Critical Condition

Immediate Medicare Reforms Could Slash Nation’s Debt

When it comes to the super-committee’s duty to reform Medicare, you’ll likely to hear the same tired and unsuccessful methods for lowering Medicare’s soaring costs: raising taxes, manipulating payment formulas, or making even deeper payment cuts to doctors and hospitals. 

The best way to reform Medicare is transform it into a premium-support program, which provides a defined contribution to seniors’ chosen health plans, which include a variety of private plans as well as traditional Medicare fee-for-service. This approach — based on injecting consumer choice and competition into Medicare — has a long history of bipartisan support, going back to the early 1980s.  

Congress could adopt this approach through a two-stage, ten-year structural reform, which the Heritage Foundation outlined in its long-term deficit plan, “Saving the American Dream.” When compared with the Congressional Budget Office’s baseline, Heritage’s two-stage Medicare reform plan would result in $9.4 trillion in savings by 2035.

During the initial five-year transition period, Congress could make immediate changes to help secure the program’s fiscal solvency. Calculations from Heritage’s Center for Data Analysis show the initial reforms would result in nearly $299 billion in savings. These savings could eliminate shortfalls in the Hospital Insurance (HI) trust fund — which CBO estimates to go broke by 2020—and “fix” the Medicare physician payment formula, which threatens a 30 percent payment cut next year to doctors who see Medicare patients.

Here’s what Congress could do right now, while transitioning Medicare into a sustainable premium-support program:

Add a catastrophic benefit to protect Medicare patients. Traditional Medicare, which is broken up into four parts, does not provide seniors with any protection against the costs of a catastrophic illness. To cover this and other gaps, nine out of ten seniors buy a supplemental policy that provides “wraparound” coverage. But because these policies also provide “first-dollar” coverage, they fuel excessive utilization of medical care and cost taxpayers tens of billions of additional dollars. .

Instead of recovering those costs through a “Medigap” premium tax, as some have recommended, Congress could provide seniors a catastrophic benefit in lieu of the more costly supplemental insurance. Senior could choose the benefit or keep the more expensive supplemental coverage, but catastrophic coverage would guarantee peace of mind. In a future premium-support program, all health plans would have catastrophic coverage. Meanwhile, structured properly, a catastrophic benefit could reverse harmful incentives and yield real savings.

Eliminate Medicare hospital deficits with a temporary premium. Medicare’s Part A (hospitalization) spends more than it takes in through payroll taxes. Washington’s historical response to this has been to raise payroll taxes on working families, or cut spending through tougher price controls and tighter regulation. But rather than raise taxes in a recession or slash hospital payments even more, Congress could establish an annual supplemental premium — just enough to cover the shortfalls.

The premium would be flexible, and guarantee the financing of seniors’ hospitalization during the transition to a premium-support program. A temporary monthly premium, if applied equally to all beneficiaries, would be about $30 or less per enrollee. This is a much better option than continuing to allow endless deficits or hiking the federal payroll tax in a struggling economy with a 9.1 percent unemployment rate.   

Reduce taxpayer burdens for Medicare Parts B and D.  When Medicare was enacted in 1965, Part B premiums were split 50–50 between Medicare beneficiaries and taxpayers. But over the years, taxpayers ended up paying 75 percent of premiums. Beneficiaries should pay more for their benefits. Therefore, Congress should slowly raise (over five years) the premiums that patients pay for parts B (doctor visits) and D (prescription-drug coverage), from 25 percent to 35 percent. This is only fair to taxpayers who struggle to pay their increasing health costs as well as the exploding entitlement costs. Of course, current protections for Medicare beneficiaries with limited means — such as Medicare patients not paying Part B premium increases if they exceed their Social Security benefits’ cost-of-living adjustment — would remain.

Cut taxpayer subsidies for the wealthiest Medicare patients. Today, a retiree with an annual income of more than $85,000 pays higher Medicare premiums than retirees with lower incomes. The White House wants wealthy people to pay more in taxes. But instead of adopting this “soak-the-rich” tax policy, why not gradually reduce taxpayer subsidies for upper-income retirees? To maximize the savings, start the phase-down more gradually for single seniors with annual retirement incomes of more than $55,000.

That’s more than $12,000 above the average annual income for today’s American worker. Under the Heritage proposal, taxpayer subsidies for Medicare would be phased out entirely for a retiree with an annual income of $110,000 or more. Of course, wealthy seniors could enroll in Medicare, and get all of the program’s special insurance advantages. But they would pay the full premium costs. Meanwhile, the Heritage proposal would direct more financial assistance to poorer seniors who need the most help.

Slowly increase the program’s eligibility age to 68. The average lifespan when Medicare started was 70.2 years. Today, it’s 78.2 years. Today’s retirement age doesn’t reflect the growth in longevity, nor the crushing tax burden that a smaller work force faces in financing a growing Medicare population that will reach more than 80 million enrollees by 2030.

Additionally, Congress should provide significant tax breaks to Americans who work past the normal retirement age to help delay enrollment in Medicare and Social Security. Heritage’s tax reform proposes a yearly $10,000 tax deduction for any American, regardless of income, who works beyond regular retirement.

Introduce a co-payment for Medicare home health care. While only 10 percent of Medicare patients use home health care, it is an expensive benefit for taxpayers. Today, there is no cost-sharing requirement in the program, despite a sharp increase in usage and staff visits. Adding a 10 percent co-payment for the cost of each home health care episode (home health care for 60 days) would save taxpayers an estimated $14 billion over the first five years.

These steps — taken together with reforms that guarantee provider access — would not only start a turnaround in Medicare’s financial condition, but also improve seniors’ access to quality care. They are real solutions that will make Medicare work for seniors and taxpayers, and be viable for future generations.

— Robert Moffit is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.


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