Medicare, the huge federal health program serving 65 million seniors and disabled citizens, is America’s most difficult entitlement challenge. Sticking with the status quo not only threatens seniors’ access to care but also guarantees large and growing financial burdens for beneficiaries and taxpayers alike. That is why The Heritage Foundation is hosting a public forum to discuss ways to solve these problems and strengthen Medicare now and for the future.
In our new book, “Modernizing Medicare: Harnessing the Power of Personal Choice and Market Competition,” published by the Johns Hopkins University Press, several other policy experts and I provide insights on a wide range of topics for reforming Medicare.
These topics include the financial burdens facing Medicare beneficiaries and taxpayers, the political obstacles that have hampered past efforts at Medicare reform, the success of Medicare’s private Medicare Advantage health plans, the opportunities to expand care options for Medicare patients, the steps to improve the financing and delivery of the Medicare prescription drug benefits, and the necessity to reform traditional Medicare.
Topics also include the need to improve private health plan payments to better reflect patients’ health risks, the case for expanding the Medicare Advantage defined-contribution payment model throughout the entire Medicare program, the lessons for Medicare from over six decades of rich experience with the popular and successful Federal Employees Health Benefits Program, and the potential beneficiary and taxpayers savings—amounting to trillions of dollars—from increased patient choice and intense competition among health plans.
Reform cannot come soon enough. Over the next 10 years, the number of baby boomers enrolled in the program will reach its highest level, and Medicare spending will accelerate rapidly. Medicare’s trustees report that total Medicare spending is on track to double from more than $1 trillion today to nearly $2 trillion by 2032.
The trustees’ data is sobering. In just eight years, nearly 78 million Medicare beneficiaries will face an automatic 11% payment cut in their hospital insurance benefits, and these cuts could come even sooner and strike even deeper if America is hit by recession. Congress has no choice but to act.
Beyond threats to their hospital benefits, seniors’ premiums for their supplemental medical insurance—those benefits covering physician care and drug benefits—are also growing rapidly. Today, standard premiums and cost-sharing for physician and drug benefits combined equal almost 28% of this year’s average Social Security benefit. Over the next five years, physician and outpatient cost increases alone will average about 9.7%, and prescription drug costs will grow at an annual average rate of 6.2%—likely much faster than wages or the growth in the general economy.
But seniors’ premiums cover only 25% of total supplemental medical insurance costs. Taxpayers fund roughly three-fourths of these physician and drug costs through income taxes, so taxpayers will also get hit hard. While taxpayer funding for these services in 2022 accounted for a little more than 13% of all federal income and business taxes, that chunk of Medicare spending will consume 22% of income taxes by 2030 and almost 27% by 2040. Gen Z won’t know what hit them.
Neither seniors nor taxpayers should put much faith in Washington’s standard prescriptions for reform. Previous congressional actions have focused on slowing costs through payment cuts and price controls. If left in place, these will only make matters worse. As the Medicare actuaries report, if existing payment policies remain in place, by 2040, one-third of hospitals and more than half of the nation’s nursing homes and home health agencies will be running in the red, threatening Medicare patients’ access to quality care.
As our new Medicare reform book makes clear, intense competition among health plans and providers rather than bureaucratic central planning can deliver better care at lower costs. The old model of a patchwork policy of Band-Aids is the failed policy of the past. A new path based on the advantages of personal choice and market competition is the road map for the future of Medicare.
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