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Medicare Reform Faces Reality

Friday, February 17, 2012

A proposal in Congress would create a competitive bidding process that has the potential to save the taxpayers substantial sums—without forcing seniors to pay more for their Medicare benefits.

Let’s face it. Medicare reform is a phrase that scares the daylights out of politicians. They know that Medicare is in deep financial trouble, but they also know (or think they know) that seniors and people nearing age 65 will punish them at the polls if they even hint that the program might have to change. What most politicians are unwilling to admit is that the program is changing for the worse, whether older voters like it or not. Today, Senators Richard Burr (R-North Carolina) and Tom Coburn (R-Oklahoma) leveled with the public on what it takes to save Medicare.

Their plan acts on what the experts have been telling us for a long time: Medicare is in deep financial trouble now, not just ten years from now. For the past four decades, the program has been spending more than it collects in premiums and payroll taxes.

Physicians are threatened with a 27.4 percent pay cut, which Congress is about ready to override. That doesn’t solve the problem. Next year the proposed cut will exceed 30 percent, and there’s no end in sight. One of the Medicare trust funds becomes insolvent in 2024, but seniors’ access to care will be threatened long before that.

Medicare would move from a defined-benefit program, which promises unconstrained fee-for-service payment for covered benefits, to a defined-contribution plan, which gives consumers the resources to choose a health plan that best meets their needs.

The Coburn-Burr solution is premium support, a system based on fair and open competition that gives the health sector a reason to find more efficient ways to deliver necessary care. Medicare would move from a defined-benefit program, which promises unconstrained fee-for-service payment for covered benefits, to a defined-contribution plan, which gives consumers the resources to choose a health plan that best meets their needs.

All the plans, including traditional Medicare, would bid against each other and would have an incentive to seek more efficient ways of delivering necessary care. No senior would be forced to leave traditional Medicare, but a better deal might be found in one of the competing plans that can offer the full benefit package for less.

Rather than waiting a decade to make this fundamental reform, Coburn and Burr would start competitive bidding in 2016. They recognize that delaying competitive bidding means delaying the efficiencies that the health sector will implement when given the financial incentive. Why wait when delay only means wasting more money?

Premium support with competitive bidding has the potential to save the taxpayers substantial sums without forcing seniors to pay more for their Medicare benefits. A recent AEI report shows that one form of competitive bidding could reduce Medicare outlays by $339 billion over the next decade without cutting benefits. If we do not find a way to achieve savings of this magnitude, Medicare will become an increasingly difficult burden on younger people, who pay most of the program’s costs through their taxes.

Medicare enrollees are going to have to pay higher premiums, and doctors are going to have to accept today’s payment rates for the next few years.

Other steps must also be taken. Medicare enrollees are going to have to pay higher premiums, and doctors are going to have to accept today’s payment rates for the next few years. Wealthier seniors will pay more out of their own pockets for their healthcare, and millionaires on Medicare will have to pay the full cost of coverage themselves. Medicare’s eligibility age will gradually increase to 67. One clear improvement: Medicare will become a more streamlined benefit that, for the first time, offers protection against catastrophic expenses.

Senators Coburn and Burr have taken an important step in advancing their Medicare reform proposal today. They are well aware that Congress will not take up any far-reaching legislation during an election year, but they also know that unless the conversation starts now, we have little hope of serious debate next year.

We can wait, and continue to impose tighter price constraints and top-down constraints on an ailing health system that will make it increasingly difficult for seniors to access care. Or, we can change the perverse economic incentives that drive Medicare, give seniors a real voice in the healthcare market, and create an effective program that we can afford.

Joseph Antos is the Wilson H. Taylor Scholar in Healthcare and Retirement Policy at the American Enterprise Institute.

FURTHER READING: Antos has also written “Long May She Waive,” “Still No Good News for ObamaCare,” “Confessions of a Price Controller,” and “The Wyden–Ryan Proposal—A Foundation for Realistic Medicare Reform.” Robert F. Coulam, Roger Feldman, and Bryan E. Dowd say “Competitive Bidding Can Help Solve Medicare's Fiscal Crisis.” Thomas P. Miller discusses “The 13 Key Questions To Ask About Wyden-Ryan Medicare Reform.”

Image by Darren Wamboldt / Bergman Group

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