Medicare Reform — Will Congress Do What’s Right?

Merrill Matthews Jr., PhD
Article Type: 
Feature Article
Summer 1997
Volume Number: 
Issue Number: 

Medicare is going bankrupt. That’s the conclusion of the Medicare Board of Trustees in its most recent actuarial report on the financial status of the Health Insurance Trust Fund (known as Medicare Part A), the fund that pays hospital bills.

In 1995 the trustees estimated that the Medicare trust fund had sufficient reserves to remain solvent only until the year 2002 (lowered to 2001 in 1996), resulting in a national debate about the future of the Medicare program and how to reform it.(1) The Republicans came up with a proposal which, for all its problems, at least tried to move Medicare in the right direction by slowing its rate of growth and shifting it from a “defined benefit” to a “defined contribution,” i.e., Medicare recipients would be given a specific amount of money to purchase health insurance rather than an open-ended promise to pay for almost all medical care. But President Clinton vetoed this reform as part of the Republicans’ budget proposal.

By 1996, an election year, Republican attempts to “cut” (read: slow the rate of growth of) Medicare became the Democrats’ and the labor movement’s political hammer, with which they continually pounded Republican candidates’ heads. Their onslaught failed. Republicans still hold the House and Senate, and something still has to be done about Medicare’s financial crisis.

Republicans are understandably reluctant to step forward with a proposal, and most Democrats are still too embarrassed over their campaign demagoguery to suggest their own solution. As a result, Republicans have decided to let President Clinton — who never lets a little embarrassment over past actions slow him down — make the first move in his budget.


The Democrats’ Solution: Shifting Costs, Cutting Costs, and Raising Taxes


One solution proposed by Democrats is to shift home health care expenses reimbursed under Medicare Part A to Medicare Part B — the Supplemental Medical Insurance (SMI) program that pays physicians’ fees and outpatient service charges.(2)

Although it is a voluntary program that charges a monthly premium (which is deducted from the recipient’s Social Security check), 97 percent of Medicare’s 37 million beneficiaries enroll in Part B.(3) The reason? It is so heavily subsidized with federal tax dollars that it’s a great deal and no private insurance plan can compete with it. The current monthly premium of $43.80 covers only 25 percent of the program’s costs — down from 1995, when beneficiaries paid nearly a third of the costs.(4) The federal government pays the remainder out of general revenues.

Shifting expenses covered under Part A to Part B would lower Part A expenditures, thus delaying the trust fund’s financial collapse. However, the move would increase Part B expenditures. Since seniors pay a percentage of Part B’s total cost, and since taxpayers fund the remainder, this means higher monthly premiums for seniors and higher taxes for the general public.

Another Democratic solution is to cut provider reimbursements. Indeed, new information could provide a justification for this approach. While providers and health policy analysts have pointed out that Medicare only pays about 70 percent of standard prices, a study by Medirisk, Inc., a private firm that collects payment information, found numerous instances in which managed care paid fees at or below Medicare’s rates, some by as much as 40 percent.(5) Congress might reason that managed care ought not to be getting a better deal than Medicare, considering the number of patients Medicare provides, and opt to lower reimbursement rates equal to or below that of managed care. This solution would be a disaster, of course, since it would only exacerbate the rationing already taking place. But reimbursement reductions permit politicians to blame the medical community for the rationing rather than themselves.

Finally, we are already hearing the first rumblings from Democrats and the media that perhaps the only responsible solution would be to raise the Medicare payroll tax, which is currently set at 2.9 percent of wages (split between employer and employee). Congress might consider increasing revenue from the Medicare payroll tax by  increasing the 2.9 percent payroll tax. But this solution would hit lower- and middle-income families disproportionately at a time when Democrats are sensitive to charges of increasing taxes on the middle class.


