How Do We Pay for a Growing Medicare Program?

Source: NCPA

To keep Medicare’s spending in check, reform solutions may necessitate an increase in the share of senior health care paid for by the senior population, according to a new study by NCPA Senior Fellows Andrew J. Rettenmaier and Thomas R. Saving.

“Over the past 50 years, Medicare spending has risen and, on average, seniors have received benefits that are increasing relative to their preretirement incomes,” write Rettenmaier and Saving. “But program costs are expected to continue growing as a share of GDP, according to Medicare Trustees and Congressional Budget Office forecasts. The contrast between the baseline forecast, that assumes all of the Affordable Care Act’s spending constraints actually hold, and the higher, more realistic alternative forecast illustrates that magnitude of the financing divide that must be bridged.”

Saving and Rettenmaier suggest four options for reforming Medicare:

  • Raise Beneficiary Premiums to Cover Excess Cost Growth. Reducing federal per-capita Medicare spending growth in the alternative forecast to the baseline estimates from the 2015 Trustees Report could be accomplished by raising seniors’ premiums. 
  • Raise Deductibles and Copays to Limit Spending to the Baseline Forecast. Retirees would then be responsible for the rising cost-sharing this option requires. Means-tested contributions to Health Savings Accounts (HSAs) by the federal government could complement the reformed insurance.
  • Constrain the Federal Payment Rate by Procedure and Service. Rather than paying the CMS-determined reimbursement to each provider, Medicare would give those amounts to the participants. Over time, a real market would emerge for health care due to seniors’ demand for lower prices.
  • Premium Support Payments that Rise at the Same Rate as Per-capita GDP.  This would offer a significant level of both individual choice and individual payment responsibility, while limiting the role of CMS in the Medicare market.  In its simplest form, this option provides average premium support payments that in aggregate follow the Trustees baseline forecast. 

These proposals would bring the per-capita federal cost growth of Medicare, the taxpayer burden, in line with the per-capita growth of GDP and all four can incorporate premium payments, deductibles, co-payments, or contributions that vary by lifetime income.

While it is unlikely that Medicare beneficiaries’ health care consumption will be constrained to the Medicare Trustees’ baseline forecast, it is not unreasonable to use the baseline forecast as the target for taxpayers’ support of the program,” said Rettenmaier. These four reforms options can accomplish the goal of bringing the more realistic Trustee alternative forecast of federal Medicare expenditure down to the level of the Trustees’ baseline forecast.”

The study is co-authored by former Medicare Trustee and NCPA Senior Fellow Thomas R. Saving and NPCA Senior Fellow Andrew J. Rettenmaier, both from the Private Enterprise Research Center (PERC) at Texas A&M University.

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