Earlier this month, President Trump, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, and other senior Republicans huddled at Camp David to plan the party’s 2018 legislative agenda.
Speaker Ryan argued for reforming Medicare. That “is how you tackle the debt and the deficit,” he said. He’s right.
Unfortunately, GOP leaders concluded they didn’t have the votes this year to pass entitlement reform through the narrowly divided Senate.
That doesn’t mean free marketers should give up hope for a Medicare overhaul. They ought to learn from 2017’s failed ObamaCare repeal efforts and use 2018 to explain, in detail, why reform is necessary — and how it would work.
Free marketers have a good case to make. Medicare’s trust fund is on track to run out of funds in just over a decade. That means the federal government would have to either raise taxes or cut benefits for the nearly 57 million people covered by the program.
Medicare’s spending growth is unsustainable. The program spent $675 billion in 2016. That amounts to 15% of federal spending. In 2016, Medicare paid out $349 billion more than it collected in payroll taxes and premiums.
A decade prior, the cost of the entire program — $375 billion — was barely higher than just this 2016 deficit.
Right now, when people turn 65, they can sign up for the program. Medicare Part A covers inpatient hospital care. There’s no monthly premium, but beneficiaries face a $1,340 deductible and have to pay a fraction of the cost for long-term hospital stays. Part A is funded through payroll taxes — the FICA line on a worker’s paycheck.
Medicare Part B covers doctor’s visits and drugs that must be administered under physician supervision. Beneficiaries pay a premium of $134 per month — or more, if they have relatively high incomes. They also must cover copays and co-insurance. Part B is funded through premiums and general tax revenue.
Parts A and B have a fatal flaw. They set inflexible payment rates for procedures. Two competing heart surgeons in the same city who both perform a triple bypass operation, for example, will receive the exact same reimbursement. Doctors have no reason to compete on price to attract Medicare customers.
A “premium support” model could inject some competition into the health care marketplace for seniors — and save taxpayers money in the process.
Under such a model, private insurers would negotiate with hospitals and doctors in order to create networks of preferred providers willing to offer discounted rates in exchange for a steady stream of patients.
Beneficiaries would receive a lump sum from the federal government they could put toward the cost of an insurance plan that meets their needs and budget. The amount they receive could be pegged to the average price of the various plans offered by insurers in a particular region.
If a beneficiary chooses a plan that costs less than her federal premium subsidy, she could pocket the remainder, perhaps in a tax-advantaged Health Savings Account for future out-of-pocket expenses. If she picks a more expensive plan, she would pay the difference herself.
Such a reform would encourage seniors to spend their health care dollars wisely. And the competition it would engender among insurers and providers would reduce Medicare spending. According to a new Congressional Budget Office report, if the government switched to a premium support model and offered beneficiaries a subsidy equal to the average plan premium, federal spending would drop by $184 billion between 2022 and 2026.
Medicare beneficiaries would save money, too. The CBO report revealed that such a model would cut premiums for seniors by an average of 7%.
Democrats have long claimed that turning Medicare into a premium support program would be tantamount to pushing wheelchair-bound grannies off a cliff.
But such accusations are hypocritical. The premium support model has an awful lot in common with ObamaCare.
ObamaCare allows private insurers to compete for customers in a particular region. The federal government offers individual consumers subsidies tied to their incomes and the cost of a benchmark plan. Consumers who choose less expensive, less comprehensive plans may not have to pay any premium. Those who choose more generous — and more expensive — policies pay the difference between their subsidy and the plan premium out of pocket.
Democrats have fought tooth and nail to preserve this model for the ObamaCare population. So why are they opposed to it for seniors?
The math on Medicare is clear — the government cannot afford the program in its current form. A premium support model can preserve Medicare for future generations — without bankrupting those generations’ children and grandchildren to pay for it.