Medicare at 50

Published July 28, 2015

National Review Online

GOP presidential candidate and former Florida governor Jeb Bush recently found himself doing what no politician ever wants to do, which is explain himself. He shouldn’t feel too bad, though, because the subject was Medicare. Countless others have also had their words purposely distorted on this subject by their critics and political opponents.

What Governor Bush said was that Medicare, enacted 50 years ago this week, is not sustainable in its current form and therefore needs to be “phased out” while the country “moves to a new system.” Not the best way to describe his views, for sure, but everyone who reads what he actually said, in context, will know what he meant.

Governor Bush began by referring to Representative Paul Ryan’s proposal to reform Medicare — basically, by injecting more market discipline into the program by providing the entitlement in the form of premium-support payments and allowing the beneficiaries to choose their Medicare coverage from competing options. Bush said these changes should not apply to those who are already on Medicare; they should apply only to those who will be entering the program in the future. And he made it clear that the purpose of making changes was not to get rid of Medicare but to ensure that future generations would also have a program that provided them with secure health-care coverage.

Quite predictably, Bush’s critics pounced. They said, in so many words: There go those mean-spirited Republicans again. Paul Krugman argued that Republicans have always hated the idea of the government providing “a universal safety net,” and thus they are always seeking ways to undo it. His implication is that Bush wants to leave poor seniors without the protection Medicare provides.

This is nonsense, of course. As Governor Bush capably explained, the point is not to decrease security for future generations of retirees but to increase it by undertaking sensible reforms that will make entitlement programs, including Medicare, more sustainable.

This is not a radical position, by the way. It was the position of the Bowles–Simpson commission, a bipartisan panel established by President Obama during his first term to address the nation’s long-term budget challenges. Indeed, it’s the position of just about everybody who has taken an honest look at the nation’s fiscal situation over the past two decades.

What’s happening now, however, is that some, including Krugman, have begun to move away from this mainstream argument and take the position that no real change is needed at this point, at least with respect to Medicare, because the Affordable Care Act — i.e., Obamacare — has already solved the problems. They point to the slowdown in the escalation of health spending and claim the ACA is the cause.

That’s also false. As others have noted, the slowdown in health spending predates the enactment of the ACA, and a similar slowdown is observable in many other countries as well. The real causes are a weak economy, the move (in the U.S. context) to higher-deductible insurance plans in the employer market, and the introduction of fewer expensive new products and technologies into the marketplace. The ACA had nothing to do with any of this.

The ACA’s proponents argue that the law has effectively leveraged “delivery system reforms” in Medicare, and that this is what has produced the cost reductions; but there is no evidence to support this contention. These reforms — like the introduction of Accountable Care Organizations (ACOs) and the “bundling” of payments for all providers involved in an episode of care — are very minor events in the context of a $3 trillion health system. When the ACA was enacted, the Congressional Budget Office (CBO) estimated that ACOs would save $5 billion over a decade — a drop in the bucket of Medicare’s $6 trillion in expenditures over that same period. And early results of the ACO effort indicate that the CBO’s estimate was very optimistic.

What the ACA’s advocates never mention — though it is evident in information released last week in conjunction with the Medicare trustees’ report — is that the ACA, and a new law enacted earlier this year, are imposing blunt, across-the-board payment reductions in Medicare that make the program’s long-term financing appear better than it really is. The ACA included a “productivity adjustment factor” for payments to hospitals and other institutions. This adjustment reduces the inflation increase in Medicare payments every year by an average of 1.1 percentage points, on the assumption that hospitals can become that much more productive. This isn’t a one-time cut. It is a reduction in the inflation increase for hospital payments every year in perpetuity. In a separate law enacted earlier this year with substantial Republican support, the despised sustainable growth rate (SGR) formula for physician fees was repealed, but in its place Congress imposed a permanent (after 2025) upper limit of 0.75 percent on annual increases in physician fees — far below the forecast inflation rate of 2.3 percent a year for physician services outside of Medicare.

The actuaries who produce the estimates of Medicare’s future costs believe these across-the-board reductions are unrealistic because, rather soon, Medicare’s payments for services would fall so far below the actual cost of caring for patients that large numbers of hospitals and doctors would either start steering clear of Medicare patients or exit the marketplace altogether.

Since 2010, the actuaries have produced an alternative projection scenario alongside the official “current law” projection of the trustees’ report. Their aim is to highlight their concern that the official projection is misleading because it includes the cost reductions associated with these blunt reductions in payments. The alternative scenario assumes annual increases in hospital payments and physician fees that are closer to what has happened historically, and the results are telling. Medicare spending under this alternative scenario is 18 percent higher in 2050 than under the official projection in the trustees’ report, and the unfunded liabilities of the program would reach $36.8 trillion, nearly $9 trillion above the estimate based on the trustees’ report.

Medicare is already far, far larger than it was ever expected to be when it was launched. In 1970, program expenditures were only 0.6 percent of GDP. By 2014, they were 3.5 percent of GDP. And in the alternative scenario put together by the actuaries, program spending will be well above 6 percent of GDP by 2050.

Krugman and others want policymakers to ignore this reality and assume the problem will somehow go away on its own. It won’t. If nothing is done, budgetary pressure will build, and then, during the predicable crisis that will eventually ensue, a push will be made for a massive tax hike.

Which is why it is important for Governor Bush and his fellow candidates for the GOP nomination to continue pressing the case for reform, politics notwithstanding.

At some point, it will be important to give the electorate a better idea of what reform will mean for them. A good plan, one based on consumer choice and innovation, would be appealing to many voters, including those about to enter the Medicare program. And presentation of such a plan would go a long way toward defusing the inflammatory attacks by defenders of the status quo.

But there’s still plenty of time for that. For today, we should be grateful that Governor Bush, and several of the other candidates, have not backed down when confronted with the usual demagoguery.

— James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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