Commentary

Heroic Medicare Rescue

By Peter J. Ferrara
This article was originally published by The Washington Times.

Commentators are always complaining about political leaders ducking the nation’s most difficult problems. That is why it is all the more important to laud those leaders who do step forward to address the real, hard questions.

In recent months, Rep. Bill Thomas, California Republican, has bravely risen to take the lead in addressing four-square the intractable Medicare problem. Joined by the equally heroic Sen. John Breaux, Louisiana Democrat, the effort has become bipartisan, growing out of their joint leadership of the National Commission on Medicare Reform.

Medicare is perhaps the most difficult problem facing the nation. Most of the elderly rely on it to pay for essential medical care they could not otherwise finance. Yet, the costs are skyrocketing beyond the ability of taxpayers to pay them.

On our current course, by 2010 total Medicare spending will have doubled to about $540 billion. At current tax rates, payroll taxes will cover only 38 percent of those expenses. Medicare premiums paid by seniors would only cover another 13 percent, even assuming they continue to rise at recent rates. By 2030, under the government’s own projections, Medicare will cost $2.2 trillion to $3 trillion per year, accounting by itself for 28 percent to 38 percent of the entire federal budget.

This runaway spending is expected despite severe price controls on Medicare services and treatments that will only deteriorate the quality of care for retirees over time. As Mr. Thomas rightly says, “Medicare now comprises the worst of three worlds: It is based on incentives that encourage unchecked spending; it operates through intrusive controls to counteract those incentives; but it nevertheless faces bankruptcy within a decade.”

Mr. Thomas adds, “Rather than helping senior citizens participate in the private health care system, it has become a top-down, government-run health system itself.”

Three powerful trends are contributing to this long-term disaster - the impending retirement of the Baby Boom, increasing life expectancy for retirees, and rapidly rising health costs.

The reforms offered by Mr. Thomas and Mr. Breaux are based on the best thinking on this subject. You can find in their proposals innovative contributions ranging from the conservative Heritage Foundation to the libertarian Cato Institute and National Center for Policy Analysis to the moderate Democrat Progressive Policy Institute. For the last several years, these different groups have all been trying to develop ways to address Medicare’s problems without hurting seniors or taxpayers. They have found the only solution is to bring in the efficiency, competition, incentives, and productivity of the private sector.

The Thomas-Breaux proposal based on this work is to reform Medicare to provide assistance to retirees in buying coverage from a full range of private alternatives, whether Medical Savings Accounts, HMOs, traditional insurance, or other innovative plans. In place of current Medicare premiums, seniors would pay no more than 12 percent of the premiums of an average-cost plan mandated to provide the same coverage as Medicare today. The reformed Medicare system would pay the rest. Seniors would pay less if they chose a lower-cost plan, down to zero if they chose a plan costing 85 percent of the average.

Seniors could pay the additional cost of a higher-cost plan with added benefits if they chose. The government would pay for added prescription drug coverage and catastrophic cost coverage for low-income retirees.

Seniors could choose to stay in the government’s Medicare insurance plan if they wanted. But that plan would charge government-subsidized premiums to cover its costs under the same terms as the private plans. Unrealistic price controls, which will only hurt elderly patients, would no longer apply to Medicare.

The eligibility age for Medicare assistance would be equal to the regular Social Security retirement age, which will be phased up to 67 under current law over the next 20 years or so. Given the increasing lifespan, this makes sense. Those with physical limitations leaving them unable to work would still be eligible at 65.

The competition, efficiencies and incentives of the private plans are expected to reduce Medicare’s costs by as much as 20 percent. Overall, the proposal is expected to save $60 billion per year by 2010 and $500 billion to $ 700 billion per year by 2030.

But projected payroll tax revenues would still be far short of covering the program’s remaining costs. Adding in general revenue subsidies, now close to $ 100 billion per year, would still be insufficient, even if these subsidies continued to increase at the rate of economic growth. Mr. Thomas and Mr. Breaux invite further discussion of where to get the additional needed revenues for the system.

This is where they need to take the innovation a step further. Workers should be allowed to choose to save and invest their Medicare payroll taxes in personal retirement investment accounts. By retirement, these accounts would generate far more income for retirees than the Medicare payroll tax. Sen. Phil Gramm, Texas Republican, has already been hard at work developing this idea.

Peter J. Ferrara is an associate policy analyst at Cato and the general counsel and chief economist at Americans for Tax Reform. He is also author of “The Next Steps for Medicare Reform.”