America's Fiscal Constitution (65 page)

Source:
US Census Bureau, Population Division.

Alice Rivlin, one of the leading experts on the federal budget, noted that “we have never directly confronted the question of how much, in a resource-constrained world, we are individually and collectively willing to devote to health care, and how much to all other goods and services.”
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Debt-financed Medicare violates the original premise of social insurance. Insurance shifts some part of today’s medical bills to a population with less than average medical needs. Federal borrowing to pay for current medical bills is akin to passing an unpaid medical bill—plus interest—on to a future, older population with even greater medical needs.

The search for more efficient medical services does not justify the use of debt to fund Medicare. If anything, a tax-financed system should induce greater urgency and realism in the pursuit of cost reduction. Debt itself raises the ultimate cost of medical care by adding a layer of interest payments. Like
cancer, the growth of compound interest is difficult to detect in its early stages and more difficult to cure once the pain becomes acute.

Balancing the Budget for Medicare

Three basic alternatives illustrate the type of choices required to balance the budget for Medicare.

Alternative 1: Reduce Medicare Spending to Existing Dedicated Revenues

This alternative would require an immediate 40 percent reduction in payments for Medicare services.
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Some services would be rationed or unavailable if reimbursement rates are set below the cost of providers. This option is outside the political mainstream, but the prospect of such a cut might prompt an honest debate about the other alternatives.

Alternative 2: Medicare with Strict Cost Ceilings and Higher Tax Revenues

Someone has to pay the medical cost of an aging population. The Medicare payroll tax, now 2.9 percent for most taxpayers, would need to double in order to produce revenues sufficient to cover the program’s cost past 2020. Legislation passed in 2007, 2010, and 2012 increased the Medicare premiums and taxation for people with high incomes, so it is unlikely that those taxpayers alone would bear the additional cost of closing the funding gap. This alternative would require the dedication of taxes amounting to, say, 2 percent of national income.
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If strict cost controls on reimbursement levels eventually discourage medical providers from offering their services, then access to the most costly services or the shift of some costs to beneficiaries may be required in order to avoid further increases in Medicare taxation.

Alternative No. 3: Medicare with Higher Tax Revenues

This alternative retains Medicare with reimbursement rates based on the realistic estimates of the cost of providing services. It will be more
expensive than Alternative 2 and might entail some new form of taxation because it might require revenues greater than those produced by the payroll and personal income tax systems.

“P
AY
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O
” M
EDICARE

Long-term budget plans now embraced by leaders in each party perpetuate the use of debt to fund a large part of Medicare’s cost. As of 2013, Republican and Democratic leaders have pledged to retain coverage of the same services for the same beneficiaries, resulting in an estimated average annual cost per beneficiary of about $15,000 by 2020.
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Congressional leaders have exaggerated the differences and relative benefits of favored partisan alternatives for restraining the growth of Medicare costs. Most Republican members of Congress endorse a plan that would pay insurance administrators a defined annual amount per beneficiary, while most Democratic members of Congress prefer to curb costs through direct restrictions on the prices paid to providers. Versions of both of these approaches were incorporated into the Balanced Budget Act of 1997. That legislation limited the rise in Medicare costs for several years but also demonstrated the weakness of cost controls and managed care plans without also changing Medicare services or eligibility. No insurance administrator can limit annual costs unless it either puts a lower cap on payment for various services or shifts costs to someone else. Similarly, no direct controls on reimbursement rates can force providers to offer services at a lower price than they are willing to accept.

Nevertheless, politicians still claim that they can lower the growth in Medicare costs without ultimately diminishing the quality of care. Elected officials are used to campaigns that tend to blur the line between hope and reality. They are not the only ones who fail to distinguish between realistic and specific legislation and wishful thinking. A wide variety of expert plans to balance the budget simply
assume
future Medicare costs per beneficiary will not rise after 2020. That assumption recognizes that Medicare costs cannot continue to rise faster than national income during the remaining lives of most Baby Boomers. A premise, however, is hardly a plan. Any plan that surprises the public with unadvertised cuts in services would likely be repealed or delayed. Politicians who believe that the federal government should impose a strict ceiling on Medicare costs per beneficiary
should try to do so immediately rather than touting “plans” that will not be implemented until sometime after 2020.

Budget commentators who complain about rising costs of “entitlements” without describing how they would immediately restrain the cost of Medicare shed more heat than light. And glib anecdotes are no substitute for honest debate. For example, many people have heard about the substantial share of total medical costs incurred during the last year of life of patients, but that observation alone does not prescribe a method for reducing those costs. Obviously patients who suffer from more severe illnesses receive more care. In fact, younger Medicare patients receive more extensive and expensive medical care in their last year of life than do older patients. No acceptable system would fail to treat patients simply because their acute conditions make it more likely that they could die.

