August 22, 2012
By Stuart M. Butler, Ph.D.
With Rep Paul Ryan (R, Wis) now Governor Romney’s running mate, Medicare reform is front and center in the election debate. This development could provide a chance to have a serious national debate about the program. But it could also mean any chance of a real conversation is drowned out by political hysteria and attack ads.
Let’s hope a real debate takes place. If it does, there will be a discussion about some core elements of reforms needed to deal with the huge future funding shortfall in Medicare. According to the program’s trustees, Medicare will be unable to pay full benefits within 12 years and it would take nearly $40 trillion to cover its projected costs. That growing shortfall is destined to render the program unsustainable and become the largest element in the tsunami of debt about to engulf the nation.
It turns out, surprisingly, that underneath the mounting and ferocious political debate now taking place, there is actually a large measure of agreement. As I pointed out in an earlier JAMA Forum piece, both parties have already embraced the idea of a real, enforceable budget for Medicare, in contrast with the current open-ended entitlement in which the “budget” is simply a guesstimate of future costs. That’s a big change. In an important sense, both sides have already agreed to “end Medicare as we know it.”
Although there will be loud arguments about the pace at which a controlled budget should be allowed to grow over time, the differences are small. The real dispute is over how to enforce a Medicare budget. Currently, the method used by the Centers for Medicare & Medicaid Services to control spending by Medicare on physician services is called the Sustainable Growth Rate. President Obama would enforce a budget ultimately through the Independent Payment Advisory Board (IPAB), created as part of the Affordable Care Act. This board would cut payments to hospitals and doctors until spending hit the target—an approach some call the “Sustainable Growth Rate on steroids.” The Romney-Ryan Republican approach would maintain the budget by sending a “premium support” payment—a defined contribution—to the plan of each senior’s choice or to existing fee-for-service Medicare.
Each side also recognizes that without delivery system reforms to improve efficiency, their firm budget approach will pose problems for future seniors. Without greater efficiency, IPAB-driven cuts in payments to those who provide health care services would cause more physicians to dump individuals who are insured through Medicare and hospitals to skimp on care for such patients. In the case of premium support, failure to improve delivery efficiency would mean higher out-of-pocket costs for seniors.
That’s why there is an important debate going on about how to speed up delivery system reforms. Although neither side wants to emphasize it, they agree that it’s critical to edge away from traditional fee-for-service Medicare and toward more organized or managed care, to improve medical outcomes as much as to improve efficiency and aid budget control. On the one hand are those who argue that the competition and the consumer choice in the market established by premium support is the best way to achieve efficiency and delivery system improvements. And there are those who see the government driving this process by pushing the health system to adopt approaches developed by experts in Washington. In my view, the market argument is the more persuasive. I’ve described this as a clash between the “evolutionary” and “central planning” approaches.
The other important element in the larger picture of Medicare reform is determining what would be a fair subsidy for seniors to receive for their health coverage. I’ve spoken at enough town hall meetings to know how irate some seniors can get when their belief that “I’m just getting out what I paid in” is challenged. But while there is a plausible argument that on average that’s true for Medicare Part A (hospital insurance)—although it’s fast becoming less true—it’s never been the case for those seniors enrolled in Part B (which helps pay for physician services, outpatient hospital care, and certain other services) or the Part D drug benefit. Nobody pays into those with dedicated payroll taxes during their working years. Both are merely subsidized, voluntary insurance plans.
That subsidy is very large for most seniors. Couples with an annual income of $170 000 or less pay just a quarter of the actual cost of their Part B premiums. The proportion rises for seniors with higher incomes than that but still only tops out at 80% of the true cost for couples with incomes of $214 000 or higher. Part D enrollees get similar discounted premiums. Taxpayers pick up the rest of the tab.
So part of the Medicare debate this fall should be the argument that upper-income seniors pay a larger share of these premiums so that the finances of the whole program can improve. For starters, the Warren Buffetts and other high rollers should be paying 100% of the true cost of Part B and Part D, not 80%. And it is time to lower the income threshold at which seniors pay a bit more than 25% of their premiums. Is it really fair that a working couple earning $100?000, with children and a mortgage to pay and maybe inadequate or no insurance, should be paying taxes to subsidize the B and D coverage of a senior couple with their house paid off and an annual income of $150?000?
Interestingly this is an area where conservatives and progressives should be able to work together. Conservatives have been arguing for years that high-income seniors should pay more or all of the true cost for their B and D benefits. And what could be more progressive than that?
It’s been a gloomy couple of decades for those of us who hoped that President Bill Clinton’s willingness in the mid 1990s to have a national debate on the future of Medicare and Social Security would have led to structural reforms by now—before the programs began to plunge into the red. So let’s hope we’ll see a real debate now.
-Stuart M. Butler, PhD, is Director of the Center for Policy Innovation at the Heritage Foundation in Washington, DC, where he focuses on developing new policy ideas. Previously he served as Vice President for Domestic and Economic Policy Studies. He is also an Adjunct Professor at Georgetown University’s Graduate School.
First appeared in The Journal the American Medical Association.
Stuart M. Butler, Ph.D.
Distinguished Fellow and Director, Center for Policy Innovation
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