A Better Solution: Patient Choice


A better way to hold down Medicare’s exploding costs is to permit Medicare beneficiaries the option of choosing a private-sector plan. Private-sector health plans have been very successful in slowing the growth of health care spending. For example, health insurance premiums for workers have been growing a modest 2 to 5 percent per year, while Medicare has been growing by more than 10 percent annually.(6) Thus, giving seniors the ability to choose among a wide range of private-sector plans could also reduce total Medicare spending.

Under current law, some Medicare beneficiaries already have the option of taking 95 percent of Medicare’s average annual per person expenditure and transferring that to a Health Maintenance Organization (HMO).(7) In return, the HMO promises to provide the senior with comprehensive health care services. However, only 10 percent of Medicare enrollees have chosen this private-sector option, in part because HMOs restrict patients’ ability to choose their own physician and because seniors have a natural aversion to trying something with which they are unfamiliar.

In addition, there has been a growing number of articles and investigative reports on the quality problems and subsequent successful lawsuits that plague many HMOs. Doubtless the concern over quality of care keeps many seniors, especially those experiencing health problems, from shifting to the HMOs.


The Republicans’ Private-Sector Options


The essence of the Republican proposal has been to shift power and control over Medicare dollars away from the government to the elderly themselves. The key features of the plan they proposed would have meant that each senior would have had the freedom to choose from a full range of private health plans, rather than remaining under traditional Medicare.(8)

• Options included HMOs, Medical Savings Accounts (MSAs), traditional fee-for-service insurance, preferred provider networks, provider service networks (doctors and hospitals in an area organized to provide health coverage directly) and plans offered by associations such as AARP, unions, or employers.

• Any senior could stay in the current Medicare system, forgoing the private options entirely.

The private plans would have been required to provide at least the same benefits as Medicare and to accept all seniors who chose them during an annual open enrollment period, regardless of health condition. Moreover:

• The amount the government paid to the private plans would have varied, depending on the senior’s age, geographic location, and certain health factors; plans would have received more for older and sicker enrollees and less for younger and healthier enrollees.

• If a chosen plan cost less than the government paid, the senior could keep the difference, up to the equivalent of the Medicare Part B premium, which would have been around $600 per person in 1996.

• The amounts the government would have paid for these private options could grow no faster than the targets set in the federal budget. Thus the targets would have been automatically met to the extent that seniors chose the private options.


Slowing the Growth of Medicare Spending


Both Republicans and Democrats are proposing to slow the rate of growth in Medicare spending. When the Medicare reform debate began in early 1995, Republicans believed that giving seniors private-sector options would result in massive savings to the program, thus averting a financial collapse. However, the Congressional Budget Office (CBO) refused to consider any savings from the plans in budget projections. If the Republicans wanted CBO confirmation of Medicare savings for purposes of balancing the federal budget, the Republicans would have to place a limit on how much Medicare would be permitted to grow each year.

By the end of last July, Republicans were proposing to reduce the growth of Medicare by $158 billion over six years;  Democrats were proposing a growth reduction of $116 billion. Both proposals were intended to reach their goals by reductions in provider and hospital reimbursements. However, cuts in the Republican plan were a “fall back” provision, meaning that reimbursements would have been cut only if the attempt to encourage private-sector options failed to slow the growth in spending by the targeted amount.

Unfortunately, slowing the rate of Medicare’s growth won’t necessarily save the program. A recent analysis by the CBO says that, under one scenario, cutting $100 billion over seven years will only extend the trust fund’s solvency by about a year — say, to 2002.


A Medicare Commission: A Placebo At Best


After the election, President Clinton has slyly hinted that he would like Bob Dole to head a bipartisan congressional commission that would look into ways to solve the financial crisis of the Medicare program. By mentioning Dole as the head of a commission both he and Dole had agreed during the campaign should be formed, President Clinton looked magnanimous in victory. But Dole apparently realized he was being set up to take a political fall for himself and the Republican Party and so graciously declined the subtle suggestion.

