Medicare Is a Future Budget Buster

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WASHINGTON--The riveting oral arguments before the Supreme Court about the Affordable Care Act have diverted attention from another facet of the health-care problem that is likely also to emerge as a 2012 campaign issue: how to revise Medicare so that its future cost will be less than the astronomic amount expected under present law.

In the Budget resolution for fiscal year 2013 (which begins this October 1) passed by the House late in March, the Republicans proposed important changes, including income-sensitive federal help with premiums to be paid for a choice of health insurance plans.

With elections seven months away, President Obama lost no time on Tuesday in attacking the GOP and its approach to Medicare reform in remarks at the Associated Press's annual meeting in Washington.

After admitting that Medicare is "one of the biggest drivers of our long-term deficit," the president went on to misrepresent Medicare changes in House Budget Chairman Paul Ryan's Budget resolution.

Medicare, as complex a problem as one can conjure, with competing needs for compassion and fiscal prudence, will be part of the campaign. That is inevitable, and desirable, because the current program is unsustainable. But exaggeration and oversimplification are not the way to go.

In the interests of clarity, let us here try to disentangle what Mr. Obama said and what the facts are.

The president said, "Instead of being enrolled in Medicare when they turn 65, seniors who retire a decade from now would get a voucher that equals the cost of the second cheapest health care plan in their area. If the voucher isn't enough to buy a private plan with the specific doctors and care that you need, that's too bad."

But page 14 of the Ryan Budget reads, "When younger workers become eligible for Medicare a decade or more from today, they will be able to choose from a list of guaranteed coverage options, including a traditional Medicare fee-for-service plan. This flexibility will allow seniors to enjoy the same kind of choices in their plans that members of Congress enjoy."

Ryan did propose a voucher two years ago, an arrangement whereby seniors would receive a set amount of funding to use in whatever plan they chose. He has abandoned that in favor of a premium support device, co-sponsored with Oregon Democrat Rep. Ron Wyden. Seniors who retire in 2022 and later could choose from a variety of government-approved, competing, and comprehensive private-market health insurance plans, at different prices with different levels of service.

Medicare would pay most of the insurance company premium, with the exact amount to depend on the income, age, and health of the beneficiary. Poorer and sicker beneficiaries would get a greater subsidy.

Mr. Obama criticized the Ryan plan as a policy of tax relief for the well-off and tax increase for the poor. But the means-tested Medicare premiums that Ryan proposes would leave well-off seniors paying more for their health care than the less fortunate. To be consistent, shouldn't Mr. Obama favor this? Everyone agrees that Medicare is unsustainable now. Part of the way to solvency is to have the well-off pay higher premiums.

This debate is vital because Medicare, more than any other program, including Social Security, threatens to increase the deficit and add to the nation's debt. Unless we take heroic action, the Medicare Trust Fund will be exhausted in 2024, the trustees project.

We must not let that happen. Now is the time to start devising a remedy.

In his 2013 Budget, President Obama outlined his remedy for Medicare. He wants to cut Medicare by $335 billion over the next decade through lower payments to doctors, requiring more use of generic pharmaceuticals, and the work of the Independent Payment Advisory Board to control what treatments doctors are allowed to prescribe.

IPAB would only permit treatments to Medicare patients that it deems are cost-effective. So physicians will not be allowed to prescribe treatments that are not approved by the Board, a form of rationed care. This is no remedy.

Medicare reimbursements to doctors are already lower than in most insurance plans. That's why seniors find that many doctors refuse to take them. In many areas, Medicare patients face a shortage of doctors and longer waits for appointments. This is unfair both to doctors and seniors.

The projected aggregate cost of Medicare is staggering. Richard Foster, chief actuary of the Center for Medicare and Medicaid Services, has estimated that without the $500 billion Medicare spending cuts under the ACA-cuts that are unlikely to win congressional approval, if history is a guide-Medicare spending as a percent of GDP would grow from 3 percent today to 8 percent in 2050, and to 11 percent in 2080.

Even if Congress keeps the ACA cuts, Medicare spending would be six percent of GDP in 2080, twice what it is now, according to Mr. Foster. That means either deep spending cuts elsewhere, higher taxes, or more borrowing. The program as it is now is unsustainable and something must be done to retard the growth of spending.

The most effective way to reduce the cost of Medicare and give seniors high-quality medical care is by giving recipients a choice of plans and allowing them to shop around. The most cost-effective plans will have the most customers. When patients shop around for medical care costs go down, as has been the case with Lasik eye surgery and cosmetic surgery.

As the law reads now, Medicare cannot keep its open-ended promises to future seniors. The program needs revision. Whatever the Supreme Court decides about the Affordable Care Act will not relieve us taxpayers and voters and the Congress from future decisions on Medicare. Mr. Ryan's plan to transform Medicare into a stable program for future generations merits careful, dispassionate, examination.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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