A Framework for Medicare Reform

Policy Reports | Health

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

Integration with Social Security and Medicaid Reform

A major trend in post-retirement living is the assisted living facility. These entities typically offer room and board — in some cases quite luxurious — plus nonacute health care. In theory, an initially healthy senior could progress through Alzheimer’s disease and then death without ever leaving the facility.

The emergence and growth of assisted living facilities causes us to focus on an often ignored reality: It is becoming increasingly difficult to separate living needs from health care needs — especially for senior citizens. That being the case, why do we need three separate programs: Social Security for living expenses, Medicare for health care and Medicaid as a fall back insurance for long-term care? Why can’t all three programs be rolled into one? They could.

In a reformed Social Security system, each generation would save through private accounts for its own retirement living expenses. In a reformed Medicare system, each generation would save through private accounts for its own post-retirement health care. But why have two accounts? Why have separate investment strategies? Wouldn’t a single account be more efficient and make more sense? We believe it would. Additionally, there is no reason why the same account could not also be used for long-term care insurance — thereby replacing the largest, fastest growing part of Medicaid.

It might work like this: At the time of retirement, an annuity would be purchased which generates two separate cash flow streams. One would be for living expenses (like a pension) and the other would be for health insurance (like the HIRA accounts described above). However, the two income streams could be combined and redivided in different ways. For example, one stream of payments could cover the cost of living, outpatient care and long-term care at an assisted living facility, while the remaining stream pays for insurance for catastrophic inpatient care.

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