Normally the party in power would want to head a commission in order to control its direction and the proposals reached by the commission. In this case, however, everyone knows that the commission is going to recommend that Congress “cut” Medicare, perhaps between $100 billion and $150 billion by 2002, plus outlining ways to make the cuts. Were Dole to have accepted the offer, and the commission reached a compromise, the president and Democrats could simply point at Senator Dole and say, “See there! We said all along that Dole and the Republicans wanted to cut Medicare.”

It would be a perfect political cover for the Democrats. They could accuse the cruel and heartless Republicans of hurting seniors, and since they are in the minority in both houses, the commission’s proposal would still pass if not one Democrat voted for it. Medicare would be “saved,” and Republicans would take any political blame, which is why the mood has turned against forming a commission.

If, however, Congress does decide that a commission is needed, Republicans should probably look at the bipartisan Commission on Presidential Debates as a model. (You might recall that this was the commission that decided to deny Ross Perot a slot in the presidential debates.)

The commission — composed of five Republicans and five Democrats with a co-chairman from each party — looks first to a nonpartisan advisory committee which makes recommendations to the commission.(9) Once the Commission on Presidential Debates comes to a decision, a representative from each party jointly defends the commission’s decisions to the public and the press, making it difficult to blame either side.

While this approach is not characterized by what one would call courageous leadership, if it is the only way Congress will address the problems facing Medicare, it may be necessary. Unfortunately, the political cover a commission provides for a Congress trying to pass good reforms could also provide it cover when supporting bad reforms — such as a payroll tax increase.


What’s Needed: Radical Surgery


While giving patients the ability to choose a private-sector option is a step in the right direction, Congress should go further: let workers create their own medical IRA (or MSA) by permitting them to redirect their 2.9 percent Medicare payroll tax to an individual savings account. These accounts would grow over the employee’s working life and could be used for health care after retirement.(10) This is, in fact, the only long-term solution that would ensure that people had money for health care after retirement while preserving the freedom of choice that seniors — indeed, everyone — expect in American medicine.


A Challenge


Medicare must be reformed. You know it; Washington knows it. Unfortunately, too many politicians have their wishbone where their backbone should be. They are afraid of reprisals if they implement reforms; they are not afraid of reprisals if they don’t. That’s where the medical community must come in. There is no stronger impetus for reform than principled physicians standing together telling their elected representatives that they must adopt market-oriented Medicare reforms. The medical community has let too many people outside the health care system — labor groups, socialists, and special interests — guide the debate. It is time for those who are part of the health care system, who have the backbone congressmen wish they had, to lead the reform.




1. The Board of Trustees, Federal Hospital Insurance Trust Fund, “1996 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund,” June 5, 1996.

2. “Hospital Fund Shift Sought for Medicare,” Washington Times, June 7, 1996.

3. The Board of Trustees, Federal Supplementary Medical Insurance Trust Fund, “1996 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund,” June 5, 1996.

4. Ibid.

5. Miller M. The Medicare boom. The New Republic, December 11, 1995.

6. Goodman JC, Ferrara PJ, Matthews M, Jr. Saving the Medicare system with medical savings accounts. National Center for Policy Analysis, NCPA Brief Analysis No. 175, September 15, 1995.

7. The Medicare risk-contracting program was established in the Tax Equity and Financial Responsibility Act of 1982.

8. See “The Medicare Preservation Act,” H.R. 2425.

9. Information on the Commission on Presidential Debates can be found on the Internet at

10. Matthews M, Jr. “The Medicare program: the need for radical surgery.” National Center for Policy Analysis, NCPA Brief Analysis No. 208, July 3, 1996.


 Dr. Matthews is vice president of domestic policy for the National Center for Policy Analysis, a nonpartisan, nonprofit research institute based in Dallas, TX. His address is 12655 N. Central Expressway, Suite 720, Dallas, TX 75243-1739. (214) 386-6272, Fax (214) 386-0924.

Originally published in the Medical Sentinel 1997;2(3):87-89. Copyright ©1997Association of American Physicians and Surgeons (AAPS).



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