The Great Medicare Compromise

If you aren’t already convinced that current politics are dysfunctional, just listen to the campaign rhetoric on Medicare. Democrats accuse Republicans of seeking to “end Medicare as we know it,” while shifting unbearable health-care costs to struggling seniors; Republicans accuse the president of crippling Medicare by transferring huge sums intended for Medicare to pay for Obamacare.

Huh? Why would any politician want to undermine one of the most successful and popular programs in American history, especially at a time when the number of senior voters is growing rapidly? In fact, neither side wants to destroy Medicare—or even change it very drastically. But each wants to scare seniors away from their opponents—a truly irresponsible tactic that is leading millions of fearful seniors to believe the winner might actually gut their benefits.

Behind the exaggerated rhetoric lie projections accepted by both parties. American health spending (now about 18 percent of total spending) is crowding out other priorities for families, businesses, and all levels of government—and this problem will worsen as the population ages and care costs continue to grow. No one disputes that the fragmented, wasteful American health system could deliver better care at less cost. Paying providers on a fee-for-service basis offers incentives to perform more services than necessary. Health reformers in both parties favor adjusting payments to reward results, improve care coordination, and discourage waste. They also see the massive, largely fee-for-service Medicare program as a potential leader driving the whole health system toward greater efficiency. Both campaigns propose preventing Medicare spending from growing appreciably faster than the economy—defined as GDP growth plus one half of 1 percent.

But then ideology kicks in. To reach the common objective, Democrats favor regulation and Republicans tout market competition. The Affordable Care Act (ACA) funded innovation, demonstrations, and research to develop more effective care delivery and an Independent Payments Advisory Board (IPAB) to design ways of keeping Medicare spending from rising much faster than the economy. Proponents of the IPAB see it mobilizing evidence to improve the quality of Medicare services and control costs, while detractors see bureaucrats second-guessing medical judgment.

Republicans prefer giving seniors a choice of comprehensive health plans offering benefits equivalent to Medicare, with the plans receiving a risk-adjusted payment from Medicare (premium support). They hope competing plans will ensure improvements in quality and lower cost, but they would also cap Medicare spending growth at the same rate the president proposes. Since Democrats mistrust the private sector in health care as much as Republicans mistrust the government, they predict that premium support will cause providers to profit and seniors to suffer. Ironically, Democrats favor competition among private plans in the ACA, but oppose it in Medicare, while Republicans push competition in Medicare but want to repeal the ACA. But who expects campaign politics to be logical?

In the Medicare debate, each side predicts worst-case outcomes from the other’s proposals. In reality, neither side can be sure that its favorite prescription will have the desired results. Regulations designed to reduce unnecessary costs have often failed in the face of provider opposition, while competition among health plans has not always reduced costs.

So why not try both—continue to improve traditional Medicare, but allow private health plans to compete with it on a well regulated exchange? This compromise was endorsed by the Bipartisan Policy Center’s Debt Reduction Task Force that I co-chaired with former Sen. Pete Domenici (R-N.M.). The dual approach is also roughly similar to the proposal that Rep. Paul Ryan (R-Wisc.) worked out with Sen. Ron Wyden (D-Ore.). Ryan-Wyden should be much more acceptable to Democrats than the far more stringent earlier Ryan proposal that gradually phased out fee-for-service Medicare—the basis for the Democrats’ claim that Republicans want to “end Medicare as we know it” and throw Granny off the cliff.

Moreover, the compromise proposal is not a radical change from the choice that one-quarter of all seniors make now under the Medicare Advantage (MA) program. Originally, MA was badly designed, got extra subsidies, and favored younger, healthier seniors. But the ACA terminated most of the extra payments (they are part of the Medicare savings the Republicans say are being “raided” to offset Obamacare) and stricter risk-adjustment has reduced “cherry picking.” MA plans now offer equivalent benefits at less cost in communities where most seniors live, and evidence is mounting that competition among plans can reduce costs without impairing quality.

If reducing the growth of Medicare spending to sustainable rates and moving away from fee-for-service are “ending Medicare as we know it,” then both parties have embraced that goal. They should defend this mutual objective and stop scaring seniors into thinking something terrible is about to happen. No successful politician will ever gut Medicare. After the campaign dust settles, the two parties will have to work together to make Medicare sustainable. Improving traditional Medicare while offering seniors well-structured competitive options could prove an attractive compromise.