Can Medicare be fixed?

February 9, 2012

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)


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This is basic economics, our healthcare/Medicare system is geared for about 15 million people accessing it at a time. With the current amount of baby boomers retiring and approaching age 65 we are about see 73 million use the current system over the next 15 to 20 years.

Demand will outstrip Supply thus making prices rise – why is this so hard to see

Posted by jekyllisle | Report as abusive

In attempting to address the problems of Medicare and medical expenses on the whole, members of Congress should look to the history of the program. The House Ways and Means Committee, when charged with assessing the costs of the program, projected that total costs for the first year would run no more than $1.3 billion when total spending in the first year actually was $4.6 billion. The committee did not improve its accuracy over time, projecting that hospital spending would amount to just $3.1 billion in 1970 when it was actually $7.1 billion. John Goodman, president of the National Center for Policy Analysis, explains that these chronic projection mistakes are because analysts failed to account for increased demand as 19 million people were given free access to unlimited health care. Today, Congress makes the same mistakes in different ways, failing to account for a dynamic market that undermines direct controls and ignores price-controlling efforts.

Posted by Carly_EngAmer | Report as abusive