What Medicare Reform?

Robert D. Reischauer
Robert Reischauer Headshot
Robert D. Reischauer Distinguished Institute Fellow; President Emeritus - Urban Institute

May 8, 1997

WASHINGTON—Medicare is in for some big cuts under the balanced-budget agreement that was reached last week. But those cuts, however necessary, will do almost nothing to address the crisis the program will face when the first baby boomers start receiving benefits in little more than a decade. Nor do these savings require the 38 million current participants to bear a more equitable share of the burden of this middle-class entitlement.

By failing to do more than trim short-term spending, Congress and the Clinton Administration may be passing up their best opportunity to deal with a problem now that will only become more intractable over the next 20 years.

The budget agreement calls for roughly $110 billion in Medicare savings over five years. This would come from slowing the growth of payments to hospitals, doctors, H.M.O.’s, nursing homes, laboratories and home health agencies. For the most part, these providers are financially strong enough to absorb such cuts without lowering the quality or availability of care.

This is because in many markets Medicare’s payments to hospitals are generous compared with those of private insurance plans. Even where Medicare’s payments to doctors are well below those of private payers, the Federal system remains attractive to doctors because it generally places far fewer restrictions on their decisions and treatments than private insurers now do.

Under the new agreement, recipients will have to contribute about $15 billion more in premiums over the next five years. But this sacrifice is far smaller than it may seem. Almost two-thirds of the money will come from canceling a provision which allows the percentage of Medicare’s costs supported by premiums to fall after 1998.

The remaining $6 billion will be raised through a gradual increase—$4.50 a month per recipient by 2002—in premiums. This small rise will be more than offset by about $10 billion of worthwhile new benefits like colorectal screening, annual mammography, diabetes management programs and lower coinsurance payments for outpatient treatment. These benefits should cut participants’ out-of-pocket expenses and their premiums for supplemental Medigap insurance.

Yes, cutting the payments to doctors and hospitals will slow the growth of Medicare spending over the next few years. But it will do little to slow the program’s spending over the long run because it does nothing to encourage efficiency. Nor will the changes make Medicare more equitable. Certainly, participants with above-average incomes should be asked, as they were in the Republican plan of 1995 and the President’s health reform proposal, to pay slightly higher premiums to ease the burden on taxpayers, many of whom lack their own health insurance.

The Congressional committees that will translate the budget agreement into actual legislation should correct its omissions. They can start by approving structural changes that will create a more efficient and competitive Medicare system. For example, they might begin creating a system in which recipients are given a choice between competing plans; those who choose inexpensive plans with a limited choice of providers and few amenities might receive rebates, while those selecting the most expensive coverage would have to pay additional premiums out of pocket.

Like any investment for the future, such a change would probably entail added expenses up front, costs which upper-income participants should pick up through increased premiums.

The window of opportunity for serious revamping of entitlement programs is beginning to close. In 2001 there will be a new President who, with an eye toward re-election, will be only too aware that roughly 45 percent of voters in 2004 will be over the age of 50. If there is to be real change, it must begin now.