Repairs to Medicare

By Editorial Board, Sunday, January 6, 6:54 PM

ON NEW YEAR’S DAY, President Obama looked ahead to the post-“fiscal cliff” deficit-reduction battles and declared: “I agree with Democrats and Republicans that the aging population and the rising cost of health care . . . [make] Medicare the biggest contributor to our deficit. I believe we’ve got to find ways to reform that program without hurting seniors who count on it to survive.” The question — a tricky one for a president who won reelection in part by defending “Medicare as we know it” — is how to accomplish this feat. Medicare as we know it is not sustainable.

Medicare cost $555 billion in 2012, according to the Congressional Budget Office. The CBO has projected that this number, already 15 percent of non-interest federal spending, will nearly double by 2022. Medicare’s trustees estimate that the hospital insurance fund supported by the payroll tax will run out of cash by 2024, but this is mainly a symbolic threat: The government will draw on general revenue to keep Medicare going. The real threat is that Medicare spending will crowd out other necessary federal endeavors, forcing undesirable cuts, substantially higher taxes, unsustainable borrowing — or some combination of the three.

There are two major reasons for Medicare’s rising costs. The first is the program’s design, often tweaked but left fundamentally intact since its creation in 1965, which basically pays doctors and hospitals fixed fees for whatever they do. At a time of rapid (and often beneficial) medical innovation, the dominant incentive has been to provide more, and more expensive, care. Hence the House Ways and Means Committee’s 1965 estimate that Medicare hospital insurance would cost $9 billion by 1990 fell short by $58 billion. The second reason costs keep going up, of course, is the rising number of elderly eligible for Medicare, which is inevitable; the 50 million beneficiaries today will be 78 million in 2030.

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