The Medicare Payment Advisory Commission recently released its 2012 annual health spending report. If left unchanged, Medicare spending is projected to increase from today’s 3.7 percent of gross domestic product to 6 percent in 2040.
Medicare’s current fee-for-service structure has created inefficiencies and huge financial challenges. By 2024, the program will be entirely bankrupt — five years earlier than projected in 2010. In the next 75 years, Medicare faces unfunded liabilities of up to $36 trillion. And given political uncertainties, Medicare’s chief actuary has warned that future costs could be substantially larger than estimated.
Medicare’s current path is unsustainable. To save the program, lawmakers must act now, but Democrats and Republicans have developed diverging views on what Medicare reform should look like.
The debate boils down to control over the program. Should plans and pricing should be set by a government board of appointed bureaucrats, or driven by competitive consumer choice, as it is in the market-driven Medicare Part D program?
Before them are two very different visions for Medicare: President Obama’s newly created Independent Payment Advisory Board, and Rep. Paul Ryan’s new budget proposal.
When it comes to preserving Medicare, the president’s solution comes up short. The main cost control element of the 2010 Affordable Care Act, IPAB is a powerful and unaccountable board of 15 presidential appointees. These individuals are tasked with combating runaway Medicare costs.
Beginning in 2014, if Medicare expenses exceed predetermined levels, these bureaucrats must recommend spending cuts. But they are limited in the kinds of savings they can propose. IPAB can’t alter Medicare’s eligibility requirements or premiums. All it can really do to limit expenditures is slash reimbursement rates to health care providers.
A ratcheting down of these rates would threaten America’s Medicare enrollees. Indeed, the financial burden of too-low payments under Medicare has driven 17 percent of doctors and 31 percent of primary care physicians across the country out of the Medicare program altogether, according to a study from the American Medical Association.
Worse, when IPAB does make such a policy recommendation, however detrimental, it can only be overridden by a two-thirds congressional supermajority, or passage of a law with equal spending cuts. Essentially, IPAB’s recommendations are equivalent to law.
Leaving Medicare in the hands of government technocrats won’t save the program. It will only sacrifice quality of care for Medicare enrollees.
If, on the other hand, lawmakers lean toward Ryan’s plan, a component of his budget proposal recently approved by the House, Medicare may actually stand a chance.
The congressman’s plan has potential because it emulates the competitive structure of the successful Part D program. With Medicare’s drug benefit, private insurers vie for seniors’ business — competing on price and choice. The government stays out of these price negotiations, allowing market forces to have their full effect.
Thanks to this competition, Part D has become our country’s most successful and popular entitlement program. Seniors love their wide choice of prescription plans and the low prices at which they are able to obtain medications.
Ryan’s proposal creates a similar structure for doctor and hospital benefits. A “Medicare Exchange” would allow seniors to choose from competing coverage plans. They would receive a fixed level of government support, sufficient to buy a plan. Instead of Medicare setting rates and determining which procedures to cover, each plan would do the negotiating, and seniors would then decide which one offered the best value.
A recent study from the American Enterprise Institute found this competitive bidding could save $339 billion in Medicare expenses over 10 years, without raising taxes or compromising benefits.
Rep. Wally Herger, R-Calif., Chairman of the House Ways and Means Committee’s Subcommittee on Health, has already held hearings examining proposals to reform Medicare through this competitive “premium support” model.
These are steps down the right bipartisan path. Lawmakers should steer clear of heavy-handed government control, instead opting for reforms that replicate proven successes and encourage market competition.
Peter Pitts is president of the Center for Medicine in the Public Interest and a former Food and Drug Administration associate commissioner.
