Redesigning the American Health Care System to Lower its Cost II. Medicare


By far the biggest problem our country faces is long term debt. The public debt (on which we pay interest) is now 77% of GDP, the highest since the end of WWII, and steadily growing worse.  The fundamental driver of our debt problem is the cost of healthcare, public and private.
My last post describes two major reforms which are needed to get the cost of healthcare under control. The first, and most important, is to replace the tax exemption for employer provided care by a universal tax credit limited to the cost of catastrophic health insurance (with a high deductible).  This fundamental change would be accompanied by allowing tax preferred Health Savings Accounts for use in paying routine medical expenses.  The purpose here is to make all of us more responsible for the cost of our own healthcare.

The second big change which is needed is a

  • Redesign of Medicare. Medicare is currently being subsidized by the federal government at a net cost (after FICA taxes and premiums paid) of over $400 billion per year, and this cost will continue to increase rapidly without a change in policy.

The best way to reform Medicare is to first modify the tax exemption for employer provided care, as mentioned above, and then gradually migrate Medicare onto this new system.  However, in the meantime there are more direct ways to make Medicare less expensive:

  • Community-rated premiums. Medicare premiums should not vary based on age or health status but they should vary based on an enrollee’s income.
  • Defined contributions and beneficiary choice. Enrollees would apply the government contribution to their choice among competing options for Medicare coverage.
  • Facilitating healthcare savings. Tax-preferred Health Savings Accounts would be made available to Medicare enrollees to pay for routine medical expenses up to a deductible amount.

Conclusion. The current Medicare program is rapidly becoming too expensive for the federal government to fund with general tax revenues. A few simple and sensible changes will put Medicare on a sustainable course.

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