Medicare reform is needed to fix the federal debt
Health care is the main driver of the federal debt. According to the Bipartisan Policy Center, total health care spending accounts for more than 17% of the entire U.S. economy and is growing 2% faster than GDP. Given the huge influx of baby boomers entering retirement, it’s hard to see how the “Super Committee” can fix the nation’s debt problems without reforming Medicare.
But reforming Medicare can be politically dangerous for lawmakers – especially those who are facing re-election next year. Privatize Medicare and they’ll be denounced as “ruthless capitalists” for putting seniors at the mercy of corporate profiteers. Cut too much funding and they’ll be called “heartless” for condemning scores of older Americans to their deaths because they can’t afford the out-of-pocket medical expenses. Increase subsidies or impose strict (cost-control) regulations and they’ll be labeled as “socialists” for supporting the government takeover of health care. Maintain the status quo and they’ll simply live up to their reputation as the “do nothing” Congress.
When it comes to Medicare reform, lawmakers will be vilified no matter what they do. With Congressional approval ratings in the single-digit, there’s not much further to fall. So maybe the most responsible thing lawmakers can do is to adopt a Medicare reform plan that will displease all factions – the right, the left, seniors, soon-to-be seniors – but that will bend the cost curve on Medicare, place the program on a more sustainable path for future generations, and help reduce the federal deficit. The Domenici-Rivlin Protect Medicare Act presented to the Super Committee earlier this month comes close to meeting the aforementioned goals.
Developed by the Bipartisan Policy Center’s Deficit Reduction Task Force, the Domenici-Rivlin plan proposes to partially privatize Medicare to reduce health care spending. The proposed reforms are supposed to hold private insurers, health providers, and Medicare beneficiaries more accountable for their actions.
The Domenici-Rivlin plan will move Medicare away from the current fee-for-service model to a premium support system. Regulated regional exchanges will allow private insurance plans to compete with Medicare. The baseline federal contribution will be determined by the second lowest approved bidder in each exchange, which could be a private insurance plan or fee-for-service Medicare. To participate, the private insurance plans are required to cover at least the same services as traditional Medicare and accept anyone who is eligible for Medicare regardless of the person’s pre-existing conditions or health status. (In exchange, private insurers will receive government subsidies on a risk-adjusted scale, meaning they’ll receive higher payments for accepting sicker patients.) Current Medicare beneficiaries could choose to stay with traditional Medicare or switch to a private plan offered through the exchange and have the option to change plans once a year during open enrollment periods.
In theory, the Domenici-Rivlin plan would curb Medicare spending through market competition. For example, private insurers will have to keep their premiums low enough to attract Medicare enrollees and provide better service and coverage to prevent enrollees from switching to another plan. Medicare beneficiaries will have more choices, but they’ll be held more accountable under the new cost-sharing arrangement that would discourage the over-use of health services.
That’s how the plan is supposed to work – in theory. But even the plan’s authors aren’t sure whether partial privatization will actually result in lower health care costs.
“We’re not absolutely certain about how the markets will work. We have seen, even in the limited market that is Medicare Advantage, that in some places they work well and come in under the fee-for-service, and in other places they don’t,” said Dr. Alice Rivlin, the former director of the Congressional Budget Office and the Office of Budget Management.
The Domenici-Rivlin plan will cap the government’s spending increase for Medicare at GDP plus 1%. Cost increase that exceed the government’s cap will be covered through higher premiums for Medicare enrollees, but the premium increases will be exempted for low-income beneficiaries. In other words, the Domenici-Rivlin plan will likely shift more costs to seniors if market competition fails to produce adequate cost-savings. Considering that private health insurance premiums increased by 113% between 2001 and 2011, there’s a strong likelihood that most retirees will end up paying more for their health care through higher premiums and out-of-pocket fees under the Domenici-Rivlin plan.
“The reality is if you were to get rid of Medicare and send its users over to the private sector – the insurance market – they would actually end up paying more because the cost of private insurance is growing at a faster clip than is Medicare,” said Rep. Xavier Becerra (D-Calif.), a member of the Joint Select Committee on Deficit Reduction.
The Domenici-Rivlin plan will be attacked by liberals for privatizing Medicare; by conservatives for not fully eliminating fee-for-service Medicare; by seniors for raising the cost of their health care; and by private insurers for imposing too many regulations. But at least the plan provides a responsible and balanced roadmap to curb the unsustainable cost of health care – and that’s better than doing nothing and allowing the problem to worsen. Even if the Super Committee meets its statutory requirement to pass a $1.2 to $1.5 trillion deficit reduction plan, the committee’s efforts will do very little to fix the nation’s $14 trillion debt without substantial Medicare reform.
“Let me be blunt. A plan that does not fundamentally restructure Medicare and other health entitlements will fail to adequately address the debt crisis that we face,” said former Sen. Pete Domenici (R-N.M.).
- Bipartisan Policy Center: Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System (PDF)
- Written testimony submitted by former Dr. Alice Rivlin, Co-Chair of the Bipartisan Policy Center’s Debt Reduction Task Force (PDF)
- WhatTheFolly.com: Health insurance costs rising faster than wages & inflation
- WhatTheFolly.com: Congressional Budget Office warned U.S. debt may exceed total economic output by 2035
- WhatTheFolly.com: Transcript: Super Committee testimony by Dr. Alice Rivlin on reducing the deficit
- WhatTheFolly.com: Transcript: Super Committee testimony by former Sen. Pete Domenici on deficit reduction
- WhatTheFolly.com: Transcript: Super Committee Rep. Xavier Becerra’s Q&A on previous debt proposals
- WhatTheFolly.com: Transcript: Super Committee Rep. Chris Van Hollen’s Q&A on previous debt proposals
- WhatTheFolly.com: Transcript: Super Committee Sen. Pat Toomey’s Q&A on previous debt proposals
- WhatTheFolly.com: Transcript: Super Committee Sen. Max Baucus’ Q&A on previous debt proposals
- WhatTheFolly.com: Transcript: Super Committee Sen. John Kerry’s Q&A on previous debt proposals
- SSA.gov: Summary of the 2011 annual reports to the Social Security and Medicare Board of Trustees
- Medicare.gov: Medicare premiums and coinsurance rates for 2011
- Congressional Research Service: The Impact of Medicare Premiums on Social Security Beneficiaries (1/27/10) (PDF)
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