The voices of Urban Institute's researchers and staff
March 7, 2013

A Responsible Path to Medicare Savings

March 7, 2013

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Last week our political leaders allowed $1.2 trillion in automatic, across-the-board spending cuts to defense and domestic discretionary programs to go into effect.

If the cuts stand, as many now believe they will, President Obama and Congress will have effectively reduced the projected deficit over the next 10 years by almost the $4 trillion called for by the Bowles-Simpson budget plan.

However, many economists say the sequester cuts are the wrong reductions and that any serious effort to address deficits will require addressing the big three: Medicare, Medicaid, and Social Security. Today, Robert Berenson, John Holahan, and I released a paper that weighs in on the debate over Medicare’s role in deficit and debt reduction.

Simply put, the caricature of Medicare as an out-of-control program that needs fundamental restructuring is just wrong. Evidence suggests Medicare can reduce spending without sacrificing its essential protections.

Equally wrong is the notion that any significant changes made to Medicare’s current benefit design and payment policies would compromise access to and quality of health care.

To better illustrate these points, we suggest some reasonable Medicare policy options that could produce about $734 billion in savings or new revenues over 10 years, while simultaneously preserving—and in some cases improving—the program for current and future beneficiaries:

Implementing a Medicare Buy-In Option

Many argue that increasing the Medicare eligibility age to 67 is the best option for reducing government obligations. But that would force 65- and 66-year-olds to rely on the current mix of public and private insurance programs, and leave many with limited or no health coverage at all.

A viable alternative would be to allow those turning 65 to buy into Medicare by paying actuarially fair premiums for Parts A, B, and D (including Medicare Advantage) until they turn 67.

At the same time, the very lowest income beneficiaries would pay no premiums; those with somewhat higher incomes would be made eligible for premium subsidies under the same schedule provided in the Affordable Care Act.

While this approach would not save as much as raising the eligibility age, it would mitigate many problems associated with upping the enrollment age to 67 and still save roughly $90 billion.

Restructuring Beneficiary Obligations

Another cost-saving option would be restructuring Medicare’s current beneficiary obligations. That would mean increasing premiums and deductibles for middle- and high-income enrollees, while lowering them for those with incomes below 300 percent of the federal poverty level.

We would also cap out-of-pocket spending to protect beneficiaries with the greatest health needs; a safeguard that’s not part of Medicare today.

These reforms would make Medicare beneficiaries less reliant on Medigap supplemental insurance, allowing leaders to adopt policies that reduce the first-dollar Medigap coverage that’s contributing to higher Medicare spending.

Adjusting Plan and Provider Payments

Approximately $30 billion would be saved by reforming Medicare Advantage payments, which cost more but don’t perform better than traditional Medicare.

Similarly, restoring drug rebates for dual eligibles and promoting wider use of generics would save the government about $154 billion.

Another $50 billion would be saved by reducing teaching hospital payments and creating targeted incentives to adopt efficiency measures.

Eliminating excessive skilled nursing facilities and home health payments would trim another $35 billion.

Repricing currently overvalued services and promoting primary care in the physician fee schedule would save another $15 billion.

Finally, reducing overpayments for clinical laboratory services would decrease government obligations by another $10 billion.

Increasing the Payroll Tax

Raising the payroll tax by just 0.5 percent would produce about $200 billion in new revenues for Medicare. It would also mean that baby boomers would be contributing more to the cost of their own future benefits.

However, because unemployment is high in the current economy, we recommend delaying the payroll tax increase until 2017.

Finding the Way Forward

These options are but a few of the dozens of reasonable benefit and provider payment reforms that could bring down Medicare’s costs while keeping the program true to its insurance protection.

Medicare does not need to be rebuilt. Savings can be achieved with reasonable policies that share the costs among beneficiaries, providers, and general taxpayers.

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As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.

Comments

Why not just forget all these Bandaid approaches and adopt any advanced nation's medical system outright. We pay more than 2 times any other countries and suffer lousier health care. That would cut Medicare and Medicaid in half and do the same for premiums nationwide whether or not they are paid by an employer or individual.