Reforming Medicare the Right Way

With all of the heated rhetoric coming from Washington these days you would think there is a huge difference in the way Republicans and Democrats want to reform Medicare.

But did you know that over the next decade there is no difference at all between the agendas of the two parties? Although the House Republicans voted to repeal ObamaCare they did not vote to repeal the cuts in Medicare spending intended to pay for ObamaCare. So for the next ten years, there’s not a dime’s worth of difference between the two parties, to quote an all but forgotten political refrain.

Even more surprising, there is no difference between what the House Republican budget proposes and what Democrats voted for in last year’s health reform bill for anyone over the age of 55. It’s only young people who have a real stake in this fight. But as former Medicare Trustee Thomas Saving and I reported in The Wall Street Journal the other day, the cuts the two parties are proposing are so draconian, that there is little chance they will ever see the light of day.

In a way, that’s bad news. Absent politically unsustainable spending cuts, Medicare’s unfunded liability is almost $90 trillion at today’s prices, looking indefinitely into the future. That’s about six times the size of the entire U.S. economy. And Medicare spending is growing at twice the rate of growth of our national income. Clearly that cannot go on forever.

So what can be done? Fortunately, there are three common sense steps we can take that will give us substantial reform with a minimum of pain.

There is no sickness or toil or danger
In that bright land to which I go.

My colleagues and I at the National Center for Policy Analysis found we can solve Medicare’s financial problems this way:

  • Using a special type of Health Savings Account, ben­eficiaries would be able to manage at least one-fifth of their health care funds, keeping each dollar of wasteful spending they avoid to spend on other consumption.
  • Physicians would be free to repackage and re-price their services — thus profiting from innovations that lower costs and raise the quality of care.
  • Workers (along with their employers) would save and invest 4 percent of wages in tax free accounts — eventually reaching the point where the average person in each generation of retirees pays for his own post-retirement medical care.

The first reform lets seniors do what 23 million younger Americans are already doing. Instead of paying three premiums to three plans (Medicare, medigap and drug insurance) for wasteful first-dollar coverage, seniors would be able to choose a single plan that provides comprehensive catastrophic insurance for any cost, say, above $2,500.  They could then take all the money they were previously giving to insurance bureaucracies and spending on copayments ($2,500 or more!) and manage their own small dollar expenses through a savings account they would own and control.

This arrangement would change the economic incentives of senior patients, just as it has for younger patients. Every dollar of waste a patient avoids is a dollar he or she gets to keep and use for other purposes. Imagine what difference that would make. For the first time in Medicare’s history, we would have close to 47 million people with an economic self-interest in keeping health costs down.

The second reform would let doctors do what suppliers of other professional services do in every other market: profit from lowering costs and improving the quality.

Doctors participating in Medicare today must practice medicine under an outmoded, wasteful payment system. Typically, they receive no financial reward for talking to patients by telephone, communicat­ing by e-mail, teaching patients how to manage their own care or help­ing them be better consumers in the market for drugs. Medicare pays doctors government-mandated fees for about 7,500 specific tasks and these tasks are not on the list.

Other health care providers face the same perverse incentives. In fact, all too often high-cost, low-quality care is reimbursed at a higher rate than low-cost, high-quality care.

How can we produce high-quali­ty care for a cost that is well below the price we are paying today? For­tunately, we do not have to specu­late. There are hundreds of exam­ples of efficient, high-quality care, and many of them have been stud­ied and described in the academic literature.

To reverse these perverse incentives, we propose to allow providers who save Medicare a dollar to be able to pocket 25 cents (or some other substantial amount). Once 800,000 doctors and 5,000 hospitals and tens of thousands of other suppliers realize that they can make money by saving taxpayers money, cost-reducing innovations will spring up everywhere, overnight.

The final reform is to stop running Medicare like a Bernie Madoff Ponzi scheme. Although employees are told that their payroll taxes are funding their retirement medical care, in fact every dime is being spent — the very minute, the very hour, the very day it comes in the door. When today’s young people reach the retirement age, they will get health care benefits only if future taxpayers are willing to cough up a lot more than what today’s taxpayers are paying.

We have calculated that if employees and their employers deposit four percent of wages in a tax-free account (managed safely and securely away from the grasp of politicians), the average employee can fund his own post-retirement health care. We can meet all of Medicare’s promises by mid-century with a payroll tax no greater than the one we have today.

In fact the payroll tax would not be needed at all, except for low-income workers who do not produce enough to pay their own way.

None of these reforms would take away government’s commitment to the elderly. To the contrary, we need these reforms to make that commitment a meaningful reality.

Comments (15)

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  1. Ron Luke says:

    How does the payroll deduction method handle funding of healthcare for those who are not employed, such as stay-at-home moms or dads?

  2. Bob Blandford says:

    Has a lot in common with Which is good!

