Hey, Washington: We Don't Have to Overhaul Medicare to Save It

Republicans and some Democrats claim that we have to radically change Medicare because we can't afford it. They're wrong on both counts.



Medicare needs a structural overhaul in order to avoid bankrupting the federal government--or so Republicans and many Democrats would have you believe. The latest evidence of this consensus is the Paul Ryan-Ron Wyden proposal to change Medicare into a voucher system where traditional Medicare is one of the options, but there are artificial caps on the value of the vouchers.

There's only one problem with this consensus. It's wrong.

The push for Medicare reform comes from understandable concerns about health care. Rising medical costs are a serious problem. We spend more than people in other countries, we get less, our gains in life expectancy are mediocre, employers are struggling with increasing health care costs, and of course, 50 million people are uninsured.

Washington says we can't afford Medicare. What does the math say?

Second, rising health care costs are the most important factor in the federal government's long-term deficit. The CBO projects that spending on Medicare, Medicaid, CHIP, and subsidies for insurance purchased through exchanges will grow from 5.4 percent of GDP this year to 10.3 percent in 2035, and that's assuming a slight slowdown in the growth rate of health care spending. (But there's a major caveat to that well-known talking point, discussed below.)

Third, policies that actually reduce the overall, economy-wide price level for health care--for example, by shifting toward payment methods that focus on outcomes and promote accountability--are good. We should do all of that that we can.

But policies that simply shift costs from the federal government onto families--like arbitrary caps on the growth rate of "Medicare" vouchers--are worse than pointless. Substituting out-of-pocket spending for government spending doesn't save the American people any money. In fact, it is likely to only increase costs, since Medicare has more purchasing power than private health care plans. Policies like Ryan-Wyden only make sense if they can reduce the overall price level--but there's no evidence that competition in the private insurance market can reduce health care costs. There is, however, evidence that it will only increase costs. (For example, charging people more at the point of service doesn't even reduce overall health care costs, as attested to by Atul Gawande.)


When people say we have to drastically overhaul Medicare, they generally don't provide the numbers to back up that claim. That's because they can't. Let's take a look.

First of all we have to know how much money Medicare loses today. It's important to realize that Medicare was never designed to be self-funding. Part A (hospital insurance) was supposed to be self-funding through payroll taxes, but Parts B and C were always meant to draw on general government revenues in addition to beneficiary premiums. In 2010, Part A's deficit was $48 billion, or 0.3% of GDP. (That's from the 2011 Medicare Trustees' Report, Table III.B4.) Parts B and C together ran a deficit of $205 billion (funding from general revenue, which by construction fills the gap between expenses and other income, in Table III.C1), or 1.4% of GDP, for a total deficit of 1.7% of GDP.

Then we have to know how much worse that deficit is going to get. (Remember, Medicare was always supposed to run a deficit.) By 2040, Part A's deficit will double as a percentage of taxable payroll (Table III.B7), so it should be about 0.7% of GDP. The Part B/C deficit will be 2.3% of GDP, for a total of 3.0% of GDP.*

In other words, over the next three decades, Medicare's additional contribution to annual deficits will only be 1.3% of GDP. 


That's not peanuts, but there are plenty of ways to pay for it. For one thing, we could eliminate the tax exclusion for employer health plans, which currently costs the Treasury Department 1.9% of GDP (see "Tax Expenditures Spreadsheet"), including lost income taxes and lost payroll taxes. Forty percent of the value of this exclusion currently goes to households in the top income quintile. If we eliminate the tax exclusion and use half of the proceeds to fund rebates to low-income households, we save 0.9% of GDP right there. Increase the Medicare payroll tax by 1 percentage point (from a level that hasn't changed since 1986, despite twenty-five years of rising health care costs) and you get another 0.5% of GDP. In other words, those two policy changes alone -- one of which eliminates a distorting subsidy that largely goes to the well-off -- could buy us 30 years of Medicare.

Presented by

James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.

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