How to fix Medicare

What is breaking the Federal Budget and most state governments are pensions and health benefits.  The heart of the health benefit problem is that “someone else” is paying for it.  Patients have no idea of how much each service costs – and they seldom ask – because they are not responsible for paying for these services. I myself have been on Medicare for the past 18 years. I have never asked a doctor what the many tests and procedures cost – and I have never paid a penny for them beyond the $1,384.80 that I pay each year, despite the fact that I have had a knee replacement and radiation for prostate cancer.

The result of this third party payment system is that Medicare costs are rising by about 7% a year. More and more people are getting old enough to enjoy this free ride as our population ages. Looking toward the future, Medicare, as we know it, will bankrupt our government. Many people are worried about it, but so far, no one is doing anything about it.  Obamacare would make it much worse by forcing everyone in the country – not just the seniors – onto the same plan.

Along comes Congressman Paul Ryan with a plan to fix all this – and much more.  I think that Ryan’s plan will work. Essentially, he is saying that we will give all seniors a fixed amount of money and let them buy their own health insurance from among a large number of competing private insurance companies. Why would this work, and why would it save money?

Right now, the medical care for the 46 million average Medicare enrollees costs about $13,000 each per year.  The recipients pay total premiums of $1,326 a year for hospital visits and zero for physician services, and can purchase supplementary private Medigap policies that cover virtually all deductibles and co-pays for another $1,500 a year. So the enrollees pay a total of around $3,000, or 23% of the total $13,000 cost. Taxpayers cover the balance of $10,000. In 2011 the taxpayers paid $460 billion which was about 13.5% of the federal budget spending for that year. Medicare is the fastest growing part of the federal budget.

Under the Ryan plan anyone 55 or older would continue to receive the same Medicare that they do now.   Beginning in 2022, the government would pay directly to a private insurance plan, selected by each enrollee, a fixed amount (similar to the current $10,000) which would increase each year based on the consumer price index. The Ryan Plan will raise the age of eligibility from 65 to 67 between 2022 and 2033, and pay much less to the wealthy. The top 2% would get 30% of the average payment, and the next 6% would get half of the average payment. In addition, the new Medicare would provide increased assistance for lower-income beneficiaries and those with greater health risks.

This plan is similar to that enjoyed by Federal Employees. The costs of the Federal Employee’s plan have been growing at only about 2% per year as compared with Medicare average increase of 7% per year.  Why does the cost of the Federal Employees plan grow so much less rapidly?  Because of competition.  Each Federal Employee gets to choose every year from among a large number of different private plans.  My wife and I (both former Federal Employees) have been making our own decisions about the best private health plan for many years.

Another proof that the Ryan plan will cut costs is the Medicare Part D drug benefit plan where private companies compete to offer prescription drug benefits. Created in 2003, this program provides a range of choices and a subsidy that works much like the proposed premium support, allowing people to select the plan that best suits their needs. And because plans are competing on both benefit design and price, the Part D program is costing taxpayers 30 percent less than projected.

Will Paul Ryan’s plan be adopted?  We have three possibilities: Obamacare, the status quo and the Ryan Plan.  If the country continues to want to reduce the level of government spending, the Ryan plan is the only way to go.  There is no other plan out there today.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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