One prescription for runaway Medicare costs

Medicare spending is among the top drivers of the nation's expanding debt. It's not the Centers for Medicare and Medicaid Services to set policy, It's Congress.

Medicare spending is among the top drivers of the nation’s expanding debt. Everyone knows it. It’s not up to the Centers for Medicare and Medicaid Services to set policy, though. It’s up to Congress. For some details, the Federal Drive with Tom Temin spoke with a senior fellow at the conservative American Enterprise Institute, James Capretta.

Interview Transcript: 

Tom Temin Let’s talk about the structure of the Medicare system. I think people typically assume it’s a pay as you go system. And it might be that, but like Social Security, there is a couple of trust funds. How do they operate and how do they affect the spending and ways that might be a little bit subtle?

James Capretta There is one trust fund that is kind of like Social Security, the Hospital Insurance Trust Fund. That was the original idea for Medicare, it was added on to Social Security so that people paid payroll taxes during their working lives and then got this hospitalization protection when they retired at 65. Then they added a second part at the time of enactment of Medicare, called part B, the [Supplemental Medical Insurance (SMI)] trust fund. And this trust fund is not pay as you go like a payroll tax trust fund. It’s a premium. So people pay premiums and then the government contributes the other 75%. So it’s basically a 25-75 split with the beneficiaries paying a premium and the government paying for the rest. It pays as you go in a certain way, but not in the same way people understand it with the Social Security payroll tax. And that’s a big now 60% of the program. Medicare spending is in part B, not the hospital side, which is part A.

Tom Temin So is the answer to simply raise the premiums or cut the benefits? The formulas are what they are, just like the tax code. They’re enshrined in law. And therefore what are the trends showing us about that secondary fund?

James Capretta Well, I think the big issue here is that we’re going through a major demographic change. So you just have a much larger retiree population relative to the size of the workforce. It’s been happening for about 15 years now. It’s going to continue for another 15. And so you just have this big bulge of people going into the program. And how do you pay for that. So you probably do need to look at, well, maybe we need to raise the payroll tax somewhat. Maybe we need to raise the premium somewhat to make this more affordable over time. The conditions that were in place when the program was enacted are not the same as they are today. And so you have to make adjustments.

Tom Temin Yeah. So it does parallel Social Security in the sense that the pyramid is almost upside down. That is the payers in by payroll tax are supporting a larger number of people that are collecting.

James Capretta That’s right. It used to be more of a pyramid course which smaller numbers at the top and bigger numbers at the bottom. It’s still kind of a pyramid, but the base is not quite as big compared to what it was years ago, relative to the size of the retirees. And so that is a shift. And then there’s the health care component, which is that this is not just a retirement program, but it’s also a medical program. And of course, there’s pressures associated with us running a system that is a little bit more expensive than our peer countries.

Tom Temin Right. And so given the fact that it’s not politically possible to end the program, I don’t think anyone seriously proposes that. It seems like things can be done both on the demand side and the supply side. The supply side, it’s kind of like higher education. The costs run away out of control outside of any normal market, in any other field of economics that you see. So have you got any ideas on that side?

James Capretta Yeah, there are lots of ideas on the supply side, as you know, and they’re big disagreements. So this is not something that easily fits into something where you say, oh, everybody will join in and say, yeah, that’s the answer. So there will be ideas that say, look, we need to make this more efficient. How do we make it more efficient over time? There’s many provisions that were in the Affordable Care Act from 14 years ago that tried to to pay for care, what they call value based payment, to try to make the hospitals and physicians work a little more efficiently together to drive down the costs, even as the quality would go up. Accountable care organizations. Then there are people say, well, just cap the prices and cut them even lower, tell the people providing the services, hey, you’re going to get paid a little bit less. That, of course, is a tried and true method. And the problem there is that they’ve squeezed that quite a bit already. And it’s hard to know if you can get any more out of that. There’s always a little bit of room though, I would say, there are some more ways to squeeze. And then there are folks that are worried about Medicare Advantage, which is the private insurance component of Medicare, and they’re big disputes, and maybe some evidence that the Medicare Advantage plans are getting paid a little bit above what they need to be paid to do the services they’re expected to do. And so they’re overpaid. And how do you get that money back so they aren’t overpaid without harming the beneficiaries in the process. So those are some of the things in play. None of them are easy though. That’s why this is a big problem.

