Modest Cuts Could Save Medicare From Disaster

This article appeared on The Wall Street Journal on May 15, 2019.
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Instead of debating how to expand Medicare coverage, politicians should focus on fixing the fatal financial flaws in the existing program that threaten to bankrupt the nation.

Medicare spent 3.6% of gross domestic product in 2016, more than six times the share it consumed in 1967, the first full year it was implemented. The forecasts I have analyzed show that the share of GDP will rise to at least 9% within 75 years—and that's the good-news scenario. Other plausible forecasts show that Medicare could spend more than twice that.

A spending jump to 9% would require a roughly 17.4% increase in all federal taxes or a 30.5% cut in other entitlement and discretionary spending, or some intermediate combination—otherwise we'd be likely to see a Greek-crisis level of debt within 18 years. If the spending jump follows the worst forecasts, we would need to raise taxes by 36.33% or cut 91.76% of other spending. And this all assumes Congress doesn't enact Medicare for All in the meantime.

The good news is that three fixable problems account for a substantial majority of the excess spending.

First, Medicare's eligibility age is much too low. The threshold has remained where it was originally set, at 65. In 1967, the average 65-year-old American was expected to live 14.8 more years. In 2016, 65-year-olds live 19.3 more years on average—a roughly 30% jump. Yet the government has not adjusted the age required for benefits.

The solution is to raise Medicare’s eligibility age incrementally. If it increases by between three and four months a year, the Medicare eligibility requirement would synchronize with the rise in Social Security’s full retirement age, so that both would hit 67 by 2027. The government could keep raising the age floor at this rate until around 2072, when the eligibility age would be 73 and the average length of coverage would return to the original duration, 14.8 years. After that point, the threshold could rise more slowly, having made up the difference that has accrued over the past 50 or so years. It would be a gradual enough adjustment to allow ample time for beneficiaries and others to adapt, but it would still help stop the program from bankrupting the nation.

The second source of Medicare’s excessive spending is the almost fourfold increase since 1972 in the proportion of the working-age population classified as eligible for disability under Social Security, and hence coverage under Medicare.

The solution is straightforward. The government can restore the original disability standard—which has become lax—so that people qualify for benefits only when they are “unable to work any job in the economy.” In addition, other countries have reduced disability rolls by requiring most applicants to complete a rehabilitation plan before being awarded payments. The Netherlands has cut 60% of its disability numbers with this measure. These two tweaks would allow the disabled to continue receiving benefits, but people simply looking for an easy payout would no longer threaten the financial security of the elderly and truly disabled.

Adjusting the eligibility age and cutting disability rates could eliminate about 41% of the future growth in Medicare’s resource share. Much of the remaining excess could be cut by raising deductibles and coinsurance.

The average beneficiary today consumes six times more medical services than in the previous generation, even without counting the drug benefit introduced in 2006 that boosted Medicare’s share of GDP by 0.38 point. This is because the costs they have to pay for care have become heavily discounted. Most beneficiaries pay 68% less in deductibles than the previous generation and are charged coinsurance on steeply discounted rates. Since 1989, 20% of beneficiaries who are designated as low-income have been excluded from paying deductibles, coinsurance or premiums. Adding another service costs them nothing, and as a result they consume about 42% more services than other beneficiaries, even when the total is adjusted for health status. Medicare can’t be sustained at such discounted rates.

Instead, deductibles and coinsurance should be adjusted to fit those in the private market. The current Medicare deductible for professional services is 11% of the average for commercial insurance. Deductibles need to rise to 25% of the average commercial rate over the next 20 years and then up to the full average rate over the following 10 years. Coinsurance can remain at the below-market rate of 20% for 30 years. After that, unless other cost-cutting measures are taken, saving Medicare will also require low-income beneficiaries to bear some cost increases. By 2091, deductibles for most beneficiaries would need to hit $7,500 and their coinsurance would have to rise to the current market rate of 36%.

If the U.S. is lucky and Medicare follows the most optimistic forecasts, these increases, along with the first two changes, should keep Medicare’s GDP share constant. If costs follow pessimistic predictions, these increases would need to be approximately double.

More-extensive redesigns may be preferable to these three fixes, but one way or another costs have to stop consuming ever larger shares of GDP, or else the program is liable to explode—and take the rest of the economy with it. Talking about a grand expansion scheme like Medicare for All is pure fantasy.

John F. Early

John F. Early is president of Vital Few LLC and a former assistant commissioner at the Bureau of Labor Statistics. This article is based on his recently published Cato Institute paper.