Medicare’s 11th Hour? What’s Next? by Glen Turpening

Medicare, the nation’s health care safety net for Social Security recipients, is on precarious financial footing. Increasing demands are expected to place such a strain on Medicare’s cash reserves that Medicare will begin running serious deficits within the next decade unless something is done now to reform it.

Americans 65 and over and the disabled are currently eligible to receive Medicare benefits under a two-part system. Part A, Medicare’s “trust fund,” covers hospitalization through a 2.9% payroll tax paid evenly by employers and employees. Part B, for outpatient care and services, receives a quarter of its funding from recipient payments with the rest coming from the general treasury (a.k.a. everyone’s tax dollars).

As the baby boom generation grows older, the government’s burden to provide those promised health care benefits will become almost impossible to meet. The only conventional way to satisfy this demand will be to take funding away from other programs or raise taxes. One potential solution requiring neither of these distasteful choices, however, would be privatization. The government would instead pay private insurers chosen by each individual rather than be fully responsible for providing benefits.

When Medicare was created 33 years ago, Medicare spending amounted to less than one penny of every tax dollar. Spending has skyrocketed, however, now consuming 18 cents of every tax dollar. This has happened because Medicare spending has ballooned at an average annual rate of 14% per year, while federal revenues have grown by 8%. At this rate, Medicare will only be able to pay one-half of the benefits promised when Generation X reaches eligibility.

Replacing the government’s obligation to provide benefits with a contribution toward an individual’s health care security is endorsed by respected medical organizations like the American Medical Association and the American Hospital Association. The Federation of American Health Systems, representing more than 1,700 for-profit hospitals, sees privatization as the “best way” to ensure future health care security.

A privatization proposal by the National Center for Policy Analysis (NCPA) would enable individuals to invest taxes now earmarked for Medicare in private Medical Savings Accounts (MSAs). Upon reaching the age of 65, individuals could take the money they have paid into Medicare and direct it into an MSA. MSA money could be used to pay for Health Maintenance Organizations (offering fixed-rate health insurance), employer-sponsored health plans or similar programs. Private health care providers would be required to offer at least the same services as Medicare, but would not be kept from offering additional services – allowing individuals to choose the plan best fitting their budget and needs.

Catastrophic insurance would cover large medical expenses like operations and extended hospital stays that might quickly deplete an MSA. Seniors transferring their Medicare funds to a private insurer would have a portion of their funds directed to catastrophic insurance, with the rest deposited in an MSA.

A proposal from the libertarian Cato Institute would also allow those currently eligible for Medicare to use accumulated payroll taxes for MSA-style insurance or to retain Medicare. Medicare itself would not change much, although some payments would be tied to economic growth rather than kept at fixed rates.

Medicare expenditures would not be allowed to exceed revenues under the Cato Institute plan, averting potential deficit crises. This risk would be lessened by the influx of private insurers handling beneficiaries. Furthermore, private insurers would be prohibited from accepting only the healthiest individuals and making Medicare a ghetto for the sickest Americans – a situation that would undoubtedly drive up government expenditures yet again.

While Medicare currently does not limit out-of-pocket expenses that require tens of thousands of dollars a year for procedures and medications not covered by Medicare, the Cato Institute plan only makes recipients responsible for expenses falling between the minimum $1,500 they must deposit in their MSA and catastrophic insurance’s $3,000 deductible payment. This dollar cap would appeal to lower-income individuals and those who have not been paying into the system for a long time, and would also eliminate the current need for “Medigap” insurance to cover these expenses.

Opponents of Medicare privatization say plans like these may compromise health care quality. Groups like the National Committee to Preserve Social Security and Medicare instead suggest the government simply reduce payments to health care providers for their services and raise the age for Medicare eligibility to save money. But reducing payments will lead to fewer doctors and hospitals wanting to accept Medicare recipients. And raising the eligibility age would make benefits less accessible to those who paid into the Medicare system their entire working lives. It would be particularly hard on black men, who have a lower life expectancy in relation to the rest of the population, and would therefore receive fewer benefits.

It is obvious that our nation’s health care systems can no longer promise full benefits and still remain solvent. In order to put Medicare back on track, a choice beyond a government-only option should be considered. Such a choice could benefit Medicare recipients and taxpayers alike by reducing growth in costs and permitting more freedom of choice for those who have diligently paid into the system and expect a quality return on their investment.


Glen Turpening is a research associate of The National Center for Public Policy Research. Comments may be sent to [email protected].

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.