Medicare could stay solvent if stakeholders act soon

Saving Medicare from bankruptcy is an enormous mathematical and political challenge. Experts agree that the U.S. must address the problem without delay, but a polarized political environment has politicians running for the hills. By 2017, Medicare Part A, which covers inpatient visits for the elderly, will run out of money.

In 1966, 19 million people were enrolled in Medicare. This year, enrollment will reach 47 million. By 2020, it will have reached 62 million and by 2030, 79 million, according to Medicare's actuaries.

Meanwhile, Medicare is funded by a combination of payroll taxes, general revenue and premiums paid by beneficiaries. In 1999, there were 4 working taxpayers for every one beneficiary. Today there are 3.7, by 2020 there will be 2.9, and by 2030 there will be 2.4.

Medicare and Medicaid contribute more to the growth in federal spending than any other program. According to the Congressional Budget Office, the growth of federal spending on health care is the single greatest threat to budget stability, and rising costs will rapidly increase federal debt well beyond the 67% of gross domestic product projected for 2020.

With fewer people paying in and many more receiving benefits, Congress will have few available options—all of which will be unpopular.

Raise taxes. Congress could drastically raise payroll taxes, but a large increase would likely damage the economy. Congress could enact a new broad-based tax to support Medicare, such as the consumption or value-added taxes commonly used by European countries. Congress could raise marginal income tax rates, alone or in some combination with other tax increases.

Cut benefits. Medicare beneficiaries could be required to pay higher co-pays, deductibles and premiums. Congress could limit expensive therapies for the very old if such therapies don't result in substantial gains in years of life, like the United Kingdom does.

Limit or delay eligibility. Congress could raise the Medicare age to 68 or 70, or decide that no person above a certain level of retirement income would be eligible.

Make the wealthy pay more. Congress could require higher-income people to pay more into the program by charging higher co-pays and premiums. It could also raise taxes on the well-off.

Cut spending on physicians and hospitals. Congress could slash reimbursement, impose strict budget and utilization controls, cut pay to physicians, hospitals and other providers with above-average costs, and replace fee-for-service with capitation. Independent private practices could be replaced with integrated delivery systems.

Privatize Medicare. Congress could repeal Medicare as we know it, and instead give people tax incentives to save for their own health care. Once at Medicare age, people could be issued a pre-paid voucher to buy their own coverage in the private insurance market, much like guaranteed annuity retirement plans have largely been replaced with defined-contribution 401(k) plans.

Expand Medicare to all. Although it may seem counter-intuitive to expand a broken program, Congress could decide that bringing everyone into Medicare would give it the leverage to raise revenue, spread risk and control costs more effectively, just as many other industrialized countries have done.

Because the options are so unpalatable, politicians don't want to consider them. But Congress could reduce the political pain if it started the process now.

Taxes could be raised gradually. Higher premiums for upper-income beneficiaries could be phased in more slowly. Payment and delivery system reforms could be pilot-tested on an accelerated basis, and then expanded throughout the program. Over time, fee-for-service could be completely replaced with models that pay based on the value of care provided. Research on comparative effectiveness could be expanded and incorporated into evidence-based benefit design decisions. Medicare Parts A, B, C and D could be combined into a single program to coordinate approaches to improving outcomes and lowering costs. Patients could be encouraged to do more advance planning on end-of-life care.

For such changes to happen, though, both political parties will need to set aside orthodoxy. Republicans would need to agree to tax increases, and Democrats would need to agree to limits on benefits. Physicians and hospitals would need to agree to be paid based on the outcomes of care, not the volume of services.

Alternatively, we can wait until Medicare runs out of money, the number of people enrolled doubles, and the number of contributing workers drops by half, leaving Congress and the next president with no choice but to institute harsh and unpopular measures.

Medicare in 2017, 2020 or 2030 will not be your Grandma's Medicare, but it could be a more sustainable and affordable program if our politicians decide to lead and consider all reasonable solutions, instead of pretending that the problem will go away.