Opinion A fiscally responsible government cannot keep its hands off Medicare

(Michelle Kondrich/The Washington Post)
5 min

Editor’s Note: This editorial is part of a series that looks at the challenges of tackling the growing federal debt and the specific programs that drive it. Read the previous installment on Social Security.

Medicare is a successful component of the American social safety net. As of September, it covered 65.1 million people, 85 percent of them elderly. (The remainder were certain disabled workers and people with amyotrophic lateral scerlosis, commonly known as Lou Gehrig’s disease, or end-stage renal disease.)

It is also expensive: During fiscal 2022, the program accounted for $710 billion in federal spending, which was 11.4 percent of the $6.2 trillion total, according to the Congressional Budget Office. By 2028, the Medicare trust fund, which pays for hospitals, skilled nursing facilities and hospices, and is financed by payroll taxes, is expected to be exhausted. No rational approach to fiscal sustainability could wall off so many of the dollars that Washington spends every year. And yet that is what a de facto bipartisan consensus in Washington has effectively done.

This has to change. To be sure, President Biden proposed, in his 2024 budget, changes that would keep Medicare solvent for 25 years. He would accomplish this by adding more drug price negotiations (on top of the ones in last year’s Inflation Reduction Act) and raising a tax on the investment income of people who earn more than $400,000 a year. The president deserves credit at least for discussing the topic, but his plan is mostly political messaging rather than a serious approach to the issue. It places the entire burden of ensuring Medicare solvency on unpopular drug companies and high-income earners, implying — incorrectly — that structural reforms are unnecessary. Such changes could be carried out with relatively modest sacrifice from beneficiaries, in return for which all Americans would enjoy the security of a program built to last.

Containing costs for Medicare Advantage

Containing costs for Medicare Advantage, the alternative to “traditional” fee-for-service Medicare that now covers roughly half of all beneficiaries, is probably the most important step the president and Congress could take. Under Medicare Advantage, private health insurance companies provide managed-care coverage to Medicare-eligible patients in return for a per capita payment from the government. Many enrollees prefer Medicare Advantage plans because they can cover dental and vision needs, which regular Medicare does not.

But the program costs more per beneficiary than traditional Medicare — 4 percent more, according to the latest government data. This is in part the perverse result of upward rate adjustments the government awards insurers to cover patients with higher “risk scores,” which incentivize Medicare Advantage companies to maximize each client’s reported ailments (known as “upcoding”). These adjustments, in turn, are made to rates that companies and the government negotiate relative to a predetermined baseline. Reducing that so-called benchmark by 10 percent would save the taxpayers a whopping $392 billion over 10 years, according to the CBO.

Would this force companies to trim some of the extras they provide? Perhaps, but it would also give them an incentive to innovate and be more efficient, reshaping plans based on what patients find truly essential. As the CBO points out, “additional payments to Medicare Advantage plans are allocated in part to additional benefits for Medicare Advantage enrollees and in part to plans’ administrative costs and profits.”

Eliminating payment discrepancies

Medicare pays more for services performed on an outpatient basis at hospitals than it does for the same services done at physicians’ offices or ambulatory surgical centers. This makes no sense and creates an incentive for hospitals to buy up independent doctors’ offices that they then relabel as hospital facilities. Eliminating this discrepancy could save $141 billion over 10 years. Equally irrational are the different co-pays and deductibles traditional Medicare assesses for doctor visits and hospital stays. Replacing that system with uniform cost-sharing rates and an annual out-of-pocket cap would save $27 billion over 10 years.

Distributing grants differently

Medicare helps teaching hospitals to pay the costs of training new doctors, directly — as compensation for residents — and indirectly. On the whole, this is a worthy use of the program’s funds, but in recent years expenses have been growing much faster than inflation. The current formula for allocating the money is complex and, according to a 2021 report by the Medicare Payment Advisory Commission (MedPAC), inexact relative to how hospitals actually treat patients. The CBO estimates that a new graduate medical education grant program, indexed to inflation, would save $68.2 billion over 10 years.

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Reducing Medicare’s reimbursement rate for uncollectible hospital bills

A large chunk of hospitals’ unpaid bills — so-called bad debt — is now covered by the government. Reducing the government’s share from the current 65 percent to 25 percent would save $45.7 billion over 10 years. The hospitals would have to absorb the rest.

With these reforms in place, it would be more justifiable to extract additional tax revenue from wealthy investors. Specifically, closing the loophole that currently protects profits of so-called pass-through businesses, such as limited partnerships, from the 3.8 percent Medicare tax on net investment income would raise $249 billion over 10 years, mostly from high-income households.

A plan with these elements would make Medicare a much more sustainable program and provide its trust fund with an even longer lease on life than Mr. Biden’s proposal would. It can only do so, however, because it calls for sacrifice from powerful groups — doctors, hospitals, insurance companies. Their self-interest, plus the genuine, understandable fears of many seniors, presents a difficult political challenge. And yet it has to be overcome if this vital federal program, and the government as a whole, is to remain financially viable for future generations.

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