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Medicare Is Insolvent, And Getting Worse. Here Are 3 Ways To Start Fixing It


Most conservatives recognize the federal government faces enormous fiscal problems—both a large overhang of debt from spending in years past, and sizable deficits forecast for the years to come. But what to do about it?

While spending on things like earmarks and Congress’s failure to right-size spending when passing tax relief have worsened our fiscal woes, at bottom the United States’ financial shortfalls stem from unsustainable entitlements: Obamacare, Medicaid, Social Security, and Medicare. These programs comprise a large, and growing, share of the federal budget, particularly as the Baby Boom generation retires.

In the immediate future, President Joe Biden and his Democrat colleagues in Congress will likely thwart any major attempt to right-size our entitlement programs, until Washington finally re-learns the habit of spending within its means. But that doesn’t mean conservative lawmakers should sit back, do nothing, and watch the situation get worse.

Enacting several modest reforms to Medicare—ones that could attract Democrat support—could rebuild a bipartisan consensus to tackle the unsustainable nature of our entitlements. It would hopefully build momentum towards the bigger reforms that Medicare needs to remain solvent for future generations of Americans.

The Problems

On the macro level, the federal government as of the end of the fiscal year this September will hold $23 trillion in debt—roughly equal to the size of our current economy. According to the Congressional Budget Office, the national debt has roughly tripled since 2007 and is projected to rise such that, by the end of the coming decade, Washington will spend nearly $1 trillion per year just to pay the interest on our bills.

Medicare itself has been effectively insolvent for several years. In 2009, the last year before Obamacare’s enactment, the program’s trustees concluded the Medicare Hospital Insurance Trust Fund would become insolvent by 2017, i.e., four years ago.

Obamacare changed that dynamic—but only on paper. Democrats used government accounting practices to claim that the Medicare spending reductions and Medicare tax increases in Obamacare both improved Medicare’s solvency while paying for the new health-care law. In reality, however, you can’t spend the same money twice—meaning this double-counting made Medicare appear more solvent on paper alone.

Obamacare’s financial gimmicks allowed lawmakers to avoid dealing with Medicare’s problems for most of the past decade. But now even those gimmicks have run their course. Estimates suggest the Medicare trust fund will become officially insolvent within five years—and could face a cash flow crunch even sooner.

That’s where the need for solutions comes in. To be clear: Republicans can—and should—explore more comprehensive Medicare reforms, including a premium support program that would place private plans and traditional Medicare on a level playing field to attract and enroll seniors. But because Democrats would likely object to these solutions for ideological reasons, other, smaller changes in the meantime could set the stage for larger reforms in 2025 under a Republican president.

Solution 1: Medicare Opt-Out

I wrote about this issue four years ago, during the Trump administration’s opening weeks. In 1993, an administrative ruling by the Clinton administration—one that did not even go through notice-and-comment rulemaking—forced all individuals to enroll in Medicare Part A as a condition of applying for Social Security.

This policy makes little sense, for several reasons. Forcing individuals—even wealthy seniors like Bill Gates or Warren Buffett—into Medicare wastes taxpayer dollars better spent elsewhere. Moreover, when seniors get (forcibly) enrolled into Medicare Part A, they lose their ability to make additional contributions into health savings accounts, meaning they effectively lose a part of their health coverage that they like and want to keep.

Inexplicably, the Trump administration did not take executive action to allow individuals to opt out of Medicare if they so choose. But Congress can and should pass this modest reform into law. Given the size of our debt and deficits, it seems absurd to force people into government-run health coverage if they don’t want it and feel they can go without it.

Solution 2: (More) Means Testing

The principle of means testing—charging affluent individuals higher Medicare premiums—began as part of the Medicare prescription drug law enacted in 2003. In one of its few positive changes to the health-care system, Obamacare expanded means testing some years later.

That law expanded the number of affluent seniors paying higher Medicare Part B (outpatient physician) premiums and extended means testing to Medicare Part D prescription drug coverage as well. Unfortunately, however, these savings did not get used to improve Medicare’s solvency so much as they got “raided” to fund Obamacare, as noted above.

Projections from the Kaiser Family Foundation demonstrate the rationale for expanding means testing further. According to Kaiser, between 2016 and 2035, per capita income for seniors will rise the greatest for those in the top quartile of income. Means testing benefits for the most affluent seniors provides one way to combat inequality—making the wealthiest Americans “pay their fair share,” as Democrats like to say—while making Medicare more solvent over the long term.

Perhaps the best case for this reform came from House Majority Leader Steny Hoyer, D-Maryland. In 2009, Hoyer opposed a bill to cushion the effects of a Medicare premium increase for some seniors. In a floor speech, he said he opposed the bill because he believed the affected seniors could afford to pay the higher premiums, and Congress needed to set clear priorities:

At some point in time, my friends, we have to buck up our courage and our judgement and say, if we take care of everybody, we won’t be able to take care of those who need us most. That’s my concern. If we take care of everybody, irrespective of their ability to pay for themselves, the Ross Perots of America, frankly, the Steny Hoyers of America, then we will not be able to take care of those most in need in America. [Emphasis added.]

Given the deterioration of the national government’s fiscal condition over the past 12 years, those words apply even more in 2021 than they did in 2009. Congress should follow Hoyer’s advice, and expand Medicare means testing accordingly.

Solution 3: Structural and Medigap Reforms

A third bipartisan solution would rationalize the Medicare benefit structure, and specifically rein in the purchase of Medigap supplemental insurance. Because the traditional Medicare benefits provided by law do not include a cap on out-of-pocket costs, roughly nine in 10 seniors have some type of “insurance” to provide such a catastrophic cap. Otherwise they could face medical bills totaling tens of thousands of dollars (or more) in the case of a medical emergency.

Unfortunately, however, the Medigap supplemental plans that some individuals purchase do more than cap out-of-pocket expenses. The most popular Medigap plans cover virtually all medical cost-sharing—all deductibles, all co-payments, etc. By thereby making trips to the doctor “free,” these Medigap plans encourage seniors to consume more care than Medicare enrollees without supplemental coverage.

Congress took some preliminary steps in this direction in 2015, as part of a broader Medicare physician payment package. That law provided that, beginning in January 2020, Medigap plans could not subsidize the Medicare Part B deductible (currently $203 in 2021). But the measure contained the smallest Medigap reforms possible, and because the overall package increased the deficit, worsened Medicare’s long-term financial shortfalls.

According to a Kaiser Family Foundation study from a decade ago, a more robust package of reforms to Medicare and Medigap would lead 79 percent of seniors to save money—an average of $415 per year—while also saving the Medicare program billions of dollars every year.

Even though these changes would cause seniors to pay more out-of-pocket (e.g., co-payments, etc.), they would save over time because of far lower Medigap insurance premiums. Every dollar seniors pay to a Medigap insurer allows an organization like AARP to take their share of the cut (a.k.a. “kickbacks”) in the process. Fewer dollars running through insurance companies means less overhead and profits for the insurers—and more dollars back in seniors’ pockets.

Congress could structure Medigap reform in a variety of different ways. But the general principle should hold that, if seniors purchase additional insurance to insulate them from all cost-sharing (so they can go to the doctor for “free” without a co-payment), then those Medigap premiums should reflect the higher spending burden those plans place on the Medicare program.

A Good Start on Bigger Reforms

These three changes alone would not solve the Medicare program’s financial woes—far from it. But they would modernize a Medicare program approaching six decades old, while making it more sustainable and solvent for future generations. Passing these kinds of common-sense reforms could start the ball rolling on the entitlement reform our country desperately needs.