Can Medicare be fixed?
The cost of providing health insurance to 47 million elderly and disabled Americans through the Medicare program has been taking up a growing portion of the national budget.
It’s not clear if this is caused by beneficiaries using more services, new high-cost treatments, a higher rate of inflation in health care, the provision of unnecessary procedures or outright fraud. It’s likely to be a combination of all of these factors.
Term after term, Congress pokes at the problem by cutting payments to program providers, which they typically reverse as the deadline for the reduction approaches.
Congress has been unable to meaningfully reform the program. In 2003 it did expand Medicare to include broader coverage for prescription drugs, although it failed to fund this addition. Recent rumblings from Washington about reforming the payment method for the program sound promising, though. George Huang, a municipal analyst at Wells Fargo, wrote in a note distributed today:
One idea quickly gaining political currency as a means to rein in long-term federal healthcare spending is the concept of “Medicare premium support.” Under a “free market” premium support approach, each beneficiary would receive a capped amount of dollars (based on a regionally adjusted average cost). He/she would have the flexibility to purchase any qualified commercial health insurance plan that provides coverage of a standard set of healthcare services. Republicans favor this approach because it partly privatizes the Medicare program. Premium support also effectively shifts the program from a defined benefit entitlement program to a defined contribution plan.
This fundamental program design change is expected to limit cost growth by making the government’s contribution per beneficiary more “predictable.” In addition, annual cost increases would be tied to a non-healthcare inflation index. The thinking is that this type of fiscal discipline and competition among plans for beneficiaries would constrain federal cost growth. However, because the amount of premium support provided would be intentionally disconnected from the pace of growth in actual healthcare and healthcare insurance costs, beneficiaries would likely be required to pay more out of pocket over time. Also, Medicare’s pricing leverage with providers and insurers might eventually diminish, as greater numbers of beneficiaries may opt for privately administered plans.
Huang goes on to say the idea has been floating around Congress for years and has bipartisan support:
The Medicare premium support concept is not new. In fact, initial proposals date back to 1995. The latest iteration was articulated in a bipartisan proposal from Sen. Ron Wyden (D-Ore.) and [House Budget Committee] Chairman [Paul] Ryan in mid-December 2011. The concept, in our opinion, may be more politically viable this time around. Unlike an earlier Ryan premium support plan (which died in the Senate last spring), the Wyden-Ryan premium support version preserves traditional Medicare as an option (instead of replacing it outright) and does not call for the repeal of the Affordable Care Act. All four remaining Republican presidential candidates have endorsed the Wyden-Ryan plan, so the relative merits of this approach will likely be debated well into the fall (even if no actual legislation is passed before then).
Medicare costs, like U.S. healthcare costs in general, are not sustainable at their current rate of growth. It will be interesting to see if Congress remains deadlocked or is able to to reform this important entitlement to insure its viability.
Top chart data source: Historical Budget Data, as presented in Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011)