The Smart Money: How to save Medicare for real

Posted Wednesday, April 17, 2013 in Analysis

The Smart Money: How to save Medicare for real

by Gina Hamilton

Last week, we discussed Social Security's short-term problems. Medicare is also a short-term problem of sorts, but it has the added burden of being associated with medical care, whose cost is rising at 3.11 percent (more than three times) of the ordinary inflation rate. Medicare is a relatively easy problem to solve, too, but it will take some political courage, which is currently not present in Washington and may never be again.

Medicare was established in 1965, guaranteeing health care to seniors, and is administered by the federal government. It does not operate through an insurance company, except in rare cases where "Medicare Advantage" programs were tested, believing they would be more efficient than administration through the public sector. It wasn't, but by the time it was clear that it cost more to operate the program privately, people were already on some of these plans, and some people liked them and didn't want to switch. 

The overhead cost for administering Medicare is about 4 percent. 

That's not a typo. 

Overhead for most health insurance is between 11 and 20 percent, and some insurance companies skim more than 30 percent off the top. This usually goes to shareholders and corporate bonuses, but also goes to pay the salaries of people whose job it is to deny care or rescind coverage, something Medicare doesn't do.

The problem Medicare has is that it covers only older folks, who have more health problems than younger people, and the disabled, who have health problems by definition.

The baby boom ended in 1962, technically, with a far more sustainable population growth thereafter. A person who was born in 1962 would turn 65 in 2027, and from an actuarial point of view, could be expected to live as long as an additional 20 years, meaning that the baby-boom bubble would pass by in 2047. Keeping Medicare in the black may be a daunting task, considering that the program's trustees believe that Medicare will become insolvent in 2024. But that's if nothing is done, and something will obviously be done.

It also doesn't mean that Medicare will cease to be; it simply means that Medicare would have to become part of the federal budget at that point (it is not part of the federal budget now), and taxes would have to rise over the 23 years to cover its costs.

Republicans believe the best way to solve the problem, in the face of all actual information gathered to the contrary, is to hand Medicare over to the private sector in some way. Currently, their budget calls for Medicare recipients to be given the choice ... for no additional outlay of funds ... for the second least expensive option, whatever that is, and if they want decent health care, they'd have to fork out more money for it.

Democrats have an as-yet unproposed plan to create Medicare systems that pay per patient per year, rather than per procedure, not unlike the Kaiser Permanente model.  However, that is not yet even on the drawing board, let alone reaching a point where it is something the Senate GOP can filibuster to death. The Democrats may be waiting until they retake the House in 2014 to propose it.

In the meantime, the Affordable Care Act will go into effect in a few months. With more people insured, the cost of health care for everyone may decline. 

There are other options, of course, and in the short term, the Medicare solution will probably consist of one or a combination of these:

In the long term, the best and most cost-effective option is to provide universal Medicare coverage for everyone, paid for by taxes or at a reasonable market rate. This "public option" would solve Medicare's actuarial problem overnight, and bring in dollars to cover the higher-need seniors and disabled, while providing affordable coverage for younger participants. 

It would save businesses a great deal of money, as well, and likely spur hiring in every field except health insurance.

This solution would take political capital and political courage, however, and so far, that's been noticeably absent in this Congress and this administration.

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