NCPA - National Center for Policy Analysis

Medicare Reform

September 23, 2015

The long-term solvency of Medicare is the most serious domestic policy problem this country faces in the 21st century. Medicare Trustees confirm that Medicare spending will continue to grow at rapid rates as more baby boomers become eligible for the program, says senior fellow Devon M. Herrick of the National Center for Policy Analysis.

Medicare is funded on a pay-as-you-go basis. Each generation depends on the next to fund future benefits. As the program grows and medical technology advances, sustaining the program is possible only if younger workers and future generations are willing to pay high tax rates.

  • In 1970, annual per capita Medicare spending was only $385.
  • Of the $12,430 spent per beneficiary in 2014, $5,400 was spent on physician care while $4,900 was spent on hospital care.

Controlling exploding costs while maintaining access to quality care is the aim of any effort to reform the Medicare program. Price controls and ratcheting reimbursements down are old strategies that have been used for years and largely failed. Raising the age of eligibility sounds like an interesting idea, but it is unlikely to make much of a difference.

Reforming Medicare will take a four-prong approach that can save trillions of dollars over the next four decades. The effective driving force behind this reform plan is simple economics: increasing price sensitivity among consumers, increasing competition among providers, and providing incentives that promote efficiency and innovation.

  • Prefunded Medicare health savings accounts (Medicare HSA) put seniors in control of spending and saving their healthcare dollars.
  • Eligible seniors would be covered by a high-deductible plan with little out-of-pocket expense beyond the $5,000 deductible, paid for by their Medicare HSA funds.
  • Physicians would be rewarded for keeping seniors healthy and would be allowed to profit from innovations that lower costs and raise the quality of care.

Source: Devon M. Herrick, "Reforming Medicare with Personal Accounts, Incentives and Better Plan Design," National Center for Policy Analysis, September 22, 2015.


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