If no changes, no Medicare

Medicare has two more years to live than previously thought. The program’s trustees recently estimated that the “depletion date for the trust fund is 2026, two years later than was shown in last year’s report.”

But that conclusion is less a vote of confidence than a two-year stay of execution. Absent substantial reform, Medicare will eat up more and more of our nation’s resources even as it provides less and less to beneficiaries.

The report notes that Medicare expenditures will increase faster than earnings or the economy. As a result, the share of gross domestic product the program consumes will jump “from 3.6 percent in 2012 to 6.5 percent by 2087.”

And that may be an underestimate. The projections are “based on the trustees’ intermediate set of assumptions,” which include sharp reductions in payments to doctors and other providers that Congress has routinely overruled in the past.

As the report explains, if “lawmakers continue to override the statutory decreases in physician fees, and if the reduced price increases for other health services under Medicare are not sustained and do not take full effect in the long range, then Medicare spending would instead represent roughly 9.8 percent of GDP in 2087.”

Trustee Charles Blahous argues that future Medicare costs “are nearly certain to be higher than our current projections,” and the program “faces substantial financing challenges and warrants significant legislative reforms.”

Obamacare will only make things worse.

Supporters of the president’s health-care law point out that it will trim Medicare spending by $716 billion over 10 years. Shouldn’t such restraint be applauded?

Hardly. Obamacare simply takes money out of Medicare and lavishes it on other programs, such as Medicaid. The original Congressional Budget Office estimate of the cost of the law was $940 billion over 10 years. Earlier this year, the agency revised its estimate to $1.8 trillion over the decade 2014 to 2023.

Further, Obamacare slashes the portions of Medicare that have the best hope of reducing health costs in the long term – those governed by market competition.

For instance, the law will trim about $150 billion from Medicare Advantage (MA) over the next decade. MA, which covers 25 percent of Medicare recipients, allows seniors to pick from plans administered by private insurers. Seniors have embraced the program, as enrollment has grown by 30 percent since 2010, according to the Kaiser Family Foundation.

MA can also save money. According to a group of Harvard economists, including former Obama adviser David Cutler, MA can deliver the same services as traditional Medicare for 87 cents on the dollar.

Rather than gut the competitive elements of Medicare, lawmakers should double down on them. Market-friendly reforms hold the greatest promise for keeping Medicare’s costs under control.

Step one? A system of premium support that provides seniors a generous federal subsidy to assist with the purchase of privately administered insurance. Those who want gold-plated plans could pay more out of pocket. Those choosing less expensive plans could get a cash rebate.

Reform shouldn’t stop there. The eligibility age should be raised to reflect the reality that Americans are living longer. Means-testing the program – so that wealthy seniors shoulder responsibility for more of their care – would also help shore up its finances.

Such reforms, along with curbing the $60 billion in annual fraud, would reduce total government spending on mandatory health programs from 14 percent of GDP to 5 percent by 2050, according to the Congressional Budget Office.

Medicare may not go bust as quickly as officials once warned. But the day of reckoning is still not far off. Only real reform can preserve Medicare – and save the country from fiscal ruin.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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