Medicare: Good Intentions – Dreadful Design

News headlines repeatedly remind us that Medicare, the federal medical insurance program established in 1965 for those over 65, is burdened by rampant waste, fraud and abuse and is financially unsustainable. Payroll taxes that are suppose to fund Medicare are insufficient to cover the benefits promised and Medicare has no assets. As a consequence, Medicare suffers from a basic design flaw – payment for medical services depend, to great degree, on other people’s money i.e., the taxpayers’. As a result, the insured give little thought to the medical expenses they incur since they are only responsible for a small fraction of the costs. There is little incentive to use medical services wisely or economically. In addition, Medicare’s fee-for-service structure reimburses medical providers for each service performed rather than each patient or illness treated, thereby encouraging the providers to continually expand their services. Many unnecessary and expensive services are readily offered and indiscriminately used. There is little incentive to innovate, improve quality or reduce costs.

The elderly, being a politically powerful group, have secured ever-larger Medicare subsidies at the expense of younger working-age citizens. Given the growing retirement of the baby-boom generation, increasing longevity and medical costs rising faster than payroll taxes, Medicare must be changed dramatically if the U.S. is to rein in its deficits and insure that a medical insurance program is available for future generations.

A few points may help illustrate the magnitude of the problem:

If the Medicare program is left unchanged, taxpayers will be on the hook for trillions of dollars to pay the medical expenses of seniors – much of which are unnecessary or medically risky. There will be little left in the federal coffers for education, child care, scientific research or infrastructure spending – all of which are essential if the country is to prosper. Many suggestions have been offered to correct this defectively designed and ineffectively administered program. We will describe some of the changes being proposed in our next blog and then discuss in more detail a few controversial but vitally important ideas.

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