• Serious structural reform needed
    November 19,2013

    In a previous commentary I pointed out that we have a $37 trillion unfunded deficit in Medicare (over the next 75 years) and that the very modest changes being proposed by Obamacare are not nearly enough to resolve that problem. We cannot resolve this by collecting $500 billion during each of the next 75 years. We would have to collect an additional $500 billion during each of the next 75 years. That would require a tax increase of up to 26 percent, depending on how soon we started collecting it. Resolving this by increasing taxes on those still working simply won’t work.

    So the obvious answer is simply to reduce the prices that Medicare pays out for services. The problem with that solution is that is how we have been handling the problem for the past decade. The payment to physicians and hospitals has been cut and recut many times over. Unfortunately, it has been done in a very uneven manner so that some services are grossly underfunded while other services are significantly overpaid. The effect has been that most hospitals limit or even stop offering the underfunded services while doubling up on the overpaid services. If that kind of selective service is not possible, then the medical provider will raise the rates for non-Medicare patients to recover the losses.

    Both of these actions are being done now, but both have reached a limit. If more cuts are made in Medicare payments to medical providers, they will simply stop taking Medicare patients. This is a trend that has already started. Doctors are switching over to practices that do not require them to deal with Medicare.

    Concierge doctors are spreading fast because they have discovered that it’s possible to operate a direct primary care practice, make a living and avoid one of the biggest headaches for family medicine physicians: dealing with health insurance companies. These doctors take on a maximum of 500 patients for a flat-rate annual fee plus normal insurance payments, but they are very selective about which insurance they are willing to accept, and it often excludes Medicare.

    So the next most obvious solution to the unfunded $37 trillion is to cut benefits. This has two major problems. The first is that it would take a lot of cut services to make up that much in unfunded costs, requiring retirees to buy private medical insurance, but that is often not possible.

    Beginning in the late 1990s, the total savings by American consumers went negative. Since then, average consumers have spent more than their income and saved nothing toward their retirement, accumulating $11.13 trillion in debt. Many had planned to cash out their home’s equity to finance their retirement, but the housing bubble crash also crashed those plans. Millions of retirees will be in no position to pay for supplemental, alternative or additional medical insurance if Medicare does not cover them.

    The second problem with cutting benefits is that the retiring baby boomers will constitute the largest single-minded voting bloc in U.S. history. Nearly 80 million voters will want to retain their Medicare benefits when they choose their next political representative. Informed and coordinated by organizations like AARP, it would be political suicide if any congressman votes to reduce benefits.

    So what can be done? The Center for Policy Innovation and Health Policy Studies at The Heritage Foundation has proposed a logical and viable solution that would require serious structural changes and would take the form of both short-term and long-term reforms.

    In the near term, Congress and the president should: 1) pass a small and temporary increase to Medicare Part A premiums — this would cover more people than Obamacare but would be needed only until the deficits in the Federal Hospital Insurance Trust Fund are covered; 2) increase the Part B and D premiums by 10 percent over the next five years; 3) increase the “means testing” started by Obamacare until about 9 percent of the Medicare population is paying a larger share of its Medicare costs; 4) and add a 10 percent copayment to Medicare home health care — which currently has no copayment. This would eventually resolve the more immediate cash flow issues and set the stage for long-term stability.

    For the long-term reforms, reduction of Medicare costs would benefit most from competition.

    The government payments should be made to competing health plans (including traditional Medicare) that would be calculated on market-based bids to provide Medicare benefits. The retirees would choose the best plan to meet their personal needs. A better plan would naturally have a higher premium but would also have improved or expanded services. Some would elect to enroll in a less expensive plan so they could pocket the difference as personal savings. This realignment would require a transition of Medicare from a centralized fee-for-service program into a defined-contribution (“premium support”) program of financing.

    Obamacare incorporates a few of these ideas as well as others that should be included, like forcing acceptance of pre-existing conditions — but it does not go far enough to avert a major financial crisis in health care. Implementing the reforms cited above will work. Now all we need is a Congress that really works that can figure out how to get there from here.

    Tom Watkins lives in Montpelier. He can be reached at TomW@21vt.us.

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