Tackling the Runaway Medicare Train

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WASHINGTON--With the 2011 budget battle seemingly resolved, the Republicans and President Obama are turning to the federal budget for fiscal year 2012, which starts October 1.

Above all else, that will mean tackling entitlement spending, especially the runaway train that is Medicare, the open-ended health-care program for those 65-plus and the disabled. In a speech on the deficit on Wednesday, Mr. Obama outlined his plans to reform Medicare, responding to Republican proposals made earlier this month.

Mr. Obama proposes to cut Medicare costs by $340 billion over the next decade through lower reimbursements to drug companies and through the Independent Payment Advisory Board, which only permits treatments to Medicare patients that it deems are cost-effective. Hence, physicians will not be allowed to prescribe treatments that are not approved by the Board, a form of rationed care.

In an alternative approach laid out in his draft 2012 budget resolution, the Republican chairman of the House Budget Committee, Representative Paul Ryan of Wisconsin, has proposed replacing Medicare with federal support for premiums paid for private insurance.

Modeled after the Federal Employee Benefits Program, Mr. Ryan's approach would let seniors who retire in 2021 and later choose from a variety of government-approved, competing and comprehensive health insurance plans, at different prices with different levels of service.

Medicare, more than any other program, including Social Security, threatens to wreck our federal finances. Unless Congress takes heroic action, Medicare threatens to race from a 3.18 percent share of GDP now to an 8.17 percent in 2050.

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

Despite its shaky financial future, Medicare has become an easy place for politicians to plunder revenue for diversion other purposes. For example, under the new health care law, beginning in 2013, Medicare taxes will rise on income and capital, reducing incentives to work and to invest.

Singles with adjusted gross income over $200,000 and joint filers who earn more than $250,000 will see their Medicare tax rate increase to 2.35% from the current 1.45%. Plus, they will pay a new 3.8% tax on investment income, including capital gains, dividends, and interest.

These new tax revenues will not be used to shore up Medicare. Oh no, they will be dedicated to shore up the 2010 Act's new health care system for people under 65. In addition, $500 billion over the next decade is projected to be saved from Medicare and reallocated to the general health insurance scheme.

Meanwhile, Medicare reimbursements to doctors are lower than in most insurance plans. That is why Medicare patients complain that many doctors refuse to take them. In some areas, Medicare patients face a shortage of doctors and longer waits for appointments.

Even as physicians grumble that their fees are low, the projected aggregate cost of Medicare is staggering. The Office of the Actuary of the Center for Medicare and Medicaid Services has estimated that without the ambitious, projected Medicare spending cuts under the Affordable Care Act - cuts that are unlikely to win congressional approval, if history is a guide - Medicare expenditures as a percent of GDP would grow from 3.18% today to 8.17% in 2050, and to 10.70% in 2080. Even if Congress approves the cuts, Medicare spending would be 6.37% of GDP in 2080, twice what it is now.

That means either deep spending cuts elsewhere, higher taxes, or more borrowing-or some combination of all three. In sum, the program as it is now is unsustainable and something must be done to retard the growth of Medicare spending.

Under Mr. Ryan's plan, Medicare would pay a certain portion of the insurance company premium, with the amount to depend on the income, age, and health of the beneficiary. The rest of the premium would be paid by the beneficiary.

This would inject more choice into Medicare, turning it from its current structure into a system of competitive managed care, modeled after the Federal Employees Health Benefits Program, with more choice among plans.

In his speech on Wednesday, Mr. Obama attacked the Republican plan directly: "It says instead of guaranteed health care, you will get a voucher. And if that voucher isn't worth enough to buy insurance, tough luck - you're on your own."

However, premium support is not a voucher. Mr. Ryan did propose replacing Medicare with vouchers in his Roadmap for America in the 111th Congress, but this is a different plan. Under premium support, the government gives seniors a choice of a variety of pre-approved plans at different prices. With a voucher system, seniors are not limited to government-approved plans.

Premium support is the system used by federal government workers, members of Congress and their staffs, and government retirees in the Federal Employees Health Benefits Program. As health care costs have risen over the past two decades, the program remains popular with government workers.

Unlike Medicare, there are few complaints. In fact, many federal government workers value their ability to keep the health plan during their retirement.

The advantage of the federal workers' health program is the variety of plans at different prices, ranging from traditional fee for service to managed care to health savings accounts combined with insurance for catastrophic care.

More choice means lower costs. Medicare Part D, the prescription drug benefit, has cost less than was forecast because seniors have a choice of plans that compete for their business. Similarly, but outside of Medicare, prices for Lasik eye surgery and cosmetic surgery have declined steadily; these services are usually not covered by insurance ad so patients shop around. Sometimes, health care markets do work.

Under Mr. Obama's proposal, Medicare costs would be cut through rationing. If the Independent Payment Advisory Board says your treatment isn't worthwhile, then it's indeed "tough luck - you're on your own." Most seniors would choose premium support.

As the law reads now, Medicare cannot keep its open-ended promises to future seniors. Our elected politicians are beginning to offer alternatives for debate and enactment. Now it's up to Americans to weigh in.



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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