Three Reforms That Can Help Balance Medicare Finances

Topping the health-care agenda of the Trump administration and Congress is the repeal and replacement of the Affordable Care Act. Still, it would be a mistake to ignore Medicare, the nation’s single largest health-care entitlement. While the program is well liked by senior citizens, Medicare’s growing share of the federal budget, growing reliance on general rather than dedicated revenue streams, and outdated benefits and cost-sharing structure make it ripe for changes that can deliver better value for beneficiaries and taxpayers.

While Medicare reform has traditionally been politically challenging, Republicans and Democrats have converged significantly in their support for market-oriented Medicare Part D (drug coverage) and Medicare Advantage plans. Understanding and leveraging lessons learned from these programs might enable Congress to shore up Medicare’s overall finances while continuing to offer senior citizens coverage that best suits their needs and financial situation.

• Combine Part A and Part B deductibles and cap an individual’s annual out-of-pocket costs. In contrast to private health insurance, senior citizens on Medicare face separate deductibles for inpatient hospital care (Medicare Part A: the 2017 deductible is $1,316) and doctors’ services (Part B: the 2017 deductible is $183). To cover their Medicare coinsurance obligations—and health-care services that the program does not provide—many people also purchase supplemental insurance, called Medigap. By obscuring the real cost of these services, however, Medigap plans often lead to higher health-care spending. A single deductible for physician and hospital services, as well as a provision to cap an individual’s out-of-pocket health-care costs, would mitigate the need for costly Medigap policies (which cost, on average, over $2,000 annually) and the excessive spending that these policies induce. This reform would also limit what the sickest Medicare patients must pay to receive treatments.
• Develop a premium support system for traditional Medicare (TM) and Medicare Advantage (MA) that would better encourage competition and choice between these plans. MA plans, unlike TM, can vary deductibles and coinsurance; they also have different contractual agreements with providers that can incentivize higher-quality or lower-cost care. While traditional Medicare should remain an option, a premium support system in which senior citizens receive a voucher tied to a benchmark based on competition between MA and TM would encourage more informed choices between them and among MA plans. It also would ensure that taxpayers are not on the hook for overly expensive coverage.
• Require 340b providers to pass through drug rebates. Pharmaceutical companies that participate in Medicaid must offer deep discounts on certain drugs dispensed by facilities that serve low-income and other vulnerable patients. These discounts effectively apply to all outpatient drugs prescribed by 340b-covered providers, including to Medicare patients. While the intent of this program was to make it easier for patients to afford certain drugs, providers in many instances have pocketed the differences between discounts from drug manufacturers and what insurers (public and private) reimburse for the drugs. To save millions of taxpayer dollars and reduce out-of-pocket costs for patients, 340b providers should be required to pass through their discounts both to the Medicare program and to patients.

Most of the reforms suggested here enjoy, or have enjoyed, significant bipartisan support. Individually, they are relatively modest changes. But taken together, they could save Medicare beneficiaries hundreds (and for some, thousands) of dollars in annual out-of-pocket costs and improve their health. They could also reduce federal spending by several hundred billion dollars over a 10-year budget window. The result would be to extend Medicare’s long-term solvency and ensure that the program delivers more value to taxpayers and seniors.

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Yevgeniy Feyman is an adjunct fellow at the Manhattan Institute and a senior research assistant at the Department of Health Policy and Management at the Harvard School of Public Health. Previously, he was MI's deputy director of health policy. Follow him on Twitter here.