There are many alternatives—all with human costs—for limiting public funding for the most expensive treatments. Debt-financed denial postpones that choice. When taxes finance medical care, the patient and his or her family are not the only ones with something at stake in making decisions with extreme costs.

“Pay as you go” Medicare reform might just break the partisan stalemate over the program’s cost and financing. Republicans oppose higher taxes for Medicare while denying they have any intention to limit services. Democrats oppose restricting benefits and deny asking 98 or so percent of current and future beneficiaries to close the funding gap by paying more. Public opinion polling shows a high level of public support for Medicare—consistently over 70 percent—yet neither Democratic nor Republican leaders suggest a realistic means of substituting revenues for debt to pay for it.
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In May 2013 the CBO projected a rise in dedicated payroll tax revenues supporting Medicare from $90 billion in 2013 to $170 billion a decade later.
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Even assuming an unlikely drop in Medicare reimbursement rates in 2014 and aggressive ceilings on fees afterwards, the CBO projected that—in the same period—Medicare spending (net of premiums) will increase from $586 billion to $1.064 trillion.
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The CBO expects those outlays will be financed with a combination of debt and a reduction in the portion of national income and tax revenues devoted to all other federal funds spending.

Imagine for a moment that the leadership of either party proposed “pay as you go” funding for Medicare, based on
whatever
level of premium and
tax funding a majority in Congress could agree on. They could then challenge others to either justify debt-financed Medicare or offer their own plan that balanced revenues and related services. No one can predict with confidence the ultimate trade-off between taxes and services preferred by a majority of voters. Some will conclude that preserving health is more important than the level of taxation. Others will decide that the burden of extra taxation requires hard limits on reimbursement over the lifetime of patients. The Constitution prescribes a proven technique for resolving precisely that type of conflict: an election. Debt imposes a high price for suppressing that conflict and deferring its resolution.

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RITICAL
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HOICES FOR
M
EDICAID

Since the mid-1990s many Republican congressional leaders have proposed to limit the annual growth of Medicaid grants to a fixed annual percentage. Each state would then have to choose between paying more or discontinuing services if costs rose faster than federal grants. In order to avoid weakening the mandated priority for services to elderly and disabled Americans and pregnant women and their babies, Democrats have favored ceilings linked to the number of beneficiaries and some minimal cost of providing services.

There is no good reason to borrow to fund Medicaid costs that rise faster than federal revenues. For that reason, in 1997 the Clinton administration and congressional Republicans nearly agreed to a hard annual limit on the growth of Medicaid grants. Reasonable limits on the growth of Medicaid would require both Republicans and Democrats to compromise on one of their cherished policy positions.

Republicans would have to reconsider their long-term plan—as reflected in various House budget resolutions adopted after 2010—to balance the budget far into the future by spending a smaller and smaller share of national income on Medicaid. It is hard to imagine that most Americans want millions of citizens with special needs to be evicted from their residential institutions or pregnant women to deliver babies without using modern medical facilities. Since state payments to support long-term care already allow little more than minimum wages to be paid to the employees of providers, few expect some brilliant idea to, for example, lower Medicaid’s cost of long-term care for citizens with Alzheimer’s disease. It seems disingenuous to count on cutting services for impoverished disabled or elderly citizens
to future levels below that which Congress, including current Republican members, is now willing to fund.

Democrats should consider eliminating the feature of the Affordable Care Act that, for a three-year period, allows states to avoid paying a matching share in order to receive grants for Medicaid coverage extended to workers with low incomes. If elected state governments are unwilling to impose taxes to pay for a portion of the cost of a program that benefits their citizens, why should the federal government assume additional debt to fund it? If one believes that the program should be entirely a federal responsibility, then why not wait until the federal government has tax revenue sufficient to replace the matching requirement for all Medicaid coverage?

The principle of “pay as you go” provides the framework for a reality-based national conversation about financing federal medical services. Every day patients and family members have difficult conversations about the health of loved ones. Medical providers deliver unwelcome but honest news to patients. Physicians and patients communicate honestly about medical conditions without resort to partisanship. Insurers do not handicap medical risk based on the ideology of those insured. Adult citizens understand that medical care is not free. Baby Boomers, whose parents bore an enormous tax burden to pay for their children’s education and a safer world, have no desire to bequeath their children a legacy of unpaid bills in the form of federal debt.

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ESERVE