The Wrong and Right Ways to Reform Medicare

June 8, 1995 • Policy Analysis No. 230

The combination of the latest report from the trustees of the Medicare Trust Fund and the debate over balancing the federal budget has moved the need for Medicare reform to center stage. The trust fund, which finances Medicare Part A, will be bankrupt by the year 2002. Medicare Part B, which pays for physician services, diagnostic tests, and other outpatient services, is funded through general revenues and premiums from the elderly and therefore is not going broke. However, its rapidly escalating costs will add more than $100 billion per year to the federal deficit by the year 2000.

In response, many members of Congress have fallen back on such traditional remedies as increasing the payroll tax, raising Medicare premiums, pushing the elderly into managed care, and restricting reimbursements to providers. There is little evidence that any of those proposals will succeed in restraining the growth of Medicare spending. However, there is evidence that many of those approaches will be harmful to the economy, the health care industry, and the elderly.

Congress should seize this opportunity to fundamentally reform the Medicare system, transforming it from a first‐​dollar insurance plan to a back‐​up catastrophic program. Only through such a transformation of the Medicare system can we ensure that the elderly will continue to have access to the health care they need.

About the Authors