ACRU

Gutting Medicare By Refusing To Pay The Bills

This column by ACRU General Counsel Peter Ferrara was published March 3, 2011 on Forbes.com.

The full extent of the future cuts to Medicare under ObamaCare is revealed in the little noticed 2010 Financial Report of the U.S. Government, released in December by the Treasury Department. What the data in that report show effectively is that under current law Medicare will be rendered dysfunctional in future years by draconian, arbitrary cuts in payments to doctors and hospitals for the promised health care for America’s seniors. The essential health care needed by the sickest to save their very lives or their ability to remain functional will not be there, exactly contrary to the original promise of Medicare.

Most Democrats have no idea what has been done by the more wild-eyed radicals in their midst. While sweeping Medicare reform is essential to correct the overwhelming future financial black hole in the program, this is no way to do it. The Medicare reforms offered by House Budget Committee Chairman Paul Ryan (R-Wis.) in his Roadmap for America, by contrast, are careful, responsible and workable, and officially scored as solving the financial problem. But over the long run we can and should adopt even more fundamental Medicare reforms.

The December financial report effectively touts the draconian Medicare cuts due to ObamaCare, stating, “The 2010 projection is lower than the 2009 projection in every year of the projection period almost entirely as a result of the Affordable Care Act (ACA), which is projected to significantly lower Medicare spending and raise receipts.” Later in the report, the data presented discloses over and over the full present value of future cuts in Medicare payments to doctors and hospitals under present law — $15 trillion.

This is the foundation for the CBO score that ObamaCare would actually reduce the deficit, despite creating or sharply expanding three entitlement programs, and that repealing ObamaCare would increase the deficit. Too bad President Obama and the Democrats never explain that.

These draconian Medicare cuts apply to today’s retirees, unlike Ryan’s careful reforms. Of, course, if the government is not going to pay, then seniors are not going to get the health services, treatment and care they expect.

Indeed, Medicare’s Chief Actuary reports that even before these cuts already two-thirds of hospitals were losing money on Medicare patients. Health providers will either have to withdraw from serving Medicare patients, or eventually go into bankruptcy. The unworkable, draconian effect of these Medicare cuts is why the U.S. Government Accountability Office issued a disclaimer of opinion on the Statement of Social Insurance component of the federal government’s 2010 Financial Statement, saying, “Unless providers could reduce their cost per service correspondingly, through productivity improvements, or other steps, they would eventually become unwilling or unable to treat Medicare beneficiaries.”

Imagine cutting defense spending by not paying the manufacturers of the Air Force’s planes, the Navy’s ships, the Army’s tanks and artillery, and the bullets, bombs, and guns. How long would our national defense function under that policy? Medicare will function about as well under Obamacare.

Think of it this way. You wouldn’t try to balance your own family budget by just refusing to pay your bills, particularly for goods and services you planned to continue to consume. You would recognize that is really just stealing, and impractical. Too many conservatives have been too reticent to criticize these draconian Medicare cuts under ObamaCare, knowing that sweeping changes in the program are going to be financially necessary. But there is a far better way.

Apparently, President Obama’s concept of spreading the wealth includes sacking the Medicare system on which America’s seniors rely, in favor of others the president’s progressive vision deems more worthy. By 2030, under ObamaCare, Medicare will have been cut by 20 percent, while Medicaid will have been increased by 20 percent. That is by design, reflecting the “progressive” vision underlying ObamaCare that health care should be equal for all. Such a vision necessarily requires sharply reducing health care for the sickest, who unequally consume far more in health care than everyone else. That is why draconian Medicare cuts are at the heart of ObamaCare.

While establishment Washington expects the reversal of these unworkable cuts sooner or later, the Obama Administration has continued to tout the supposed Medicare savings resulting from ObamaCare. But if the Medicare cuts are reversed, then ObamaCare will increase future federal deficits and debt by $15 trillion on these grounds alone.

The Ryan Roadmap would make no changes in Medicare for current retirees, or anyone 55 or above. For those under age 55, the program is transformed to provide vouchers to retirees to be used to buy private health insurance of their choice, similar to the popular Medicare Advantage program. The vouchers would start out providing $11,000 per family each year for health insurance, with that amount growing over time under a set formula. Though that formula would not keep up 100% with rising health costs, Medicare does suffer an enormous long term financing gap that must be closed in some way. But seniors would still be able to obtain essential health care when they are sickest under these reforms, unlike under the irresponsible extremism of ObamaCare.

Low income retirees would receive higher voucher amounts depending on their income, to ensure they could obtain essential coverage. More would be provided as well to the sick so insurers could finance their care. But the voucher amounts would be reduced for retired couples earning over $160,000 per year and single retirees earning over $80,000. CBO scores these reforms as achieving full solvency for Medicare.

But over the long run, more fundamental reform should go further, resulting in an even better system for seniors. Every worker below a certain age should be free to choose to save and invest the employer and employee share of the Medicare payroll tax in a personal account operating under the same framework as has been proposed for Social Security reform. In retirement, the accumulated funds would finance a monthly annuity that the retiree would use to help purchase the private health insurance of his choice. Among those choices would be Health Savings Accounts (HSAs), as would be true under the Ryan Roadmap reforms.

Payroll taxes finance only about half of overall Medicare expenses. General revenues finance the rest. Under this reform, those general revenues would be used to provide supplemental means tested vouchers to lower income seniors to further help them purchase private health insurance, ensuring that all could afford the essential health coverage.

But the amount of such total general revenue spending would be limited to grow no faster than the rate of growth of GDP. That would ensure that Medicare spending burdens would no longer threaten to overwhelm our economy, and ultimately bankrupt America. Yet it would maintain the same level of general revenue commitment to Medicare that is obligated as of today, holding Medicare general revenue spending to the same percent of GDP.

Obviously, we cannot maintain a commitment to Medicare spending that is perpetually growing faster than GDP. Otherwise, as a matter of mathematics, Medicare will ultimately consume all of GDP, meaning bankruptcy for America.

Because the long term returns from real savings and investment are so much higher, saving and investing over a lifetime the 2.9% Medicare payroll tax in the personal accounts would produce an income stream in retirement roughly three times as large as the uninvested, tax and spend, purely redistributive, pay-as-you-go Medicare payroll tax today. That means the equivalent in retirement available for the purchase of private insurance of the revenues that would be produced by a 9% payroll tax under the present system.

Seniors could also contribute to such insurance the equivalent of what they are spending today for Medicare Part B premiums, Medicare Part D prescription drug coverage premiums, and Medigap premiums. They would also enjoy the cost savings from the incentives of HSAs, which would be quite substantial. With the supplemental vouchers from general revenues, this should be sufficient to finance future health care for seniors without any additional drain on government or national resources, again averting what is otherwise the coming bankruptcy of America.

Overall such reform would result in a large reduction in federal spending. That is because all of the taxes and spending generated by the Medicare payroll tax is shifted to the private sector. Moreover, limiting the general revenue financed portion of Medicare to growing no faster than the rate of growth of GDP will produce huge savings from where Medicare spending would otherwise be.

For doctors and hospitals, the shift of Medicare to private insurance would mean that they will be paid market rates for their services, and their compensation would no longer be a political football for demagogues. But seniors would be the ultimate beneficiaries of this, as it would ensure their continued access to the highest quality health care. Younger people would benefit as well, as they would no longer be subject to bearing the burden of cost shifting from Medicare. These benefits would arise from the Ryan reforms as well.

Rather than the draconian, arbitrary, unworkable Medicare cuts in ObamaCare, this Medicare reform is far superior, far better for seniors, taxpayers and America.