The Future of Medicare

Medicare is having a midlife identity crisis. Our most important health insurance program celebrates its 50th birthday on July 30, and two political and policy visions for Medicare's future are competing for supremacy in Washington. And the winning direction will have important consequences for retirees in the decades ahead.

The question on the table is how to best pay for health care for our aging population. In 2050, the 65-and-older population will reach 83.7 million--almost double what it was in 2012, according to the U.S. Census Bureau.

Medicare has accounted for a rising share of the federal budget in recent years, and that has prompted an array of proposals for change. Conservatives have proposed higher eligibility ages and a shift away from the current defined-benefit structure to a defined-contribution approach--better known as vouchers. Liberals want to continue working to control Medicare's costs through reform of care delivery systems, cutting the cost of prescription drugs, emphasizing prevention, and eliminating waste in programs like Medicare Advantage.

Medicare's spending growth actually has been slowing down in recent years--annual aggregate spending has risen a little more than 3% since 2009, according to a Kaiser Family Foundation analysis. Reflecting the trend, Medicare Part B premiums have remained at $104.90 for the past three years. Experts credit the trend to constraints on payments to health-care providers under the Affordable Care Act, a slowdown in the quantity and intensity of health-care services being utilized, and the influx of baby boomers turning 65. An influx of younger, healthier baby boomers is reducing the average age of beneficiaries and, thereby, putting downward pressure on program costs.

Still, few health-care policy experts are ready to say health-care costs have been tamed permanently. Historically, health-care costs have risen at a 6% to 7% annual rate, and the Congressional Budget Office recently cited rising health-care costs as a key driver of its projection that the U.S. budget deficit will more than double as a share of economic output by 2040 (assuming no change in current tax and spending laws).

My perspective: We have a health-care-spending problem, not a Medicare problem. Medicare costs simply reflect the overall cost of our health-care system--and the system is inefficient. The United States spent 16.9% of its gross domestic product on health care in 2012, according to the Organization for Economic Cooperation and Development (OECD). That was far ahead of the 9.3% average for all OECD member nations. What's more, we get inferior results for our greater spending--our longevity is rising more slowly than in other major OECD nations. American life expectancy was 78.7 years in 2011, OECD reports, a bit behind the OECD average of 80.1 and well behind leaders like Switzerland (82.8), Japan (82.7), and Italy (82.4).

Possible Solutions Clearly, there is a great deal of inefficiency that can be wrung out of the health-care system. That's why restructuring benefits and shifting more costs to seniors isn't the first place to go with Medicare reform, although that's been one of the visible trend lines. A case in point: passage this year of the so-called "doc-fix" legislation, which resolved a long-standing problem with rates used to reimburse physicians for care. The legislation was expensive, and one way that it raises money is by increasing the high-income surcharges that some seniors already pay for Part B (outpatient services) and Part D (prescription drugs) if their modified adjusted gross income (MAGI) exceeds certain levels (surcharges start at $85,000 of MAGI for single filers). These surcharges were first levied in 2007 as a result of reforms passed in 2003, and they were increased to help pay for the Affordable Care Act.

Soak-the-rich is bad policy in this instance. High-income surcharges don't raise much money because a small minority of seniors have income that high--6% of the $67 billion that will be collected in Part B premiums this year will come from surcharges, according to the Centers for Medicare & Medicaid Services. Meanwhile, surcharges undermine the Medicare value proposition by charging much more while delivering no additional benefit. What's more, a rising number of seniors will trip the surcharge wire by working longer, creating a perverse disincentive to additional years of labor. The law also eliminated first-dollar coverage in Medigap supplemental policies starting in 2020--another measure aimed at shifting cost more directly to seniors.

The doc fix is just the tip of the cost-shifting iceberg. Republicans in Congress have tried repeatedly to advance a new premium-support model for Medicare that would replace the current set of defined benefits with a set amount of cash that beneficiaries could use to shop for private health insurance or a variation on traditional fee-for-service Medicare.

These Medicare vouchers would raise premiums for seniors in traditional Medicare by 50% in 2020 over current projections, according to the Congressional Budget Office. Other proposals have called for raising Medicare's eligibility age from 65 to 67. Again, more cost-shifting--either to employer health plans when workers delay retirement, Affordable Care Act exchanges, or to Medicaid in the case of low-income seniors.

Smarter approaches are available. The Affordable Care Act made a good start at reforming care delivery, aiming to improve coordination among providers, patients, and caregivers. Those initiatives should be accelerated. There are also big savings to be had by restoring the federal government's ability to negotiate lower drug prices for beneficiaries who are dually eligible for Medicare and Medicaid--somewhere between $134 billion to $141 billion over 10 years, according to the Medicare Rights Center.

Better preventive care also could save Medicare billions. Just 10% of the Medicare population--the sickest enrollees--account for 58% of spending, according to KFF. Those numbers could be changed dramatically by making sure Americans receive good preventive care in the years leading up to Medicare eligibility, argues Dr. Linda Fried, dean of the Mailman School of Public Health at Columbia University in New York.

Fried is a gerontologist who specializes in healthy aging. In a new article focused on Medicare's next 50 years, she argues that we should actually reduce the age of eligibility for Medicare's preventive health services. Her argument: Age 50 to 65 is the period of greatest risk of disability due to cancer, heart disease and stroke, obesity and diabetes--and with better preventive health care, much of it could be avoided.

A Pause to Celebrate Finally, it's worth stopping to consider the remarkable achievements during Medicare's first 50 years. In 1962, 48% of Americans age 65 or older had no health insurance, and medical bills for that age group were triple those of the general population. Today, just 2% of the over-65 population lacks health insurance.

It's impossible to credit the gains in American life expectancy solely to Medicare, but it's a fact that most elderly Americans wouldn't have otherwise had access to the advances in medical technology since then that have contributed to greater longevity.

Fried notes that since 1965, the 65-plus population is living longer and experiences "substantially lower rates of mortality from chronic diseases such as stroke and coronary heart disease. They have lower disability and greater access to life-saving care for many more conditions. At the same time, out-of-pocket medical spending has declined."

Surveys show Medicare beneficiaries like their coverage and give it higher marks than employer insurance or individual plans. Despite what you read about health-care providers dropping out of the program due to their frustrations, the vast majority of doctors and hospitals accept Medicare, and patients report few problems accessing care.

Medicare's creation 50 years ago was a policy decision aimed at producing greater health and longevity in our older population. Now, we are grappling with the need to pay for the implications of that decision. But let's remember this: Longevity is a wonderful gift, not a problem.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.