Medicare Problem Solved

The most important domestic policy problem this country faces is health care.  The most important component of that problem is Medicare.  Forecasts by every federal agency that produces such simulations – the Congressional Budget Office (CBO), the Social Security/Medicare Trustees, the General Accounting Office (GAO) – show that we are on a dangerous and unsustainable path.  Indeed, the question is not: Will reform take place?  The question is: How painful will reform have to be?

Fortunately, a solution exists that is reasonably painless if we start today.  By the time we reach mid-century, the tax burden of Medicare (as a percent of national income) would be no greater than it is today.

My reform proposal has three parts:

Demand-side Reforms.  This is based on work we have done with Andrew Rettenmaier and Thomas Saving.  (See their original study here.)  All new Medicare enrollees would face a $2,500 deductible, and complete catastrophic coverage above that amount.  The amounts now spent on Medigap insurance and out-of-pocket spending could be placed in a Roth-type Health Savings Account.  However, given a fixed federal government contribution, enrollees could choose HMOs and other types of plans.

Supply-side Reforms.  These are based on a proposal Mark McClellan and I are developing, summarized here.  Essentially, providers would be free to repackage and reprice their services so long as Medicare's cost does not increase and patient quality does not decrease.  Once price and quality competition are underway, Medicare will be able to selectively contract for services.

Pre-funding.    Again, this follows the prior work of Rettenmaier and Saving.  Workers and their employers would put aside 4% of payroll during their working years to pre-fund post-retirement health care. As the accumulation grows over time, private funds will replace the taxpayer funds to finance Medicare spending.

Comments (13)

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  1. Vicki says:

    Super idea. Even if you are wrong about the forecast, this still needs to be done.

  2. Joe S. says:

    Good for young people, but it still doesn’t solve the problem for the baby boomers. As your graphs show, we will need much higher taxes during the years of baby boomer retirement.

  3. Jerry says:

    Makes way too much sense, but then again you always do! My association with Gen Xers and Yers in the workplace tells me they will deny necessity. Challenge is: naivete and Idealism seem to block reality from their minds. Add to that the “entitlement” mentality of Boomer Liberals, and that leaves only the Conservatives to carry the message.

    I pledge to do my part and spread the word!


  4. Lydia says:

    John: Interesting study that I will delve into further. Don’t know if you’ve addressed the issue of end-of-life treatments or kidney dialysis. Medicare expenses tend to be skewed towards end-of-life treatments “at any cost” because so much of the cost is not borne by the patient or the family of the patient. I’m looking for examples of countries with national health care plans where they have limited the scope and/or duration of services for life prolonging treatments among the elderly. The relationship between Kidney dialysis and Medicare is a long sad story of government interference stifling innovation and efficiency. Kidney dialysis is also a significant component of Medicare costs.

    Thanks for this proposal!

  5. Rod Newbound, RN says:

    Thanks John, for coming up with a plan that makes sense. I do think it might be dangerous to pre-fund if it isn’t securely insulated from the politicians. If it’s not, the fund will wind up being just like the Social Security fund – an empty bag full of government IOUs.

    One other area you might want to address is the area of regulation. I work in the health care industry and the amount of redundant paperwork required to satisfy Medicare and Medicaid is atrocious. It consumes many hours of limited staff time, resulting in less time being available for real patient care.

  6. Roger Beauchamp says:


    This post raises too many unanswered questions to merit comment!
    1. Is Medicare the most important component or is it the lack of a competitive market in our nation’s private health care system? A competitive market is the best arbiter of efficacy, quality and price.
    2. The fixed federal contribution you reference, exactly what is it?
    3. Who is being permitted to reprice and repackage their service? Medicare providers only? Who determines whether cost and quality guidelines have been met? Sounds like another form of micromanagement to me!
    4. You reference employers and employees setting aside 4% of payroll for future needs. Is this all out of payroll? Is it all meant to be saved until one qualifies for Medicare? Who owns and manages this account?

  7. Michael Walker says:

    What a sensible plan for the US and any thinking country. The problem may be the thinking part! But you are leagues ahead of us.

  8. Carlos Cáceres says:

    Many Thanks for The Health Alert.

  9. Stan Ingman says:


    Glad to see we will be moving toward a decentralized single payer system. The myth of choice and cowboy capitalism have been exposed as false directions. Wall Street, banking, mortgage as representatives of private solution must give even you some worries about the simple minded non regulatory capitalism?

    Mass. health care model under Republican Romney may be a model for Texas to review.

    Europe, even with whatever problems they have provides more solid directions for USA. Interesting the UK model which may be too cheap for us, is the model that third world or low income societies are looking toward, not USA. I was in Mexico recently, and it was apparent that USA cannot be model for Mexico.

    Met some administrators with some 20 plus years in medical care administration, and they reported the amount of corruption in the nonprofit hospital sector and insurance industry to be extreme. Remember the large Harris Methodist Hospital system in FW, as one example. It finally feel apart… thank heaven. My colleague and I witnessed this mess sort of up close.

    I do not know if you will not agree with much of my opinion. But I try to read your messages with an open mind. I have some 40 years of watching the mess but not the expertise that you have and the daily effort you put in. I merely teach students.

  10. Dr Bob says:

    One major factor not addressed is physician reimbursement. Physicians are opting out of medicare because the reimbursement is so low and in some cases is forcing primary care physicians out of practicing medicine at alarming rates.

    There is no simple fix, as long as “fear and greed” is the mantra for not only health care, but for the banking business, the investment industry, and on and on.

    Dr Bob

  11. Rene Scull says:

    Excellent John! Thank you!

  12. D'Henry says:

    John, At last, a plan that makes sense and could work. Notwithstanding that is sound and logical, the entitlement mentality is its biggest enemy. As a nation,we have too many like the Roman citizens of old who will voted for massive entitlements that bankrupted and killed their empire.

  13. Will says:

    Reading your article made me rezaile how much effort you must have put into its content. I really enjoyed reading all this information and agree with you on a big portion of it. Good job.