NCPA - National Center for Policy Analysis


April 3, 2007

Medicare's spiraling costs underscore the need for a rethinking of the program's financing, benefit structure and future, say Andrew J. Rettenmaier and Thomas R. Saving, senior fellows with the National Center for Policy Analysis.

According to their new book, "The Diagnosis and Treatment of Medicare," the current program has several problems:

  • Medicare's financial burden is not simply the product of an aging population, it also reflects the growing use of health services by the average Medicare beneficiary.
  • Medicare has created perverse financial incentives -- doctors are paid for virtually any service they provide, while patients have almost no direct financial responsibilities and, therefore, no incentive to control costs.
  • Medicare's payment structure is built on transfers from taxpayers to retirees, with future generations shouldering larger costs as health spending spirals upward year after year.

Moreover, Rettenmaier and Saving find that popular reforms such as increasing the eligibility age, means-testing or eliminating first-dollar coverage would not substantially lower the burden of the program's unfunded obligations in the long term.  As a result, they propose a fundamental change in the way the program is financed.  Under their plan:

  • Members of each birth cohort would pay an annual premium throughout their pre-retirement years to secure coverage during retirement.
  • Instead of relying on younger taxpayers to pay for retiree health benefits, the quantity of retirement health care consumed by each birth cohort would be directly tied to the contributions made by that group during their working years.
  • Prepaying Medicare benefits would ultimately improve generational equity by making each age group responsible for financing the cost of its own care.

Rettenmaier and Saving also support greater cost-sharing to increase cost-consciousness among consumers.  That would create a health care market that is guided more by consumer choice, producing more economically efficient decisions about how much to spend on health care.

Source: "The Diagnosis and Treatment of Medicare," American Enterprise Institute, April 2, 2007.


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