Harness power of competition and informed health care choices

Article Highlights

  • Even if Medicare spending is reduced as required by laws already on the books, the program will not be able to pay all of its bills

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  • We are not buying very good insurance for the hundreds of billions of dollars that we spend on Medicare annually

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  • Medicare reform must promote the smarter use of health services and give seniors a real voice in their health care

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Some 70 million baby boomers expect to sign onto Medicare over the next two decades. But Medicare is not ready to provide the kind of health coverage that the baby boomers have come to expect.

However, Medicare trustees say the trust fund that pays for hospital services will be exhausted by 2024, but even that is optimistic. The estimate presumes Medicare payments to hospitals and other providers will be cut by $415 billion over the next 10 years, which could mean some loss of patient access to vital services. If Congress acts as it usually does, the payment cuts won’t be that large – but the trust fund won’t last that long, either.

Even if Medicare spending is reduced as required by laws already on the books, the program will not be able to pay all of its bills. When that happens, seniors – including those turning 65 today – will have to wait their turn for health care.

Equally troubling is that we are not buying very good insurance for the hundreds of billions of dollars that we spend on Medicare annually. Beneficiaries in traditional Medicare must pay $1,184 every time they need hospital care. Seniors requiring extended stays in the hospital face additional costs. For example, Medicare stops paying the bill after 150 days in the hospital.

Seniors seek out additional coverage to fill Medicare’s holes. Medigap generally pays these charges, but the cost of plans can easily exceed $2,000 a year. That’s on top of nearly $1,700 in Medicare premiums and another $400 for prescription drug coverage.

We can do better for our seniors and guarantee Medicare’s solvency without driving up taxes or cutting funding for other vital programs. Medicare should be restructured to offer comprehensive coverage similar to what a big employer offers its workers. That means a single deductible, a simple set of copayments and protection against catastrophic costs.

Medicare pays for hospital services and physician care out of two different trust funds with two different sets of rules. Combining the benefits into one health plan would make it possible to simplify the program and create new protections against catastrophic costs.

The Affordable Care Act introduces new ways to pay for care that could reduce some unnecessary spending. However, it does not change the fundamental flaw in Medicare financing. Doctors and hospitals are paid for each service they provide to a Medicare patient, and the program effectively guarantees that all services will be paid. Overuse of services will still occur that, in many cases, provide no value to the patient.

The solution is to harness the power of competition and informed consumer choice. Health plans, including traditional Medicare, would submit competitive bids covering the cost of the full Medicare benefit package. Seniors would receive a fixed subsidy and could enroll in any plan they like. Higher subsidies would be given to low-income beneficiaries and those likely to need more health care, such as those with pre-existing conditions.

Under this plan, seniors selecting more expensive plans would pay the additional cost themselves. However, every senior would be guaranteed a choice of at least two health plans that would not charge more than the basic Part B premium that is required today.

Competition and consumer choice already work in Medicare. The prescription drug program under Part D relies on competing drug plans to reduce the program’s cost by $283 billion in its first seven years of operation.

Over 13 million seniors are enrolled in private Medicare Advantage plans, which offer the full Medicare benefit in a modern package that provides better consumer protection. A recent study in the Journal of the American Medical Association showed that taxpayers could save as much as $720 billion over the next decade by moving to a bidding system – without having to cut Medicare benefits.

Implemented carefully, premium support can reward health plans for efficiency while ensuring the protection of beneficiaries.
By changing the financial incentives of Medicare, health plans and health care providers would no longer be penalized for not ordering an extra test or medical service that does little to help the patient. Instead, they would be rewarded for providing the appropriate service at the right time.

Medicare is the biggest part of our nation’s fiscal problem. It can be saved. To be effective, Medicare reform must promote the smarter use of health services and give seniors a real voice in their health care.

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About the Author


  • Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI), where his research focuses on the economics of health policy — including the Affordable Care Act, Medicare, the uninsured, and the overall reform of the health care system and its financing. He also studies the impact of health care expenditures on federal budget policy.

    Before joining AEI, Antos was assistant director for health and human resources at the Congressional Budget Office (CBO). He has also held senior positions in the US Department of Health and Human Services, the Office of Management and Budget, and the President’s Council of Economic Advisers. He recently completed a seven-year term as health adviser to CBO, and two terms as a commissioner of the Maryland Health Services Cost Review Commission. In 2013, he was also named adjunct associate professor of emergency medicine at George Washington University.

    Antos has a Ph.D. and an M.A. in economics from the University of Rochester and a B.A. in mathematics from Cornell University.

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    Email: jantos@aei.org
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