The Doomsayers Are Wrong

America’s elderly and disabled have much to fear from the current debate over Medicare, but not from the $100-billion-plus of so-called cuts contained in the balanced budget agreement. The real threat is the idea that Medicare is fundamentally flawed, that it requires a complete overhaul and that the right solution is vouchers for private insurance.

The conventional wisdom among policy elites is that Medicare is “unsustainable in its present form,” as Robert Reischauer, former head of the Congressional Budget Office, puts it. The wholesale overhaul of the program they recommend depends on vouchers to buy private health plans.

The argument that Medicare’s financial difficulties require the complete abandonment of the program’s current structure is powerful, widely held--and wrong. It is based on dubious assumptions about demography, the control of health costs and the nature of Medicare’s entitlement. It misunderstands Medicare’s past successes and current weaknesses and ignores the responses that other advanced industrial democracies have taken to the types of problems Medicare faces. By raising the specter of impending financial catastrophe, voucher enthusiasts substitute the rhetoric of crisis for a reasoned debate about Medicare reform options.

Medicare, it should be acknowledged, is growing too quickly, and the aging of the baby boom generation will certainly exert substantial financial pressures on the program. But these fiscal and demographic projections are neither etched in stone, nor do they dictate a unique policy response. As the recent budget talks revealed, estimates of the growth of public health insurance programs are extremely sensitive to predicted rates of economic growth and inflation, not to mention expected changes in clinical practice, medical technology, patient views and the organization of medical institutions. Forecasts of Medicare costs have fluctuated widely since the program’s enactment, and there is no reason to place greater trust in current predictions. Confident talk of precise financing shortfalls in the next century should be greeted with a healthy dose of skepticism.

Nor does the aging of the baby boom generation necessarily mean that Medicare is imperiled. It may come as a surprise to Americans bombarded by the dire demographic projections of doomsday analysts, but the relationship between aging and medical costs is weak to nonexistent. Researchers studying health spending in the 24 industrial democracies of the Organization for Economic Cooperation and Development have been unable to discover any persistent link between aging populations and medical costs. In fact, Denmark and Sweden both lowered the proportion of national income they spent on medical care from 1980 to 1992, even as their populations aged. Demography, it turns out, is not destiny.

Nothing about the scope or character of Medicare’s problems implies that private insurance vouchers are the only possible hope for reforming the program. Vouchers are not inherently cost-saving; indeed, Medicare’s current HMO voucher plan costs the program money. Vouchers save money only if Medicare pays private plans less than it does for equally healthy beneficiaries who remain in the traditional Medicare program. Medicare’s growth slows only if the growth of its payments slows--whether those payments go to private insurers or to medical providers.

What’s more, as payments for private health plans go down, the incentives for plans to enroll healthier Medicare beneficiaries go up. All available evidence suggests that HMOs and other private insurance options will attract the healthiest and wealthiest of Medicare beneficiaries--those who now cost the Medicare program close to nothing and whose membership in the program is crucial for its continued fiscal viability and political support.

All this is unfortunate because there is a straightforward, politically doable and easily understood solution to Medicare’s long-term problems--a budget limit on Medicare spending. Most advanced industrial democracies cap their medical spending; they decide in advance how much to spend on medical care, adjusting doctor and hospital payments to meet their budget targets. Medicare itself was able to keep the growth of its fees below the level of private medical inflation in the 1980s. And with private insurers actively restraining their payments, Medicare fees could be further lowered without threatening the access to high-quality care.

A program budget would not mean abandoning Medicare’s entitlement status. Though no longer open-ended, the program would continue to guarantee a specified level of services to beneficiaries. Given the advantages of this option and the risks of voucher plans, we would be foolish to let questionable forecasts of impending doom cause us to undermine one of America’s most successful social insurance programs.