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Why Medicare Must Be Reformed

Medicare is shaping up to be a deciding factor in the debate over our nation’s future. 

As Heritage’s Bob Moffit and Alyene Senger explain in a recent paper, “Why Traditional Medicare Must (and Will) Be Reformed,” the status quo in Medicare is unsustainable and unacceptable due to the program’s structural and financing flaws.

Here are a few reasons Medicare needs to be reformed:Medicare_at_Risk

Medicare spending is growing faster than any other federal program.
Medicare spending has reached unsustainable levels and is contributing to our budget deficits more quickly than any other program. Further, over the long term, Medicare has made $37 trillion worth of benefit promises to future seniors that are simply not funded. The hospital insurance trust fund is projected to be insolvent by 2024.

While seniors have paid for their benefits, their payments do not cover the costs of the program.
In 2011, approximately 88 percent of Medicare’s spending was funded by taxpayers. A large part of the problem is the erroneous belief that seniors have fullypaid for their benefits. In fact, Moffit and Senger explain that, “on average, a one-earner couple who retired at age 65 in 2011 and earned an average wage will have paid just $60,000 into the program but will receive an estimated $357,000 worth of benefits.”

Medicare enrollment is set to skyrocket.
Baby boomers have already begun to retire. At the current rate of retirement, the program will enroll 10,000 beneficiaries into Medicare every day from 2011 to 2030. Moffit and Senger explain that “enrollment is expected to jump from 48 million beneficiaries in 2011 to 81 million by 2030.” This is coupled with a 50 percent decrease in the proportion of workers contributing to the hospital insurance trust fund over the same period. The outlook: more beneficiaries and fewer workers paying taxes to support them.

It’s a complex and outdated system.
Medicare’s four separate parts are financed differently and operate under their own set of payment rules with different premiums, co-pays, and deductibles. Moffit and Senger write, “Medicare’s four-part complexity contributes to confusion among patients, inefficiency among providers, and higher costs for taxpayers. Care is chopped up and fragmented, reimbursed under an old and complicated fee-for-service payment system created in the 1960s that has long since disappeared from the private sector.”

An outdated and limited benefit structure doesn’t meet seniors’ diverse needs.
Medicare has high cost-sharing requirements and does not protect seniors from catastrophic costs. For this reason, 90 percent of beneficiaries enrolled in traditional Medicare obtain supplemental insurance, most of which is private. Seniors are thus required to pay an additional premium for additional coverage (on top of their already rising Medicare Part B premiums). And because of the way supplemental coverage (such as Medigap) is organized, it encourages excessive utilization and thus raises the entire cost of the program even more for both seniors and taxpayers. In fact, this structural flaw adds 15 percent to 25 percent to Medicare program costs

Medicare at Risk: Visualizing the Need for Reform from The Heritage Foundation

Without reform, Medicare’s future is bleak. Washington’s current policy is to perpetuate the status quo and hope that an outdated combination of price controls—or the latest Medicare payment rate tweaks imposed under Obamacare—will control costs and deliver better benefits at a lower cost.

Don’t bet on it. Only reforms that inject real competition into the program and empower seniors to control their own health care decisions can save the program for the next generation.

Donald Schneider is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit the Heritage Foundation for more.

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