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William Lloyd

September 9, 2012

William Lloyd | Fixing Medicare: GOP plan vs. Obamacare

— Something must be done to solve the impending Medicare funding crisis. The debate in this fall’s campaign is over what that “something” should be.

Under current law, Medicare recipients are entitled to insurance that covers hospitalization, doctors’ care, outpatient services and prescription drugs. The hospitalization insurance is financed by a payroll tax. More than two-thirds of the cost of the insurance for doctors’ care, outpatient services and prescription drugs is financed by general tax revenue; the remainder is financed principally by premiums charged to Medicare recipients. 

Medicare does not pay 100 percent of a senior citizen’s costs. There are co-pays and deductibles. There are also health care services that Medicare does not cover. The key, however, is that the benefits Medicare does provide are guaranteed. No matter how rapidly health care costs escalate, Medicare is required to provide those benefits.

According to the Medicare Board of Trustees, the payroll tax will be sufficient to cover only 87 percent of the guaranteed hospitalization benefits beginning in 2025 and only about two-thirds of those benefits by 2045. Similarly, because of anticipated federal budget cuts, the premiums to pay for doctors’ care, outpatient services and prescription drugs will increase significantly.

There are two principal reasons for Medicare’s funding problems. First, as the baby boomers retire, the number of Medicare recipients will rise dramatically in comparison to the number of workers paying taxes to support Medicare. 

Second, health care costs have been rising faster than the growth in the economy for decades.

Under the Republican plan, benefits would no longer be guaranteed. Instead, the government would turn the available revenues into vouchers that seniors would spend to buy their own health insurance. The objective would be to lower the deficit by reducing (or eliminating) the use of general tax revenue to finance Medicare. Because the government would be spending less on Medicare, the non-partisan Congressional Budget Office has concluded that the vouchers would not increase as rapidly as health care costs and senior citizens would pay a much larger share of their health care costs than under the current Medicare system.

Notwithstanding the CBO’s conclusion, the Republicans’ theory is that competition among the insurance companies would enable seniors to get the same benefits as are available under today’s Medicare without any increase in their out-of-pocket costs. There are numerous reasons to question that        theory. 

For example, insurance companies generally have much higher administrative costs than Medicare does and, unlike Medicare, must make a profit. Furthermore, because of its size, Medicare is in a much better position to obtain “volume discounts” from hospitals, doctors and drug companies than is an insurance company acting on its own.

Therefore, it is doubtful that most insurance companies could sell the same package of benefits at a lower cost than the current Medicare system.

Under the Republican plan, those of us born before 1958 would continue to receive guaranteed benefits. In contrast, those born in 1958 or later would continue to pay Medicare-related taxes but would get less-generous benefits.

There is an alternative to the Republican plan: Solve Medicare’s funding problems by controlling health care costs. Several steps have already been taken, but more will be needed.

If potential health problems were detected earlier, Medicare recipients would be less likely to need expensive treatment later on. For that reason, Obamacare has given seniors a greater incentive to seek preventive care by eliminating the co-pays for which they were previously responsible.

According to the Centers for Disease Control and Prevention, the treatment of chronic diseases accounts for about 75 percent of national health care expenditures. 

One way to cut these costs for future Medicare recipients would be to improve the health of people well before they reach retirement age. In an effort to do that, some employers have begun offering extra compensation to workers who adopt a healthier diet and make other lifestyle changes that reduce the risk of chronic diseases. Similarly, some school districts have attempted to curb obesity by banning vending machines that sell “junk food.”          

Third, Obamacare would attempt to slow the rise in health care costs by giving smaller rate increases to doctors and hospitals and by experimenting with ways to improve productivity. The goal is to cut costs by reducing errors and by eliminating duplication and unnecessary procedures.

Admittedly, cost-cutting efforts may not succeed.  However, it would be premature to adopt the Republican plan. Until we have made a serious effort to control costs, we should not eliminate guaranteed Medicare benefits.

William Lloyd of Somerset represented Somerset County in the state House of Representatives (1981-1998) and served as the state’s small business advocate (2003-2011). He writes a monthly column for The Tribune-Democrat.

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