Securing a Downpayment on Medicare Reform

(President Barack Obama and Speaker of the House John Boehner. Via the White House flickr feed.)

Far from coping with the explosive costs of Medicare, the Obama Administration’s latest fiscal cliff offer is laughably inadequate.

The proposal remains stubbornly uninformed by the serious thinking of a variety of Medicare experts over the past several years.  These experts—ranging from  the Simpson- Bowles Commission to former CBO Director Alice Rivlin of the Brookings Institution, former Senator Pete Domenic (R-NM), Rep. Paul Ryan (R-WI), and Sens. Ron Wyden (D-OR),  Joseph Lieberman (I-CT) and Tom Coburn (R-OK)—have produced several responsible reform proposals that already hold bipartisan support. There is simply no excuse for the president or Congress to blow yet another historic opportunity to at least make an initial down-payment on the huge task of reforming the Medicare program.  

First Steps. Full scale structural reform of Medicare is doubtless a step too far in this hurried debate to avoid the “Fiscal Cliff”. But there are some tangible, and yet again bipartisan, first steps in changing the existing Medicare program that could easily be part of a broader deal. With a view toward the unfinished business of structural Medicare reform, the Heritage Foundation has already outlined several critical changes to the existing Medicare program that are compatible with long-term Medicare reform. 

·         Raise the retirement age to a level at least consistent with Social Security (67) and link it to longevity. Seniors live much longer than they did in 1965 when Medicare was created. In the 1960s, there was also a relatively larger number working Americans financing a much smaller number of retirees. Medicare should reflect these fiscal and demographic changes. .

·         Reduce and eventually eliminate taxpayer subsidies for wealthy recipients.  Rather than raising taxes on wealthy Americans to finance their Medicare benefits, among other things,  just scale back the  subsidies they get from the taxpayers.  

·         Consolidate Medicare Parts A, B and D into one unified program, with a single premium and a rational system of cost-sharing. Gradually raise that Medicare premium from 25 to 35 percent over, say five years, and add a catastrophic benefit.  Replacing Medicare’s costly and outdated multi-part silo structure, with its crazy quilt of coinsurance and deductibles, would move traditional l Medicare closer to a modern insurance program. And it would help providers manage and coordinate care more effectively.

These first steps would significantly improve both the functioning and the fiscal outlook for the program. But they are just a start.  Ultimately, for the program to be sustainable over the long haul, Medicare should be transformed into a defined contribution program (premium support), which would unleash the productive powers of choice and competition, controlling costs and delivering high quality care. It is the only long-term solution that can meet Medicare’s enormous challenges. They are:

A demographic challenge. With the flood of Baby Boomers retiring, the program--unchanged—will not be able to absorb the demographic shock.  Medicare enrollment will jump from nearly 50 million to 80 million seniors by 2030.

An absence of modernized insurance. Traditional Medicare is defective as insurance, evident in the absence of even basic catastrophic coverage.  Roughly 90 percent of seniors enrolled in the traditional Medicare program must depend on supplemental coverage to fill in the gaps where it falls short.  Moreover, Medicare’s payment system still rewards volume rather than quality of care.

Massive debt. Medicare’s long term unfunded liability—benefits that are not paid for—approaches $37 trillion. While current seniors paid into Medicare, they didn’t pay in enough for the benefits they now receive.  This forces current taxpayers to finance 85 percent or more of Medicare’s costs.

Some, like Washington Post blogger Ezra Klein, argue that Republicans do not have a plan for Medicare reform. This is absurd. The Republican House twice passed budgets that transition Medicare from its outdated model into a new and better premium support model. It’s the Senate leadership that has done exactly nothing.  Despite the political foot-dragging, premium support as the basis of long-term reform is gaining more traction not less. Meanwhile, Congress can get this reform process underway before Christmas.