The Train Wreck Ahead

...The government contribution would be set at a predetermined percentage of the average cost of an insurance plan in the area...

...Rather, he supports a laundry list of measures that he asserts will solve the cost problem for employers and public programs alike: more and better health information technology, new efforts to coordinate care for those with chronic illnesses, and better prevention...

...And there is no limit on the quantity of services Medicare benefi ciaries can use each year, so both the volume and intensity of care provided can go up over time without Congress acting to expand benefi ts...

...Enrollees would be free to select whatever plan they found most attractive, including a public option, but if they selected a plan that was more expensive than the average, they would have to pay the additional premium themselves...

...Federal taxpayers have always subsidized coverage for physician services, James C. Capretta is a fellow at the Ethics and Public Policy Center and a consultant to private health insurers...

...Medicare’s trustees make the reasonable assumption that, absent new information, this long-standing trend of costs outpacing the source of program income (i.e., the U.S...

...Medicare’s liabilities are expected to exceed revenue dedicated to paying for the program by $36 trillion over the next 75 years, and the trust fund that pays for hospital services is expected to go bankrupt in 2019...

...Whole segments of the U.S...

...even a small differential in cost and revenue growth rates will, if assumed to continue over many years, produce a massive projected deficit, especially when such a differential is applied to sums as large as those involved in the Medicare program...

...To these critics, Medicare is just one of many railcars hooked onto a runaway cost train...

...economy) will continue into the indefi nite future (though the trustees do expect cost growth to moderate somewhat from its recent trajectory...

...With this additional coverage, they pay no charges at the point of service because the combined insurance pays 100 percent of the cost...

...Medicare is the largest purchaser of services in most markets today...

...Boiling Medicare’s fi nancial predicament down to its mathematical essence—per capita spending rising faster, perpetually, than the program’s revenue base—may add to the despair of some...

...This is the kind of thinking behind the health care plan of the Democratic presidential candidate...

...Nearly all Medicare benefi ciaries also have supplemental insurance, from their former employers or purchased in the Medigap market...

...The outline of such a reform has been clear for some time (indeed it was proposed by a largely forgotten Medicare Commission in the late 1990s, chaired by former senator John Breaux and former congressman Bill Thomas...

...No one is suggesting turning the clock back to preMedicare America in order to control costs...

...A reform that promotes consumer choice and strong price competition, much like today’s drug benefi t, has the potential to signifi cantly improve the program’s fi nancial outlook and limit the scope of other changes that might be needed (like means testing or a delayed eligibility age...

...and Congress extended this subsidy, much to the chagrin of many fiscal conservatives, to prescription drug coverage in 2003...

...Medicare’s important infl uence on how health care services are delivered is often overlooked or understated...

...What is meant by this is that Social Security’s fi nancial problems stem entirely from shifts in easily measured demographic variables...

...Is it even reasonable to think such a long-standing trend can be reversed...

...The Medicare entitlement would be converted into a limited government contribution toward insurance, offered by private plans or the government...

...Offi cial estimates during consideration of the reform or even during the fi rst years of implementation are unlikely to refl ect signifi cant improvement from today’s gloomy outlook...

...Hospitals were built, and physicians and others opened up offi ces to provide newly enrolled Medicare benefi ciaries with a much improved level of service...

...But if Congress is unwilling to rely on the marketplace to weed out ineffi ciency, for political or other reasons, bringing Medicare spending into line with what is affordable over the long-run will be unpleasant work indeed...

...Consequently, previous Social Security benefi t commitments, based on overly optimistic assumptions, are no longer affordable and must be changed to head off insolvency...

...Employer-provided insurance also expanded rapidly in the postwar era...

...Would such a reform bring Medicare spending growth quickly into line with the economy...

...With plans for massive new spending on insurance subsidies, the Democratic candidate, if he won, would have little choice but to turn to the kinds of cost controls his party favors (but does not advertise) anyway: caps on premium increases each year, enforced with price controls governing private and public payments for services...

...BY JAMES C. CAPRETTA Social Security reform plans are a dime a dozen, but credible Medicare reform proposals are scarce...

...Benefi ciaries would also likely enroll in more managed-care settings if they saw lower premiums as a result...

...But, four decades later, with cost escalation now the cause of so much fi nancial distress for families and governments, policy makers must also understand that expansive insurance is the fuel for expensive care and rising costs...

...In a pay-as-you-go pension program, the implicit rate of return that can be paid out in benefi ts is determined by productivity growth in the economy and changes in the ratio of pensioners to potential workers— the so-called “aged dependency ratio”—over time...

...This kind of fi rst-dollar coverage provides a powerful incentive for benefi ciaries to use as many services as their physicians suggest might help improve their health...

...Total Medicare spending is projected to more than triple as a share of the national economy, rising from 3.2 percent of GDP in 2007 to 6.3 percent in 2030, 8.4 percent in 2050, and 10.7 percent in 2080...

...Because Medicare’s fi nancial problems are so immense as to seem beyond resolution, and the policy environment is complex...

...Treasury...

...Covering just the increase in Medicare spending expected by 2030 would require a 36 percent across-the-board individual income tax hike...

...Still, it is possible to see Medicare’s fi nancial problem as fairly simple math too...

...The Medicare entitlement is not defi ned by a mathematical formula tied to payroll taxes...

...So even if one were to assume that price controls in the private sector might cut costs, it is hard to see how the government could make further headway on Medicare spending using price controls given their already extensive, and ineffective, use by program administrators...

...In a market with strong price competition, insurers who found ways to work with more effi cient and higher quality provider networks could gain market share with lower premiums...

