Preserving Medicare for future generations: Market-based approaches to reform

Article Highlights

  • The total amount of health expenditures associated with the elderly and disabled on Medicare in 2004 approached 40%

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  • Premium support dramatically alters the economic incentives that drive program spending rather than program value

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  • For so substantial a change, competitive bidding is remarkably well-tested and administratively modest

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America’s fee-for-service Medicare program represents the third-largest category of federal spending and has been under scrutiny for decades for spending more on health care benefits for enrollees than taxes can generate to pay for them. The nonpartisan Congressional Budget Office (CBO) estimates that over the next 10 years, the number of Medicare enrollees will increase by one-third—approaching 67 million Americans.

The CBO projects the cost of providing benefits to these enrollees will increase at an annual growth rate of 7 percent, reaching at least $1 trillion in fiscal year 2022. A combination of a higher volume of patients needing more care and the increasing costs of those services presents significant challenges for sustaining the Medicare program, particularly in an era of budget deficits.

The urgency of the situation may also offer a timely opportunity for reexamination of fee-for-service Medicare, including models that may support the overall goals of health system reform: better care and a healthier society at lower costs.

The Robert Wood Johnson Foundation asked scholars at the American Enterprise Institute to consider various approaches to reforming this "800-pound gorilla of American health care." The resulting series, “Preserving Medicare for future generations: market based approaches to reform,” includes three papers, each of which addresses a key question in Medicare reform.

1. Why reform Medicare?

In “The role of Medicare in inefficient health care delivery,” James C. Capretta explains how Medicare’s fee-for-service, no-cost-sharing structure has driven high spending not just in Medicare but in the health sector as a whole. Given the program’s influence on growth in health costs and health cost growth’s contribution to the federal deficit, Medicare should top the list of reform priorities.

2. How do we reform it?

In “Plan competition and consumer choice in Medicare: The case for premium support,” Joseph Antos outlines the main features of a premium support approach and discusses other reforms necessary to modernize traditional Medicare. Premium support, Antos explains, realigns incentives to promote quality of services over quantity and establishes an effectual cap on program spending, thereby curbing Medicare’s rising costs while maintaining seniors’ access to care.

3. How do we decide the level of premium support?

In “A competitive bidding approach to Medicare reform,” Roger Feldman, Bryan Dowd, and Robert Coulam argue that competitive bidding should help determine the amount of the government subsidy in a premium support system. Competitive bidding holds the promise of substantial cost savings while protecting the health care needs of beneficiaries.

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About the Author

 

Joseph
Antos

 

James C.
Capretta

 

Roger
Feldman

 

Bryan E.
Dowd

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