As the discussions over the fiscal cliff continue, the debate over entitlement reform is getting confused. The issue is not only how much savings constitutes reform, but also the underlying policies that get you there. Thus far in the fiscal cliff negotiations, Republicans have pushed for greater spending cuts, namely in Medicare.
To that point, a National Journal article commented, “In just a few short weeks, the dominant Republican line on Medicare has shifted from attacking the Democrats for making cuts to the program to demanding a new round of cuts to reduce the federal deficit.”
But this claim cannot be taken at face value, as all spending reductions are not created equal.
There are major distinctions between Obamacare’s Medicare cuts and Medicare reforms that would reduce spending and extend the life of the program.
Obamacare’s Medicare Cuts Fund Obamacare
Despite claims to the contrary, Obamacare’s cuts do not extend the life of the Medicare trust fund and do not enhance the ability of the government to pay for future Medicare benefits. The same money cannot be used to finance new spending and shore up Medicare’s trust fund.
Medicare is facing enormous financing issues. Over the long term, the program has made $37 trillion worth of benefit promises that the government cannot afford to fund. Meanwhile, the hospital insurance trust fund, which funds Medicare Part A, is projected to be exhausted by 2024.
Despite these inescapable facts, Obamacare cuts Medicare spending by $716 billion over 10 years and uses those savings to fund new spending in Obamacare—not to help stabilize the Medicare program.
Price Controls Do Not Work
Obamacare’s Medicare cuts are based on ratcheting down government-controlled reimbursement rates. These types of draconian cuts have severe impact on the delivery of care. Former Heritage policy analyst Kathryn Nix explains, “Medicare reimbursements, rather than the needs of patients themselves, increasingly dictate provider behavior and the quantity and quality of the care they provide.”
Further, arbitrarily creating Medicare “savings” by squeezing Medicare reimbursement rates has not worked in the past. A prime example—and fiscal cliff component—is the payment formula to pay Medicare doctors. This year, the formula warrants more than a 27 percent pay cut for doctors, which almost no one expects to happen.
Every year since 2003, Congress has passed a “doc fix” to prevent these harsh cuts from taking effect. No wonder experts predict that the Obamacare Medicare cuts are unlikely to materialize, yet again proving that price controls do not work.
Medicare Savings Should Come from Market-based Reforms
As noted above, with $37 trillion in unfunded obligations, Medicare spending needs to be reined in. But failed price controls are not the way to do it. The least radical way to rein in Medicare is to transition the program out of the price control model and into a more sustainable premium support model. Premium support harnesses the benefits of choice and competition to deliver better-quality care at lower prices.
In the near term, Heritage’s Nina Owcharenko and Bob Moffit offer a set of initial steps to transition Medicare toward this larger structural reform:
Raise the retirement age to a level at least consistent with Social Security (67) and link it to longevity;
Reduce and eventually eliminate taxpayer subsidies for wealthy recipients; and
Consolidate Medicare Parts A, B, and D into one unified program, with a single premium and a rational system of cost-sharing. Gradually raise that Medicare premium from 25 to 35 percent over, say five years, and add a catastrophic benefit.
During this fiscal cliff debate, Congress must not only focus on getting serious savings in Medicare but also on getting the policy right.