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

Policy Reports | Health

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


“The cost of reformed Medicare spending will be 20 percent to 35 percent less than the current system by 2050.”

This study has outlined a comprehensive reform that addresses Medicare's costs and revenues.  The objectives of the reform are to address the unequal burden the current financing arrangement places on different generations and to address the growth in projected spending by increasing cost sharing.  Partial prepayment through HIRAs requires the current generation to pay some of the costs they will create for future workers if the program is left unchanged.  The HIRAs will produce increasing cost sharing as more and more individuals retire after contributing to their HIRA accounts for more and more years. Aggregate Results Under Different Assumptions

“The total burden of financing the reformed program would be 10 percent to 25 percent less than under the current system by 2080.”

Given that the HIRA contribution rates are the same for all workers, higher income workers will naturally have higher annuity payments and will face higher deductibles.  Thus, the cost sharing burden will be greater for higher income workers.  These workers will prepay more of their retirement health care than lower income workers of the same age.  Differential Medicare coverage tied to retirees' incomes is not a new concept.  As mentioned earlier, Medicare Part B premiums are already means tested, albeit the income thresholds as currently defined will only affect the premiums paid by retirees with relatively high incomes. Means testing of Medicare has been discussed by economist Mark Pauly and others. 23 Also, one of the policy implications from the RAND experiment was the possibility of income-related deductibles. 24 Finally, Alan Greenspan has suggested that higher income retirees may well be required to fund most of their retirement health care in the future. 25

“The reform plan would maintain the progressivity of the current system while reducing costs to taxpayers.”

The HIRA reform formalizes the mechanism by which future retirees fund part of their retirement health care, with higher income retirees funding greater shares of their consumption in the two ways outlined.  This reform gives all retirees much greater control over their health care spending.  By 2030, retirees will become a 70-million-strong health care consumer watchdog group.  The reform also avoids the alternative of bureaucratic rationing of health care and will allow subsequent generations to spend less of their incomes supporting federal elderly entitlement programs than under the current financing arrangement.

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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