Structural reforms needed to ensure Medicare's solvency

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Article Highlights

  • If we expect Medicare to meet the needs of 76 million baby boomers we must modernize the program and put consumers in charge

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  • Medicare spending will grow from $600 billion to more than $1 trillion over the next decade

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  • To be effective, Medicare reform must promote the smarter use of health services and give seniors a real voice in their healthcare

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Medicare spending has slowed dramatically in the last four years. That is good news, but we cannot relax. If we expect Medicare to meet the needs of 76 million baby boomers — and eventually their children — we must modernize the program and put consumers in charge.

Even with the slowdown, Medicare spending will grow from $600 billion to more than $1 trillion over the next decade. Left unreformed, taxpayers will pay an extra $27 trillion (in today’s dollars) to the Medicare trust funds to cover the program’s long-term excess costs. That is equivalent to nearly two years of our nation’s total economic output.

The typical policy response to rising cost pressures in Medicare is to reduce payments to hospitals, doctors, and other providers. Simply cutting payment rates will not solve the long-term spending problem. The problem is structural.

Although the Affordable Care Act (ACA) introduces new ways to pay for care that could reduce some unnecessary spending, 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. That promotes overuse of services that, in many cases, provide no value to the patient. Simply put, the program promotes more spending, not better spending.

The solution is to harness the power of competition and informed consumer choice through premium support. Under premium support, private health plans and traditional Medicare would submit competitive bids to cover the full Medicare benefit package. Seniors would receive a fixed subsidy and could enroll in any plan they like. Seniors selecting more expensive plans — perhaps those offering additional benefits or broader provider networks — would pay the additional cost themselves.

Faced with a fixed payment and the responsibility to provide all necessary services, the competing plans would have a strong incentive to reduce unnecessary services and find innovative, cost-effective ways of delivering care. Coordinated care, largely unknown in fee-for-service Medicare, would pay off. It would make business sense for plans to offer screening and other services in shopping malls, and to establish quick-response electronic systems to direct patients to appropriate and timely care.

Additional reforms are necessary to make Medicare a better program while reining in cost. First, simplify and strengthen the benefit in traditional Medicare. The program has a confusing benefit structure that leaves gaping holes in the financial protection it offers seniors. A trip to the hospital means paying a $1,216 deductible — not once, but every time you go. Medigap and other supplemental plans fill in those gaps but also reduce beneficiary awareness of the cost of care.

Medicare should be restructured to offer comprehensive coverage similar to what a big employer offers its workers. That means one deductible for all services, a simple set of copayments and protection against catastrophic costs. Limits could be placed on supplemental coverage, perhaps requiring that all beneficiaries pay at least the first $500 of Medicare costs during the year. Value-based insurance design, which can reward patients for taking necessary steps to prevent or control disease, could be included in this reform.

Second, develop new payment mechanisms that promote quality and efficiency in traditional Medicare. Paying for a bundle of related services rather than separate payments for each service can promote more efficient delivery of care. Competitive bidding for standardized types of services, such as clinical laboratory testing or durable medical equipment also has the potential for reducing Medicare’s cost. Basing payment at least in part on the provider’s performance could also help reduce avoidable clinical problems that often add up to big money. These are not new ideas — they are mentioned in the ACA — but they need considerable development before we can expect to see results.

Third, reform the ACA’s flawed accountable care organizations (ACOs). ACOs were intended to expand access to high-quality integrated care networks in Medicare. Their biggest flaw is that beneficiaries do not consciously enroll in them and have no idea that they are part of what is supposed to be a better way to provide healthcare. Instead, these provider-based networks should be offered along with Medicare Advantage plans as alternatives to traditional Medicare, and they should be allowed to offer lower costs and better benefits as inducements.

The United States is fast approaching an unprecedented economic crisis with the national debt rising to dangerous levels. The federal government has made spending commitments that far exceed the country’s capacity to pay for them. Medicare is the biggest part of our fiscal problem, but it can be saved for future generations. To be effective, Medicare reform must promote the smarter use of health services and give seniors a real voice in their healthcare.


Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

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