The Medicare trap

Time is running out for the “super committee” in Congress to agree on a plan to reduce the federal deficit by at least $1.2 trillion over the next decade. The hang-up, as expected, has been getting Republicans and Democrats to compromise on revenue increases and entitlement cuts. Although there’s been some movement on both fronts, it’s not been enough to produce a deal — yet.

The linchpin of any effort to reduce the federal budget will be slowing the growth of government health insurance and medical care programs. Medicare, an insurance program for the elderly and the disabled, is the largest and most expensive by far. Its costs have more than doubled since 2001, and consume about an eighth of the federal budget.

Medicare is growing in part because the baby boom generation is starting to hit retirement age, swelling the ranks of beneficiaries. But a bigger factor is simply the rising cost of medical care. This is due to many things, including the cost of chronic illnesses, uncoordinated and inefficient care, and a payment system that encourages people to spend more.

Those are systemic problems, and the healthcare reform law enacted last year tries to ameliorate them in a number of ways. For example, the law encourages physicians to create “accountable care organizations” to coordinate patient care and improve efficiency, and it penalizes hospitals that do a poor job of protecting patients against infection. But it’s hard to predict how much the changes will slow the increase in healthcare costs, prompting deficit hawks to call for more dramatic steps that are more certain to save tax dollars.

One example is converting Medicare from a program that provides insurance to one that provides insurance subsidies, or “premium support.” Under the version advocated by House Budget Committee Chairman Paul Ryan (R-Wis.), Medicare would give seniors a set amount to spend on policies from private insurers. To hold down spending, the vouchers would increase only at the rate of inflation. If the cost of medical care and insurance continued to rise considerably faster than that, the difference would come out of seniors’ pockets.

The goal of a premium support system is to curb excess demand for healthcare by making Medicare beneficiaries more sensitive to the cost of the treatment they receive. But by capping vouchers well below the growing price of insurance, the House plan would walk away from the central promise of Medicare, which is to provide the elderly and the disabled with healthcare they can afford. The Ryan plan might reduce the federal deficit, but it wouldn’t fix the problems in the healthcare system.

With enough funding to maintain the current level of coverage for seniors, a premium support approach like the one GOP presidential candidate Mitt Romney recently outlined, which would let people opt to buy coverage from Medicare or private insurers, is worth considering. Requiring Medicare to compete for customers with private insurers could promote more innovative and efficient ways to deliver and pay for medical services. That isn’t likely to produce the dramatic savings that Ryan’s plan would, however — the goal, after all, would be to use competition to improve the system, not to meet a specific cost target. There’s also the risk that private insurers would siphon off healthier beneficiaries, leaving Medicare with the costliest and most vulnerable patients. To avoid that problem, the system would have to be designed to spread risks and costs across all beneficiaries, as Medicare does today.

Happily for the super committee, several bipartisan deficit-reduction groups have laid out alternative ways to hold down the costs of Medicare. For example, the White House’s deficit-reduction commission offered a number of suggestions, including changes to co-pays that would give beneficiaries more incentive to shop carefully for medical services. Other paths worth exploring include allowing the Medicare eligibility age to rise to 67 in tandem with Social Security’s retirement age, and giving a new Medicare oversight group, the Independent Payments Advisory Board, greater authority to promote more coordinated and better-managed care.

Reining in spending on a program as popular as Medicare is politically treacherous, but there’s no way around it. The program isn’t sustainable, and the changes set in motion by the healthcare reform law aren’t enough to save it. Fixing the flawed incentives in the program will require at least some elderly Americans to pick up more of its costs, which won’t be easy for those on fixed incomes. But lawmakers can shore up Medicare without abandoning the promise to provide seniors with affordable, reliable health insurance.