  3. Buster says:

    A few days ago David Brooks had a good column in the New York Times that explained the difference between Democrats’ and Republicans’ views on reforming Medicare. Basically, Democrats want a centralized authority setting prices (i.e. price controls), while Republicans want to create the appropriate incentives and let market forces control spending.

  4. Vicki says:

    John, right now you are a poor wayfaring stranger with a good idea. Here’s hoping Congress will wake up and pay attention to what you are saying.

  5. Ingman, Stan says:


    Finally we admit that the OB care, as I understand, has every Republican and Democrat idea to reform Medicare that has been proposed by both parities in last 20+ years. So, much of story is pure political games.

    Why no reform?

    Could it be health care industry complex does not want reform? Readmission to hospitals. Hospitalls and physician mostly love them. Under our imbursement model they make money easy.

    So, now OB care system as before under Bush it going after this one component of major costs. even more seriously.

    So, it good to have you join the OB care system in trying to reforming the system and drop the noise that OB care is soicalist pliot to hurt American Health System.


  6. Blake Woodard says:

    Great article, John, especially giving docs a reward for saving Medicare money. Actually, that’s not a new government idea. Many evil laws include a “whistleblower” profit-sharing formula that incents people to become tattletales and turn in their employers, neighbors, and children to make a buck. Your idea turns this ugly American government concept into a positive concep: Rewarding medical providers for saving taxpayers money.

    I would add one other idea: Age adjust Medicare for the increase in life expectancy that has occurred since the program was started in the 60s.

  7. Ken says:

    Good ideas. Probably much too rational for politicians, however.

  8. Frank Timmins says:

    John, it seems you are re-inventing the HSA concept, maybe putting it a different way. I hope some pol picks it up and runs with it.

    If people would only stop to understand these types of solutions are based upon using human nature to the benefit of society. Any endeavor that denies or ignores basic human nature will ultimately fail.

    Stan Ingman, you can be sure that the big institutions associated are antagonistic to real reform. Many, both in the business of providing healthcare and financing it, have substantial investment that would be compromised by the kind of reform that could endure. It is becoming somewhat like the paradox of producers (taxpayers) and consumers (non-tax payers) in a democracy. At some point the latter outnumber the former and the system implodes. In the case of healthcare reform, there are a lot of dollars being spent in Washington by those not wanting anything to do with logical reform – much more than by those who do.

  9. Joe S. says:

    Many good ideas. I’ve read them before, of course.
    Still, their worth several readings.

  10. Al says:

    John, you write: “To reverse these perverse incentives, we propose to allow providers who save Medicare a dollar to be able to pocket 25 cents”

    I find the idea very attractive, but wonder how you will be able to determine who gets that 25 cent return while at the same time not incentivize poor practices. Don’t you think it would be better to have the patient make the decision rather than some government agency? I keep thinking about all the different diseases and how a physician could save Medicare money while hiding the fact that he has significantly reduced quality especially when there is a government agency involved that is happy to see the reduction in costs no matter the reason. One always has to remember, practice variation is a fact and something that cannot be totally avoided because different patients have different genetics/environments and thus different needs. The variation is sufficient so that these types of undesirable practices can go undetected.

  11. Virginia Frost says:

    When explaining the concept of putting the funds into the hands of the taxpayers/employees and having them shop for their medical services, the response is: “The people will not get the medical attention they need and simply keep the money, or spend it on other things.” How does one respond to that argument?

  12. Tom says:

    John: I do not understand how catastrophic insurance purchased in the private market and HSA’s spent by the individual can decrease the cost of health care for the both the government and the Medicare recipient.

    I would note that premiums currently paid by the senior for Medicare Parts B and D are heavily subsidized by the federal government. In order for the individual to replace these with a single market-priced catastrophic policy and an HSA, he would need continued subsidies. In that case, the government saves nothing.

    Currently, Medicare purchases health care at bargain rates based on government price controls. Are there any examples of large scale purchases of complete health care by private insurance companies or individuals, not just primary care from concierge practices, at discounts similar to those obtained by Medicare? If not, the individual saves nothing.

    In my opinion, I think that the individual is at a distinct disadvantage in the medical marketplace and is better served by belonging to a group.

    Your next two points are much more appealing. The real source for savings in health care costs lies in the provider network. I agree with your ideas to incentivize providers to deliver high quality care at lower prices. I think that this will require large ACO’s.

    I also feel that health care funding in the private and federal arenas needs to be based on defined contributions not defined benefits.

    I look forward to the development of a more specific, detailed plan to replace or modify our current Medicare and Medicaid systems. Keep up the good work.

    Tom Newsome

  13. Candace McTeer says:

    Great post. It may be tough to induce employees to save at least 4% of wages, but some lessons should probably be taught the hard way to avoid creating perverse incentives.

  14. Virginia says:

    Goodman for president?

  15. Chase says:

    Stunning piece. Huge fan.