How to Reform Medicare

Robert E. Moffit and
Robert E. Moffit Senior Fellow, Institute for Family, Community, and Opportunity - The Heritage Foundation
Kavita Patel
kavita patel
Kavita Patel Former Brookings Expert

December 4, 2014

Every year, Medicare physician payment rates spark a legislative fire drill. The complex formula for updating doctors’ reimbursements, the sustainable growth rate formula, routinely threatens Medicare physicians with draconian payment cuts. Next year, the formula mandates a 21 percent pay cut.

The sustainable growth rate formula, created in 1997, has never been realistic. Yet Congress has been unable or unwilling to junk it. Instead, lawmakers have blocked it from going into effect 17 times.

Doctors are understandably frustrated beyond words. They simply want to get the standard growth rate out of their professional lives. Many want Congress to act in the lame-duck session, an unwise choice of venue for the kind of legislative deliberation that such a major decision requires. Some otherwise sober-minded conservative Republicans also say they want to get rid of the sustainable growth rate formula, even if the additional costs are not offset by budget savings.

But the formula is a provision of law, and the Congressional Budget Office is required to score policy changes based on current law. The Congressional Budget Office is duty-bound to estimate the impact on Medicare spending. It now says that if Congress simply repealed the standard growth rate and continued current payment policy, embodied in compromise legislation enacted last year, the 10-year cost to taxpayers would be $144 billion. If Congress repealed the standard growth rate and updated physician payment on the basis of medical inflation, as some medical professionals have argued, the 10-year price tag would exceed $204 billion. As noted, some members of Congress want to use the lame-duck session to kill the standard growth rate, arguing that they settled on the policy earlier in the year and it is time to move on.

Analysts from the Brookings Institution and Heritage Foundation do not routinely agree on health care policy. But we do agree that Congress can build on the bipartisan, bicameral compromise legislation crafted earlier this year. We also agree that it is unwise to use the lame-duck session to make a permanent fix, and we agree that Congress must make sure that any standard growth rate replacement should be fiscally responsible. In short, the costs of any permanent fix to the formula should be offset by permanent Medicare savings.

There are several ways to do this, but we agree that there are at least two good candidates for achieving substantive savings that could pay for a permanent, sustainable growth rate formula “fix.”

First, modernize Medicare’s 1960s benefit structure by combining Parts A and B into a single program, with a single deductible and a uniform co-insurance system. Cost-sharing reduces insurance premiums, but today’s Medigap (or supplemental) coverage undercuts that cost-sharing with “first dollar” payment and thus drives up seniors’ premium costs. Also, while modernizing traditional Medicare, Congress should provide seniors with a catastrophic benefit, not unlike what President Reagan proposed in 1986. That would give retirees peace of mind and protect them from the financial ruin of serious illness. The Congressional Budget Office says that, if enacted next month, this set of structural changes would save $114 billion from 2015 through 2023.

Second, reduce taxpayer subsidies for Medicare’s wealthy recipients. About 5 percent of Medicare beneficiaries — individuals with annual incomes of $85,000 or more and couples with annual incomes of $170,000-plus — already pay more for their benefits. This policy should be broadened.

The idea already enjoys bipartisan support, although specific proposals differ in design and impact. Last year, for example, Sen. Claire McCaskill, Missouri Democrat, and Sen. Tom Coburn, Oklahoma Republican, proposed lowering the initial threshold for “means testing” from $85,000 to $50,000 for individuals, requiring upper-income Medicare recipients to pay 10 percent more of Medicare’s total costs. In his fiscal year 2014 budget proposal, President Obama proposed expanding his version of “means testing” gradually to include 25 percent of seniors. The Heritage Foundation proposed requiring about 10 percent of seniors to pay more for their benefits.

Exactly what constitutes a reasonable income threshold for wealthy seniors to begin paying more for Medicare benefits, thus easing the burden on taxpayers, is a prudent question. But a lower threshold, depending on its design, could result in significant and permanent Medicare savings.

Repealing and replacing the sustainable growth rate formula should be about more than fixing how doctors get paid in Medicare; it should also help create a better health care system and align financial incentives for all stakeholders. Congress should resist the pressure to pass a permanent formula fix in the lame-duck session just to get it off the table.

When Congress does fix the sustainable growth rate formula, lawmakers should offset the costs of that fix and refrain from imposing even greater and unnecessary burdens on American taxpayers. Carefully crafted, fiscally responsible legislation would improve the troubled Medicare physician payment system and advance broader structural reforms that would strengthen Medicare for the next generation of retirees.