The Right Way to Reform Medicare

December 19, 1996 • Commentary

Almost everyone in Washington seems to have agreed to place the future of Medicare reform in the hands of a bipartisan commission. As a general rule, anytime politicians reach this sort of consensus, we should reach for our wallets. The Medicare reform commission is no exception.

Everyone understands that Medicare is in trouble. The program is already running a deficit, and the most recent estimates indicate that it win be completely insolvent before the end of the century. But does anyone really believe that a commission, appointed by Clinton and a Congress that has grown terrified of offending the senior vote, will undertake the type of reforms necessary to fix Medicare’s long‐​term problems?

Ironically, the politicians point to the 1983 commission that “saved” Social Security as a model for the Medicare commission. But that commission is a perfect example of why we should be worried.

Unwilling to consider any truly innovative solutions, that commission fell back on the old Washington standbys–it recommended a huge payroll tax increase, along with some minor benefit cuts. The members of the commission, all charter members of the Washington establishment, then announced that Social Security was safe for the next 75 years. Of course, they were wrong. Social Security win begin running a deficit as early as 2012.

There is no need for a commission to figure out Medicare’s problems. Medicare is fundamentally unsustainable because of three irresistible facts: demographics, technology and third‐​party payment.

First, America is growing older. In 1965 a person who reached age 65 could expect to live an additional 14.6 years. That figure has now risen to 17.5 years and by 2025 win increase to 18.8 years. As a result, in the next 30 years the number of Americans over the age of 65 win increase more than 20 percent. The number of Americans over the age of 70 win double. Indeed, Americans aged 85 and older are now the fastest growing segment of the population. With medical breakthroughs and new technology, we can expect life expectancy to continue to increase, leading to even greater numbers of elderly citizens.

Second, medical treatments and technologies exist today that were not even dreamed of when Medicare was conceived. Those new treatments and technologies have saved lives and increased the quality of life, but they have increased the cost of health care.

Third, Medicare suffers from the problems inherent in any third‐​parry payment system. Many studies have demonstrated that individuals will consume more, and more expensive, health care services if someone other than the consumer is bearing the cost. Guy King, former chief actuary for the Health Care Financing Administration, says that third‐​parry payment is one of the primary causes of the rapid growth in Medicare expenditures. As King explains, “When people, either patients or doctors, are spending other people’s money, they do not worry about the cost or number of services consumed.”

What we need is not a commission but political leaders who win be honest with the American people–who will tell them that Medicare cannot continue in its current form. We cannot continue to have the government provide virtually first‐​dollar insurance coverage for every senior. Instead, Medicare should be transformed into a back‐​up catastrophic program that protects seniors from serious illnesses but leaves people increasingly responsible for the majority of their health care expenses.

The logical way to accomplish that would be to gradually increase Medicare deductibles–a modest amount in the first year but growing steadily over time. Several decades down the line, the deductibles would be several thousand dollars per year. Limits on Medicare reimbursements should be removed so that the programs would cover catastrophic expenses without limits.

While that transformation is taking place, today’s workers should be provided with incentives to start saving to cover their future noncatastrophic expenses below the deductibles. That can be done by expanding individual retirement accounts and establishing medical savings accounts.

That is the type of bold change necessary to truly reform Medicare. And it can and should be done without a compromise.

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