Repeal & Replace: Missing the Medicare Forest for the Obamacare Trees
The Trump Administration has promised to deliver to the American people a healthcare plan that is, in President Trump’s own words, “much less expensive and far better” than Obamacare. But While Obamacare is expected to spend over $900 billion from 2018 to 2027, focusing solely on the Obama administration’s signature achievement ignores bigger fiscal challenges; Namely, the Medicare program.
Our insurance program for the elderly and disabled – Medicare – is expected to cost $900 billion in 2024 alone. From 2018 to 2027, this comes to a whopping $8.5 trillion—an order of magnitude larger than the cost of the ACA. Beyond the topline price tag are a number of endangered programs.
Medicare’s hospital insurance trust fund, commonly known as Part A, is expected to run out of money in the next 10 years. This would mean an immediate reduction in benefits when the money runs out—2028, according to the program’s actuaries. Meanwhile, the funds that Medicare uses to pay for physician services (Part B) and prescription drug benefits (Part D) are consistently growing as a share of revenue.
Worse, Medicare’s overall benefit design—with different deductibles and cost-sharing arrangements for hospital and physician services—looks nothing like modern-day insurance and tends to discourage care coordination. This means that modernizing the program might not only be cost-saving but might also offer better value for beneficiaries.
Fortunately, there is a set of proposals, some of which have enjoyed bipartisan support in the past, which could put Medicare on a better fiscal track while offering more to beneficiaries.
To directly address the odd benefit design of the Medicare program, Congress could create a unified cost-sharing structure along with a cap on out-of-pocket expenses for beneficiaries. This would do two things: First, it would reduce the use of some services by beneficiaries by exposing them to more of the out-of-pocket expenses; second, it would reduce out-of-pocket burdens for the sickest patients by capping the amount that they would be responsible for as a share of their total spending. Taken together, the Congressional Budget Office expects these reforms, along with restrictions on supplemental insurance plans, would save over $60 billion from 2020 to 2026.
Another avenue for reform is to address the costs of prescription drugs delivered in the doctor’s office or outpatient hospital department. Consider the 340B drug discount program: Under 340B, certain facilities that serve large numbers of disadvantaged patients receive mandatory discounts from drug manufacturers. These discounts are so large that, oftentimes, drug manufacturers receive pennies on the dollar for the drugs they sell. Facilities that receive these discounts, however, can game the program: they receive the discounts for all qualified drugs, regardless of whom they are prescribed too. Moreover, they aren’t required to actually pass on these discounts to patients. In one analysis, for instance, Medicare’s Office of the Inspector General found that two-thirds of hospitals in their sample didn’t pass these discounts to uninsured patients. As a result, these patients pay far higher prices for the drugs – money that goes directly into the hospitals’ profit.
If facilities were required to pass on these savings, beneficiaries would have saved about $213 million in cost-sharing in 2013 and over $800 million for the Medicare program. While these savings are relatively small in the grand scheme of things, savings to beneficiaries and a more efficient 340B program would be important policy successes.
One other approach to Medicare reform is much more robust, but would ostensibly offer even more benefits to taxpayers and beneficiaries. Here, the idea would be to implement a so-called “premium support” program in Medicare. This would give Medicare beneficiaries a fixed amount of money—tied to some benchmark plan in the market, similar to the ACA—to enroll in either private plans that bid to offer coverage to beneficiaries (Medicare Advantage) or to enroll in the traditional program still offered by the federal government.
The key here is that a premium support would discourage beneficiaries from choosing overly expensive options, by forcing them to shoulder the added cost. Under today’s system, a beneficiary that enrolls in the traditional government-run program, even when private plans are less expensive, pays no more than a beneficiary who chooses a lower cost option. Similarly, private plans today aren’t paid what they actually bid to offer coverage; instead, they are paid on administrative benchmarks that minimize the incentive to compete with other plans.
Making beneficiaries bear the full cost of their choices would incentivize more of them to choose lower-cost options, while also encouraging insurers to offer lower-cost options.
Under a premium support system, beneficiaries would still receive enough money to ensure adequate health insurance coverage. They wouldn’t, however, receive a blank check that lets them off the hook for choosing unreasonably expensive coverage. Plans would also be held accountable for offering coverage that’s more expensive than alternatives. Such an approach could save over $200 billion over a six-year period according to the CBO.
Moreover, because this would increase enrollment in private plans, and given the fact that beneficiaries in private plans tend to do better than others, this avenue for reform would likely make beneficiaries healthier too.
President Trump has previously made clear that he plans to leave entitlements like Medicare alone. Yet the program’s combination of surging costs and inadequate benefits should tell this administration there is room for reform. If both parties can come together over policies like these, it is possible to secure a better, stronger Medicare for current and future beneficiaries.
Yevgeniy Feyman is an adjunct fellow in health policy with the Manhattan Institute and author of the new report, “Three Reforms That Can Help Balance Medicare Finances.”