revenues, the difference between its total spending and its tax and premium revenues, is projected for each of the next 75 years in each year's Trustees Report.  If the general revenue requirement is projected to exceed 45 percent of total spending within the first seven years of the projection period for two consecutive Trustees Reports, a funding warning is required.  The 45 percent threshold was breached in both the 2006 and 2007 reports.

Congressional Response to the Funding Warning.  Congress will be hard-pressed to ignore the warning, even though some are already downplaying its significance and importance.  During both the Clinton and Bush Administrations, the Trustees have counseled that timely action is preferable to delayed reaction.  Whether this will result in timely reform is an open question.  However, everyone agrees that some sort of reform is inevitable in the long run.

A Comprehensive Reform Proposal.  This study outlines a reform proposal that has components policymakers from across the political spectrum will find attractive.  While it won't please everyone, it covers the gamut of concerns of most would-be reformers:

  • First, it addresses the important issues of generational equity by requiring each cohort of workers to prefund some of their future retirement health care costs.
  • Second, it gives retirees more control over the money they spend on health care.
  • Third, it creates incentives for retirees across all income levels to consider the cost of the health care they consume.
  • Fourth, it creates incentives for health care providers to offer their patients more efficient and higher-quality medical care.

Through the years, most Medicare reform proposals have focused on controlling spending, while leaving the funding mechanisms essentially untouched.  This comprehensive proposal addresses both Medicare spending and funding.


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