At age 50, let’s weigh the future of Medicare

Medicare is having a midlife identity crisis. Our most important health insurance program celebrated its 50th birthday on July 30, and two political and policy visions for Medicare’s future are competing for supremacy in Washington. And the winning direction will have important consequences for retirees in the decades ahead.

The question on the table is how to best pay for health care for our aging population. In 2050, the 65-and-older population will reach 83.7 million–almost double what it was in 2012, according to the U.S. Census Bureau.

1edicare has accounted for a rising share of the federal budget in recent years, and that has prompted an array of proposals for change. Conservatives have proposed higher eligibility ages and a shift away from the current defined-benefit structure to a defined-contribution approach–better known as vouchers. Liberals want to continue working to control Medicare’s costs through reform of care delivery systems, cutting the cost of prescription drugs, emphasizing prevention, and eliminating waste in programs like Medicare Advantage.

Medicare’s spending growth actually has been slowing down in recent years–annual aggregate spending has risen a little more than 3% since 2009, according to a Kaiser Family Foundation analysis. Reflecting the trend, Medicare Part B premiums have remained at $104.90 for the past three years. Experts credit the trend to constraints on payments to health-care providers under the Affordable Care Act, a slowdown in the quantity and intensity of health-care services being utilized, and the influx of baby boomers turning 65. An influx of younger, healthier baby boomers is reducing the average age of beneficiaries and, thereby, putting downward pressure on program costs.

Still, few health-care policy experts are ready to say health-care costs have been tamed permanently. Historically, health-care costs have risen at a 6% to 7% annual rate, and the Congressional Budget Office recently cited rising health-care costs as a key driver of its projection that the U.S. budget deficit will more than double as a share of economic output by 2040 (assuming no change in current tax and spending laws).

My perspective: We have a health-care-spending problem, not a Medicare problem. Medicare costs simply reflect the overall cost of our health-care system–and the system is inefficient. The United States spent 16.9% of its gross domestic product on health care in 2012, according to the Organization for Economic Cooperation and Development (OECD). That was far ahead of the 9.3% average for all OECD member nations. What’s more, we get inferior results for our greater spending–our longevity is rising more slowly than in other major OECD nations. American life expectancy was 78.7 years in 2011, OECD reports, a bit behind the OECD average of 80.1 and well behind leaders like Switzerland (82.8), Japan (82.7), and Italy (82.4).

Possible Solutions

Clearly, there is a great deal of inefficiency that can be wrung out of the health-care system. That’s why restructuring benefits and shifting more costs to seniors isn’t the first place to go with Medicare reform, although that’s been one of the visible trend lines. A case in point: passage this year of the so-called “doc-fix” legislation, which resolved a long-standing problem with rates used to reimburse physicians for care. The legislation was expensive, and one way that it raises money is by increasing the high-income surcharges that some seniors already pay for Part B (outpatient services) and Part D (prescription drugs) if their modified adjusted gross income (MAGI) exceeds certain levels (surcharges start at $85,000 of MAGI for single filers). These surcharges were first levied in 2007 as a result of reforms passed in 2003, and they were increased to help pay for the Affordable Care Act.

Soak-the-rich is bad policy in this instance. High-income surcharges don’t raise much money because a small minority of seniors have income that high–6% of the $67 billion that will be collected in Part B premiums this year will come from surcharges, according to the Centers for Medicare & Medicaid Services. Meanwhile, surcharges undermine the Medicare value proposition by charging much more while delivering no additional benefit. What’s more, a rising number of seniors will trip the surcharge wire by working longer, creating a perverse disincentive to additional years of labor. The law also eliminated first-dollar coverage in Medigap supplemental policies starting in 2020–another measure aimed at shifting cost more directly to seniors.

The doc fix is just the tip of the cost-shifting iceberg. Republicans in Congress have tried repeatedly to advance a new premium-support model for Medicare that would replace the current set of defined benefits with a set amount of cash that beneficiaries could use to shop for private health insurance or a variation on traditional fee-for-service Medicare.

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