There are two major reasons for Medicare’s rising costs. The first is the program’s design, often tweaked but left fundamentally intact since its creation in 1965, which basically pays doctors and hospitals fixed fees for whatever they do. At a time of rapid (and often beneficial) medical innovation, the dominant incentive has been to provide more, and more expensive, care. Hence the House Ways and Means Committee’s 1965 estimate that Medicare hospital insurance would cost $9 billion by 1990 fell short by $58 billion. The second reason costs keep going up, of course, is the rising number of elderly eligible for Medicare, which is inevitable; the 50 million beneficiaries today will be 78 million in 2030.
The ultimate solution is structural: to limit growth in expenditures per beneficiary. Easier said than done. Liberals would empower the Independent Payments Advisory Board (IPAB) to stop payment for treatments it deems not cost-effective. The idea hasn’t gotten very far, partly because Republicans denounce it as “rationing.” Conservatives favor “premium support,” which would subsidize seniors to shop among competing insurance plans, but Democrats, the president included, have tarred that idea as a skimpy “voucher.”
It’s unfortunate but not disastrous that no structural solution is, for the moment, politically possible. Not even their advocates can guarantee that a beefed-up IPAB or premium support would work as advertised. The impact of policy changes on health-care costs is notoriously difficult to project. Indeed, the past three years have seen an unexpected and so far unexplained slowing in Medicare spending’s rate of growth. This happy development doesn’t mean that there’s no problem — far from it. But it buys time to mitigate Medicare’s costs incrementally, while working out the partisan impasse over more fundamental reforms.
Fortunately, there is no shortage of money-saving ideas, including several that have enjoyed bipartisan support. Gradually raising the premiums that beneficiaries pay for physician and other outpatient services to cover 35 percent of the programs’ costs could generate $241.2 billion over 10 years, according to the CBO, while imposing no additional burden on the poorest 18 percent of seniors.
The current Medicare program includes a hodgepodge of cost-sharing requirements that neither give participants clear incentives to limit consumption of services nor shield them from catastrophic expenses. Therefore many buy “Medigap” coverage — which eliminates out-of-pocket costs, further reducing their skin in the game. The CBO has estimated that establishing uniform cost-sharing and restricting Medigap plans could save $92.5 billion over 10 years.