...Rather, what is needed is a sensible reform for the program that retains security for seniors even as it fundamentally alters the fi nancial incentives in the marketplace to improve the effi - ciency of health care service provision...

...But sooner or later Congress will have to tackle the problem anyway...

...This was, of course, all to the good, as the primary purpose of Medicare was to improve the quantity and quality of health care services provided to seniors...

...The end result is predictable: deterioration in the quality of care, fewer suppliers of services, and waiting lists...

...The entire budget for the Department of Defense now stands at about 4 percent of GDP...

...Compounding is indeed a powerful force...

...Most notably, it fails to account for the role of Medicare’s current design in the rapid escalation of costs in American health care...

...That means Medicare pays a preset rate to any provider for any service rendered to a program enrollee, with essentially no questions asked...

...This type of reform could be phased in, applied to new Medicare entrants so as to avoid disruption for those settled in their current arrangements...

...And there is certainly no expectation that they would narrow Medicare’s financing gap in any significant way...

...Today, Medicare pays for many services, diagnostic tests, operating procedures, and products that did not exist when the program was created by Congress in 1965...

...In an important 2006 study, Amy Finkelstein, an economics professor at the Massachusetts Institute of Technology, demonstrated that the creation of Medicare in the mid-1960s triggered an explosion in the health care infrastructure in regions with previously low levels of insurance enrollment among seniors...

...In the past, opponents of Medicare reform have argued, effectively, that it would be unfair to penalize Medicare enrollees with a reform of Medicare alone...

...But, unlike Social Security’s problems, Medicare’s go well beyond shifting demographics...

...medical industry have been built around the incentives embedded in these arrangements...

...Shouldn’t Congress get on with fi xing the problem...

...But relatively modest changes could accomplish this...

...But Medicare is a large part of the cost problem...

...These efforts, which most Republicans also support, may, in fact, modestly ease cost pressures, but they do not come close to solving the problem of costs rising faster than income...

...Longer life spans and falling fertility are projected to drive up this ratio in the United States from .21 today to .34 in 2030...

...In her paper, Finkelstein offered the rough estimate that about half of the real cost increase in health care spending in the United States from 1950 to 1990 can be attributed to the spread of Medicare and other expansive third-party insurance...

...Enrollees are required to pay their own premiums if they elect to enroll in these parts of Medicare, but the premiums now cover only about 25 percent of costs, with the balance financed automatically from the U.S...

...A heavily governmental approach to cost control can and should be rejected simply for the damage it would do to the quality of health care services provided to patients...

...Federal individual income tax collections amount to only about 8.5 percent of GDP...

...Rather, those enrolled get government-sponsored insurance coverage, the cost of which is mainly a function of ever-changing standards and technologies of medical practice...

...No one should be under the illusion that reducing the size of Medicare’s fi nancial imbalance could be done without controversy or fi nancial sacrifi ce, which is why it is not high on the political agenda...

...By any measure, the drug program’s competitive features are working well to keep costs down for enrollees as well as the government, and the vast majority of benefi ciaries like the program and the choices it has made available...

...The dynamic possibilities of the marketplace are real, but quantifying the benefi ts beforehand is more a matter of judgment than data analysis...

...The irony is that the federal government has been trying to slow Medicare spending with tighter payment regulations for nearly three decades, with almost no success...

...Medicare, of course, was never expected to be fully funded with dedicated taxes and premiums...

...The most recent report from the program’s board of trustees, issued in late March, only adds to the sense of hopelessness...

...But there really is no other choice...

...Four out of fi ve enrollees are in the traditional program, which is fee-for-service insurance...

...Medicare is not solely to blame...

...To be sure, Medicare’s payment rates are low, but political pressure ensures they are just high enough to protect the status quo and allow doctors, hospitals, labs, and outpatient clinics to continue operating autonomously, each with its own paperwork and billing arrangements, thus underwriting continued fragmentation...

...It is often said that Social Security will be easier to fi x than Medicare because Social Security’s problems are “just math...

...This annual subsidy is set to rise dramatically in coming years, from 1.5 percent of GDP in 2007 to 4.7 percent of GDP in 2050...

...Senator Barack Obama has not offered any substantive reform for Medicare beyond perfunctory calls to cut payments to private insurers and impose price controls on prescription drugs...

...The solution is therefore not Medicare reform but a concerted effort, led by the government, to implement reforms that will improve effi ciency and eliminate low value services for everyone buying insurance and services, including employers...

...The Congressional Budget Offi ce estimates that, between 1975 and 2005, Medicare’s cost per enrollee went up, on average, 2.4 percentage points faster than per capita GDP did each year...

...And when that happened, the power of compounding would begin to work in the direction of improved solvency instead of looming fi nancial disaster...

...Medicare is a pay-as-you-go program too, and the aging of the population is an important reason program costs will soar in coming years, especially as the baby boomers retire...

...In time, these incentives would force real changes in the way services are delivered to patients...

...But it should also be rejected because it is based on a fl awed understanding of what lies beneath today’s cost pressures...

...Would-be entitlement reformers decry the lack of courageous leadership from politicians, but, truth be told, even the so-called experts are at a loss over how to begin closing Medicare’s yawning fi nancing gap...

...This redesigned Medicare would look a lot like the new drug benefi t, now in its third year...

...Policymakers should not give more weight to such estimates than they deserve...

...And demand for more and better health care naturally grows with increasing wealth and higher incomes...

...It should be self-evident that the country cannot afford a Medicare entitlement that outpaces the economy forever...