A Framework for Medicare Reform

Studies | Health

No. 315
Friday, September 12, 2008
by John C. Goodman


Conclusion. Health care spending has been growing at roughly twice the rate of growth of national income for about four decades. If that trend continues, health care will eventually crowd out every other form of consumption — there will be nothing left for food, clothing, housing and so forth. Clearly, we are on an impossible path.

The simulations in this study are based on the assumptions of the Social Security/Medicare Trustees. These assumptions presume health care spending will moderate, eventually growing no faster than the average wage. But the Trustees do not tell us what changes will occur to bring about such moderation.

Given the Trustees’ assumptions, we have proposed a set of reforms that will solve the long-term financial problems of Medicare. These include: (1) allowing providers to repackage and reprice their services in ways that improve quality and reduce price, (2) allowing beneficiaries to manage more of their own Medicare dollars through cash accounts called Roth Health Savings Accounts, and (3) requiring the working age population (along with their employers) to prefund much of their post-retirement health care benefits by saving 4 percent of wages from now until the time of retirement.

These reforms are expected to moderate the growth of Medicare spending and to shift the burden of spending from taxpayers to workers beneficiaries over time. As a result, the taxpayer burden for Medicare as a percent of national income should be no higher by midcentury than it is today. Of the future reduction in taxes and premiums, 10 percent will be due to supply-side reforms, 20 percent will be due to demand-side reforms and 70 percent will be due to the effects of prefunding.

Furthermore, all of these changes are accomplished while preserving the progressivity of the current system.

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