Where We Stand: Our Principles On Reforming Medicare

Medicare is a universal entitlement to defined medical benefits, but it is unfair to force young working families—raising children and paying for education, mortgages, and their own medical bills—to subsidize upper-income retirees at today’s levels. The old social insurance model of equal benefits to all, rich and poor alike, is no longer feasible and is not fair to the needy. Assistance should be provided to beneficiaries according to income and health costs.More help should go to beneficiaries with lower incomes and higher health care costs.

Today, Medicare funds go to doctors, hospitals, nursing facilities, and insurance companies rather than to seniors. Policymakers should change Medicare from a defined-benefit to a defined-contribution system so that retirees are put in control of their money and decisions affecting their benefits. Thus, beneficiaries should get Medicare payments and pick the health plans or health options they wish, whether traditional insurance, health savings account plans, or new modes of health care delivery. Moreover, unlike today, seniors should be absolutely free to spend their own money on a medical service or physician of their choice without unreasonable legal or regulatory restriction.

In recent years, there has been a steady growth in comparative information on the performance of health plans, hospitals, and other health care facilities. In the Federal Employees Health Benefits Program (FEHBP), federal workers and retirees receive comparative information on plans from public and private sources to help them make wise decisions. In a new Medicare, consumer information would focus on the performance of doctors, hospitals, and clinics, as well as outcomes of certain treatments, so that individuals could decide between plans with the help of family members and trusted physicians.

The demoralization of doctors reflects not merely the state of medical malpractice laws or inadequate Medicare and Medicaid reimbursements, but also the imposition of tens of thousands of pages of rules and guidelines. The onerous Medicare paperwork burden on doctors is aggravated by threats of audits, investigations, fines, and penalties, even for clerical errors. Every dollar spent on complying with bureaucratic paperwork is a dollar lost to patient care.

Real regulatory relief should be a priority in the next round of Medicare reform.

Medicare is governed by a system of administrative pricing for medical services and a rigid regime of price controls. Medicare pricing does not reflect market conditions; it is the product of complex government formulas. The result is that the government often pays too much or too little for medical services. Policymakers should end administrative pricing and controls on medical services, require doctors and hospitals to disclose their prices, and allow free-market forces to determine the prices of medical goods and services. Price transparency will help to control costs.

Medicare, like Social Security, was established as a traditional system of social insurance and financed on a pay-as you-go basis, meaning that today’s taxpayers pay for the retirement costs of today’s retirees while future taxpayers are obligated to pay for benefits designed by today’s Congress.

This social insurance system cannot continue, and it is unfair to future taxpayers. America has a rapidly aging population that will be financed by a disproportionately smaller working population. That means cuts in benefits, massive tax increases, or a combination of both.To secure high-quality health care in retirement, young Americans should start saving today for their retirement health care needs, preferably by opening health savings accounts. By building a reservoir of personal funding, young Americans would improve their future health care security and relieve mounting pressures that threaten the viability of Medicare and Medicaid.

The President and Congress should adopt a new “premium support” system for retirees. In such a system, retirees would get direct government payment to their chosen health plans, just as federal workers and retirees do today. Premium support would enable all retirees to buy a basic package of health care benefits while fine-tuning additional benefits to their individual needs. In the new Medicare system, personal choice should be as broad as possible. Options should include traditional Medicare, the right to keep private or employer-based plans in retirement, health savings accounts, new consumer-directed care options, and other innovations that emerge in a dynamic health care economy.

Medicare is governed by a complex body of rules, regulations, and guidelines. This invites waste, fraud, and abuse. It also imposes enormous administrative costs and burdens on doctors, hospitals, and other medical professionals.

In creating a new Medicare, the President and Congress could adopt the regulatory model of the FEHBP. There are no detailed benefit mandates, but there are statutory requirements for plans to offer broad categories of benefits, such as hospitalization, physicians’ services, and emergency care. Likewise, the government does not impose complex fee schedules or price controls on doctors and hospitals; instead, reimbursement for medical services is left to contractual negotiations between health plans and providers in the market. Regulation is focused on consumer protection, fiscal solvency requirements, basic benefits requirements, and preventing fraud. This model should be adopted for a new Medicare program.

The new universal Medicare drug benefit, due to go into effect in 2006, breaches the principles that should apply in sound Medicare policymaking. The benefit both pushes trillions of dollars of unfunded and unsustainable liabilities onto already overburdened taxpayers and fails to focus resources on those who need help the most. Congress should delay implementation of the 2006 benefits pending a structural reform of Medicare. Meanwhile, the discount drug card, which spurs cost-cutting competition among drug companies and provides direct assistance only to the needy, should be made permanent.

The President and Congress should start a serious national conversation on how, precisely, taxpayers are going to provide health care coverage for future retirees. The challenge is formidable: They must address the demand for advanced medical services by a rapidly aging population, the soaring unfunded liabilities of the Medicare program, and future Medicaid spending for long-term care.

The President and Congress should change eligibility rules for future Medicare benefits: for example, by increasing the age of eligibility for Medicare in the context of reconsidering the age for retirement. They should also develop a new social contract. This could include automatic enrollment in health retirement savings programs for young Americans entering the workforce. Young workers could affirmatively decline enrollment but would also have to agree to accept a higher level of taxation to offset the rising costs of public health programs.