Commentary

Much Talk, Little Action, On Saving Medicare

This article appeared in Copley News Service.

The GOP Congress and President Bill Clinton have proclaimed the end of America’s budget deficit, but their high-spending budget compromise does little to solve the problem of exploding entitlements. Medicare is set to go bankrupt in just four years. In 2006 alone program spending will outstrip revenues by an astounding $120 billion.

Yet Washington continues to fiddle while Medicare burns.

The Senate has approved a serious reform proposal that reduces benefits for high-income retirees, but opposition from the administration, as well as the seniors’ lobby, AARP, almost certainly dooms it. Indeed, Health and Human Services Secretary Donna Shalala claims to find some “good news” in the latest prediction of Medicare’s impending bankruptcy: “The health of the Medicare trust fund has not gotten worse.” Alas, that’s small comfort, especially since insolvency has moved one year closer.

Medicare is failing because America’s population is aging. Not only are the elderly making up an increasing proportion of the population, but they are living longer. This means rising expenditures since seniors are the heaviest medical consumers. Those 85 or older amass Medicare charges three-fourths higher than those 65 to 66, who consume far more medical care than do younger people.

Absent reform Medicare’s share of the GDP is expected to rise from 1.71 percent to 3.13 percent over the next 25 years.

The Republicans merely proposed to slow the growth of runaway Medicare outlays in 1995 and were rewarded with vicious demagoguery. The president’s attacks were particularly vile because first lady Hillary Clinton had earlier declared that the administration’s goal was to allow no increase at all in Medicare spending: “We are thinking zero growth in costs.”


Naturally, Clinton and his congressional allies oppose any initiative expanding freedom of choice. For them, the issue is ideological rather than practical.


Still, the Democrats have now agreed to reduce the growth in Medicare outlays by $115 billion over five years. In theory that’s all to the good, but the program will still spend $105 billion more than it takes in through 2002, and go bankrupt just seven years later, in 2008. That’s barely a decade away— assuming the future projections, which have always been overly optimistic in the past, prove to be accurate.

The specifics of the compromise offer even less reason for confidence. Republican no less than Democratic politicians have found that the easiest way to cut outlays is to simply slash reimbursements to doctors, hospitals and other health care providers.

Although politicians prefer to reduce payments to providers, the former no less than the latter hurts retirees. After all, doctors and hospitals prefer not to work at a loss. Slashing reimbursements, a strategy first utilized by the supposedly free-market Reagan administration, encourages providers to reduce care and makes them less likely to see seniors at all. Indeed, a decade worth of price controls has led to a rash of premature discharges and anecdotal evidence of poor and even deadly care.

Moreover, arbitrarily reducing payments, the primary cost savings embodied in the compromise, does not address the long-term demographic problem. Admits the Medicare Board of Trustees, “Further delay in implementing changes makes the problem harder to solve.”

The compromise also does too little to require beneficiaries to pay for more of their treatment. Current recipients receive over $100,000 more in benefits than they pay in premiums. Even the Senate plan is only a modest first step.

Instead of focusing on reimbursements, Congress and the president need to target the programs overall incentive structure. Today, Medicare operates as fee-for-service insurance, there by inflating demand, with a price control overlay, cutting quality. Real reform requires the introduction of Medical Savings Accounts for Medicare beneficiaries.

In effect, the government would provide beneficiaries with catastrophic insurance coverage along with the deductible in cash, which they could keep if they didn’t spend it. That would encourage patients and doctors alike to be more cost-conscious.

Naturally, Clinton and his congressional allies oppose any initiative expanding freedom of choice. For them, the issue is ideological rather than practical. It is important to maintain federal control even if doing so sacrifices the interests of seniors. The GOP has proposed a demonstration MSA program for up to a half million Medicare recipients, but there’s no guarantee that the compromise-prone Republicans will stand firm.

While MSAs are not a panacea, they offer the only practical means of transforming Medicare. To do anything else is to abandon any hope of meaningful reform, and to do that is to give up on controlling spending.

Doug Bandow is a senior fellow at the Cato Institute.