Medicare Can’t Be Ignored Forever

Medicare Can’t Be Ignored Forever
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For now, Medicare is not part of the national conversation on health care.  While campaigning, Donald Trump promised not to touch Medicare, and, in his first budget, he basically kept that commitment to voters.  In addition, Congress and the new administration are consumed with rolling back key elements of the Affordable Care Act (ACA) and replacing them with different provisions.  Medicare does not feature prominently in that debate.

So, for now, reforming and improving Medicare is not on the agenda.

That will need to change at some point because Medicare is simply too big and important, both in terms of its fiscal consequences and its effect on the overall health system, to leave on autopilot indefinitely.

Over the next 10 years, the federal government will spend $10 trillion on Medicare.  The Congressional Budget Office (CBO) projects that federal spending on the program will grow from 3.1 percent of GDP today to 6.1 percent of GDP in 30 years.  Medicare is one of the three major entitlement programs -- along with Social Security and Medicaid – that is the primary reason the federal government is expected to run massive and growing deficits in the coming years. 

Medicare’s regulatory structure also sets the terms for the entire health system.  Physician practices, hospitals, and other providers organize themselves in response to the requirements and incentives of the Medicare program.  Far too often, the result has been fragmented and inefficient care arrangements.

What is needed is both a short-term agenda for how to improve the program’s performance and a long-term vision for what might be done to make Medicare more affordable and sustainable in a society with a growing population of older citizens.

The Obama administration attempted to use Medicare’s size and reach to pursue what it called “delivery system reform.” That agenda need not be reversed, but it does need to be redirected and amended to become more effective at improving program performance.

The centerpiece of the delivery system reform effort is the Accountable Care Organizations (ACO) initiative.  These are provider-led organizations aimed at improving the management of care for beneficiaries enrolled in the traditional Medicare fee-for-service program.  ACOs that successfully lower costs and meet quality goals are eligible for bonus payments. 

The ACO effort has fallen short of the lofty goals set for it.  In 2015, the ACO effort increased overall program spending by a modest amount instead of reducing it.  The basic problem with the ACO program is that it is designed to avoid consumer choice and engagement, which is the opposite of what is needed.  Under current rules, beneficiaries are assigned to an ACO if their primary physician participates in it.

There is a place for a provider-led integrated care option in Medicare, but it should be offered to the beneficiaries as an option for enrollment, alongside the Medicare Advantage (MA) plans and unmanaged fee-for-service. If an ACO is able to cut costs, beneficiaries should be given an incentive to join it through a reduction in their monthly premiums. 

Recasting the ACO program -- with a new name, such as Medicare provider networks -- should be part of a broader effort to improve and clarify the choices available to the beneficiaries, with the aim of intensifying competition and lowering costs.  The Medicare program should ensure that beneficiaries are able to see clearly and easily the overall cost of various combinations of coverage.  In particular, beneficiaries should be able to select combinations of basic Medicare coverage, plus a drug benefit, and supplement insurance with a full view of the financial consequences of the various options.  That cannot be done today. 

These kinds of reforms will improve the efficiency of the program, and lower costs compared to current rules.  But the size of the financial problem associated with Medicare cannot be fixed with changes aimed solely at improving program performance.  Medicare is already imposing an immense burden on taxpayers. Subsidization of the parts of Medicare covering physician services and prescription drugs will cost $4.2 trillion over the period 2016 to 2025, and the program has an unfunded liability of more than $65 trillion when comparing the present value of future taxes and premiums dedicated to the program to future program expenditures.

Medicare is unusual in that it provides large subsidies for insurance to many millions of beneficiaries who are not poor, or even near poor.  The program increases premiums for physician services and drugs on those with incomes exceeding $85,000 annually, which is a very high income in retirement.  

It is not possible to change Medicare for those already enrolled in the program, or even for those who will be entering it over the coming decade or so.  But it will be necessary to adjust the program for younger generations to avoid a fiscal crisis. 

What is needed is a sensible long-term vision for the program that maintains the core protections it now provides without subsidizing retirees who could reasonably cover more of their costs from their own resources.  Medicare’s most important feature is that it provides a universal, community-rated insurance product to all Americans ages 65 and older.  That can and should be kept as the foundation of the program. In addition, the program should fully subsidize the elderly who had low incomes throughout their working lives and who could not reasonably cover their full premiums for Medicare in retirement.  These protections can be retained so long as workers with sufficient lifetime earnings are asked to pay for a larger share of their total Medicare costs when they retire.

These reforms are highly controversial, and will not be enacted anytime soon.  There is no appetite at the moment among policymakers to even think about these ideas, much less consider enacting them into law. 

But Medicare’s financial burdens are only going to grow in the coming years, as will the related problem of increasing federal deficits and debt.  Difficult as it will be, it will be necessary at some point soon to rethink the structure of the program in order to avoid an even more unpleasant fiscal and economic crisis.


James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.  He is the author of two recent papers on Medicare published by the Mercatus Center at George Mason University, Medicare Coverage Options:  Reforming the Beneficiary Choice Process to Improve Competition and An Examination of Medicare’s Current Design and an Alternative. 

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