The Hard Choice for Medicare
The centerpiece of Medicare, dating to 1965, is Part A, hospitalization insurance (HI). (Physician services and prescription drug coverage and provided for in parts B and D, that are financed differently.)
Part A has always been financed by a payroll tax, FICA. Workers and employers each pay 1.45 percent of payroll into the HI fund, along with the 6.2 percent (up to $110,100) for social security retirement. The self-employed pay both portions, at a total rate of 15.3 percent.
Medicare HI will become insolvent in 2024, when it will be able to pay only 87 percent of its expenditures.
The first major cause is the baby boomer retirement bulge. Between 2010 and 2030 the over-65s will grow from 22 to 35 percent of the population. These seniors will also live much longer, and consume Medicare much longer, than anyone expected in 1965.
The other dominant cause is the rising cost of health care. What doctors and hospitals could do for patients in 1965 appears primitive compared to the remarkably advanced - an expensive - techniques now in use.
Medicare could of course be made fiscally solvent by raising the eligibility age above 65, as has been done for full social security retirement, or by increasing the payroll tax rate above 1.45 percent. Both are politically radioactive.
Middle-aged people are convinced that they have earned their Medicare entitlement at 65, and won't stand for a postponement. The growing realization among today's younger workers that they are paying payroll taxes to support today's seniors without much expectation that tomorrow's younger workers will support them when they turn 65, is just one powerful brake on payroll tax increases.
"Saving Medicare" comes down to putting the brakes on health care costs for seniors, through one of two vastly different policies.
The Obama/Democratic policy relies mainly on cutting back on reimbursement rates to providers. It's based on the belief that doing so will cause hospitals, doctors and other providers to perform the same services - and more - for the same patients more efficiently, since they will no longer be getting ever more Medicare payments for ever more services.
Accordingly the Obama Affordable Care Act reduces Medicare expenditures by a projected $716 billion over ten years, the bulk of it from reducing payments to hospitals, doctors, nursing homes and Medicare Advantage plans.
This ostensibly extends Medicare's solvency by eight years. However the ACA rerouted the $716 billion out of Medicare and into paying for the act's subsidized coverage for the uninsured. Even President Obama, in an unguarded moment, observed that "you can't say that you are saving on Medicare and then spending the money twice."
If per capita Medicare spending growth exceeds 1.5 percent a year, and Congress fails to respond, the ACA Independent Medicare Advisory Board comes into play. This 15-member board will enforce spending cuts to keep the program going - but it's not allowed to restrict benefits, modify eligibility, or raise premiums or cost-sharing. All that leaves is reducing payments to providers.
The crucial problem with the Democratic plan is the likely effect of this continual slashing of reimbursements, and the ever-increasing Federal regulation of the health care sector. Will doctors refuse to accept Medicare patients, as many are doing now because of the even lower payments in the state-run Medicaid program? Will Medicare patients get lower-quality stripped-down care?
The Ryan/Republican plan, which would take full effect in 2023, relies on the market force of millions of seniors, armed with Medicare premium support (vouchers), demanding their money's worth, leading to lower cost, higher quality plans. Ryan points to the cost-saving results of market competition in Part D (prescription drugs) and Medicare Advantage to support his argument.
The crucial question about the Ryan plan is the amount of the voucher. Ryan sets it at the cost of the second lowest Medicare Advantage plan in each region. If you bought the lowest cost plan, you could pocket the difference.
This would inspire insurers to offer more efficient organization of quality care to attract more Medicare patients. Ryan also agreed to leave traditional Medicare as an option, with the expectation that the consumer-selected market plans would gain much of traditional Medicare's market share.
So, in broad brush, the first path to prevent Medicare insolvency without reducing eligibility or benefits is for the Federal government to impose provider reimbursement reductions that will arguably cause many doctors to refuse Medicare patients. This path could lead to requiring doctors to serve Medicare patients at deep discount rates as a condition of holding a license to practice medicine.
The other path, Ryan's, is for the federal government to empower millions of Medicare beneficiaries to buy products best suited to them in a competitive, innovative health care market.
Not choosing is no longer an option.
John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).
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