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Rising Costs, Skyrocketing Federal Debt: Fixing Medicare is Central to Fixing Health Care and Shoring Up the Federal Budget

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Few topics get voters – especially senior voters – more riled up than a discussion of changing Medicare. This enormous government program covers about 63 million Americans, nearly 1 citizen in 5. It has some serious structural problems that cry out for a fix. Yet with so many older Americans reliant on Medicare for their medical insurance, any thought of adjusting the age when seniors qualify for benefits (now 65) or reducing coverage sends beneficiaries (and potential ones) into a frenzy.

Still, the topic is relevant to most if not all our AgingOptions Blog readers. So with that in mind we bring you this perspective on Medicare in an article from The Hill  In this opinion piece, author James Capretta, a senior fellow at the American Enterprise Institute, argues persuasively that some Medicare reform is essential, whether the public likes it or not. The American Enterprise Institute is a generally conservative think tank, so Capretta’s views represent a certain rightward pro-market tilt, but he makes some provocative points we wanted to share with you.

Talk of Medicare Reform Brings Political Risk

“Medicare is the largest payer of medical services in the U.S., with more than 18 percent of the population covered,” Capretta writes. Because the plan covers so many citizens, any discussion about changes to Medicare brings a swift reaction. “Many failed political candidates can attest to the risks of supporting changes to Medicare,” Capretta adds.

As the article observes, politicians love to exploit the issue of Medicare during political campaigns, sowing fear among senior voters. Nevertheless, Capretta argues, the issues are real. “There is no avoiding the program’s centrality to two serious challenges: rising medical care expenses and the large increase in federal debt projected over the next 30 years,” he writes. “Neither can be addressed adequately without Medicare reform.”

“Undisciplined Spending” Imposes a Huge Societal Burden

The problem, says Capretta, is embedded in the structure of Medicare. “What connects both problems” – rising medical costs and spiraling federal debt – “is the burden that undisciplined medical spending is imposing on American society,” he argues. “Rampant waste, excessive administrative costs, and irrationally elevated prices force households to pay higher than necessary premiums and taxes. They also contribute to government borrowing and debt.”

In other words, Medicare’s lack of discipline not only costs Uncle Sam extra billions every year, but it also puts a burden on every U.S. household.

Capretta explains that, while Medicare reimbursement lags behind other types of insurance, Medicare’s costs are unsustainable. “Although Medicare pays lower rates for most medical services compared to commercial insurance because of strict regulations, the program does not have costs fully under control,” says the article. The root of the problem, Capretta believes, is that Medicare’s way of conducting business has affected how hospitals, physician practices, and other suppliers of services organize themselves, in a “tail wagging the dog” fashion.

“In general,” says Capretta, “Medicare’s fee-for-service billing system has encouraged fragmentation rather than coordination, which leads to higher costs. Medicare is not exempt from the resulting absence of discipline.”

Medicare Pays for Unnecessary Services, Excessive Overhead

Capretta takes issue with the care Medicare does cover. “A major problem today is that patients receive many services that do not improve their health,” he writes. “Medicare’s payments are low relative to private plans, but some of the services the beneficiaries receive are not necessary.”

On the other hand, ironically, the way Medicare operates has resulted in the service paying too much for some care due to extreme administrative overhead, triggered by – you guessed it – Medicare regulations. “Further, even with regulations, Medicare’s payments are likely too high in some cases,” Capretta states, “in part because the program’s rules implicitly finance the high administrative expenses built into the hospital and physician billing systems.”  It’s a classic Catch-22 situation.

Solutions Involve a Mix of Rules and Incentives

Capretta, of course, has a proposed solution which seems to us to favor private sector insurance. “There are two potential pathways for reform,” he writes. “One would rely on stricter government payment regulations and new federal efforts to improve value through bonuses and other incentives. The other would use market incentives to help consumers gravitate toward coverage and service providers that offer the best combination of high quality and low prices.” Basically, Capretta favors greater competition, a level playing field, and incentives for consumers to choose more cost-effective health insurance.

Capretta does acknowledge that the unique nature of health care demands government oversight. “Patients know much less about the care they need than their physicians,” he says, “and most consumers want to be protected by insurance so that they do not have to weigh the value of individual services against their costs.” Still, he maintains, “with the right rules and incentives, Medicare beneficiaries will opt for lower-priced options if they are confident that they will still get the care they need to stay healthy or get better.”

His prescription to make this kind of choice possible relies on the feds. “The government should standardize Medicare beneficiaries’ choices to allow for easy apples-to-apples comparisons and ensure the savings are directed to those who decide to economize,” Capretta states. It does seem like a good way to minimize market confusion.

Medicare Advantage Doesn’t Work Like It Should

Some might point out that the private sector is already deeply enmeshed in senior health care. “There are private coverage options today in Medicare — called Medicare Advantage plans — but the payment system does not reward cost-cutting,” Capretta argues. His solution is pretty detailed, and we lack the space to delve into it here. Still, his plan, which combines standardized benefits and a more rigorous system of determining reimbursement rates on a market-by-market basis, would incentivize beneficiaries to select lower-premium plans.

In its analysis of the recommendation, the Congressional Budget Office (CBO) has estimated that this reform would reduce total spending by the government and Medicare beneficiaries by 7 percent.

Capretta’s argument goes one step further. “Similarly,” he writes, “for certain services that are high-volume and can be scheduled, such as joint replacement surgery, Medicare should require those involved in caring for the affected patients to coordinate with each other to post the ‘all-in’ prices they will charge. Federal regulations will ensure that services are the same across all providers.”

The result is better-informed patients. “Medicare patients could then see the pricing differences among those providing the service in their markets,” Capretta concludes.

What’s in it for the patient? The rewards are financial. “If [patients] were allowed to share in the savings, it is likely that many would opt for the surgery teams offering below-average prices,” says Capretta.

It Sounds Good, Says Rajiv – but Will Consumers Go Along?

Capretta’s conclusion is clear. Because of Medicare’s enormous size and influence, he states, “It writes the rules that others must follow. If the program changed to encourage cost reduction through competition and consumer choice, the entire system would benefit from a renewed focus on efficiency in the provision of service to patients.”

Rajiv Nagaich of AgingOptions isn’t so certain, however. “This all sounds good on paper,” he says – “but will we as consumers be willing to do our part? Will beneficiaries agree to a change in Medicare benefits?  Will we really do the hard work of shopping for care and comparing prices and premiums? I’m not so sure. The process might seem to complex for many of us.”

Still, he says, Capretta makes some compelling points. “Medicare makes the rules,” says Rajiv, “and because they’re so influential, those rules affect how hospitals and clinics operate. The more rules we get, the more paper-pushers are required and the more the overhead goes up. I agree that something has to give!” 

But in the meantime, there is something you as an empowered individual can do. “Stay healthy,” Rajiv urges. “Find the right doctor – ideally a geriatrician. Get some exercise, eat the right foods, stay social and avoid becoming isolated. If you just do these simple things, they will help you live longer and hopefully keep you out of the doctor’s office. As I always say, ‘Age on!’”

My Life, My Plan, My Way: Get Started on the Path to Retirement Success

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The best way we know of to successfully blend all these elements together – finance, medical, housing, legal and family – is with a LifePlan from AgingOptions. Thousands of people have discovered the power of LifePlanning and we encourage you to the same. Simply visit our website and discover a world of retirement planning resources.  Make certain your retirement planning is truly comprehensive and complete with an AgingOptions LifePlan.  Age on!

(originally reported at

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