Reports are out that the U.S. House of Representatives may this month take up a plan to put in place large structural reforms to the Medicare system. This is a huge win for conservatives. Entitlement reform is the only way that the growth of government can be controlled this century.
Particularly, the House is considering a plan that controls the growth of Medicare in two key ways
Over time, wealthier seniors would pay for more of their own Medicare benefit, and taxpayers would pay for less of it. This concept, known as "means testing," already exists in Medicare. Seniors with higher incomes already have to pay for a greater share of their Medicare Part B (physicians) and Part D (prescription medicines) subsidy benefit.
Under the House's plan, this means testing would increase. That is a spending cut, and a common sense one. There is no reason why a working family should have to pay taxes to support a Medicare benefit for a recipient who can afford to pay more of it himself. Warren Buffet can pay for his own Medicare quite easily, and should do so.
Reform Medigap plans. Seniors on traditional Medicare often buy a wraparound health plan known as a "Medigap" plan to cover what Medicare does not. Under the House concept, these plans would be reformed so that seniors would see more of the true cost of these Medigap policies.
Ideally, seniors would migrate over to the far more efficient Medicare Advantage market, where Medicare is delivered via a private sector insurance plan in a way familiar to anyone with a health plan at work. Medicare Advantage plans compete with each other for seniors' business, and therefore deliver a superior health product with much greater value. Medicare Advantage plans are also far easier starting points for even more comprehensive Medicare reforms.
Together, these Medicare structural reforms represent powerful savings to taxpayers. But they will take some time to be realized. Any changes to entitlements must be phased in over time so that younger seniors and workers can adjust their planning accordingly. But we know that these structural changes will yield a very powerful check on uncontrolled Medicare spending. For example, President Obama's own budget says that increasing means testing in Medicare results in a $16 billion annual savings in 2025 alone. This number will get bigger and bigger as time goes on.
What is the incentive of Congressional Democrats and President Obama to agree to structural Medicare entitlement reform? House Republicans will offer in exchange a permanent repeal of the "Sustainable Growth Rate," or SGR. Under SGR, Medicare reimbursements to doctors is threatened to be cut by about 25% starting this year. I've written far more about SGR here.
There's just one problem with SGR--it's a fake, phony spending cut. Congress has delayed its implementation 17 times since 2003. Congress will no doubt delay the SGR spending cut (via a "doc fix") another 17 times in the years to come.
Critics of this swap claim that the 17 doc fix delays were accompanied by spending cut offsets, so we should continue to use doc fix for leverage. The first problem with that thinking is that many of the spending cuts were gimmicky. The second problem is that large structural changes to Medicare are a FAR bigger prize. Over time, trillions of dollars of Medicare's unfunded debt liabilities will be saved with this plan. All we will have surrendered in return is a theoretical, never-gonna-happen spending cut of far smaller size.
Even Medicare's own actuaries--whose job it is to accurately forecast the costs of Medicare--think SGR is not going to accomplish what it sets out to do. All SGR actually does is create a gravy train for lobbyists and political fundraisers to enact the next "doc fix." Removing it would stop Medicare from cooking the books on its true costs, and would take away a huge amount of political corruption in the health care sector. Conservatives should hate SGR, and view its replacement with large structural Medicare reforms as a win-win of the highest order.