Tom Temin We’re speaking with James Capretta. He’s a senior fellow at the American Enterprise Institute. And then on the demand side, that is the government side that is providing these benefits in concert with people paying in. Even into their old age, it kind of comes in from one agency and goes out in the other. What are some reasonable proposals that Congress, if they decided to think about it rationally, could look at?

James Capretta One thing is to redesign the benefit a little bit, not necessarily for the people on the program. So a lot of people say, well, you’re changing things and people are retired. So just to protect everybody on the program say, no, this would be prospective, but the benefits are a little bit outdated at this point. It doesn’t have catastrophic protection. It has this A and there’s B and D, all with different deductibles and cost sharing rules. They probably ought to get to a combined benefit that is a little bit more rationally designed, with one deductible and one cost sharing structure for all the covered items. And then say to the beneficiaries, hey, you can pick get it through a government managed process like it’s the traditional way or through a private plan, and we’re going to have them kind of compete with each other. This is an idea that’s controversial with some people, but still out there as an idea called premium support. And if you selected a plan that was more expensive than the average, maybe the beneficiary would have to pay a little bit more. And if they selected one that was less expensive than the average, maybe they get to pay a little bit less in a premium. And it’s through that kind of a process that you might get people to say, okay, let’s find less expensive ways to deliver this so that we can attract more beneficiaries. And so that’s the kind of idea that might be out there in the future. It is controversial. I don’t want to kid you about that.

Tom Temin Sure. Well, all these things are. And what should the financial goal do you think of this before Congress? Because, currently you’ve got major medical care programs, according to the CBO, costing 1.5 trillion, which is more than the discretionary so-called budget, roughly equal to it way above defense. And then Social Security is another 1.3, 4 trillion. And those trends are only going up. What should the financial goal be?

James Capretta I think the financial goal here should be permanent solvency for these programs. This is a multigenerational program. It’s supposed to last across years and decades, be there for workers and retirees and future participants. Even those are just being born this year. So you really should be designing something that has some stability to it and self-correct so that people always understand it’s always going to be there and it’s not going to break the bank. So as our demographics change and our cost structure change, build the end of the program some self-correcting adjustments. So the premium needs to go up a little bit, it goes up a little bit. The tax rate needs to go up a little bit, it goes up a little bit. If you need to adjust what we’re paying for services a little bit or deductible, you adjust them a little bit so that the whole thing stays stable and financed, and not something that’s driving up the federal debt to these astronomical levels that you’ve been talking about. So I think that’s should be the financial goal. And it’s doable. The corrections are large, but it’s doable. But you just got to get into it and start making some adjustments.

Tom Temin For the politicians it’s not so much understanding the finances is what I would call the psychological pieces of it. Fear over catastrophic loss, or worry over affordability of the premiums and so forth as you go into old age. And then the demagoguery of any kind of a change that one side will say to the other, look what you’re consigning grandma to falling off a cliff type of discussion.

James Capretta I think it’s pretty nonsensical to assume that the US is going to do something that would be dramatically different from what Medicare already is. So whatever Medicare is in 2040 is probably going to be recognizable to whatever is being provided today. It’s going to be changed, though, to make it somewhat more affordable, budgetary one way or another. That might mean they just pay the doctors and hospitals even less than they are today, with whatever consequences might come from that. But some adjustments are inevitable, but it will be recognizable as an insurance program for health care for the elderly, and that will be there going forward.

Tom Temin Well, we’ll never get to the point where say spinal fusion costs the same as it oil change.

James Capretta No, that’s not going to happen. And maybe we don’t want that to happen. I think you want your spine physician to be very highly trained, which means that he or she will probably charge you a little more than that.


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