Bixby, Butler and Sawhill: Entitlement reform options

Bob Bixby of the Concord Coalition, Stuart Butler of the Heritage Foundation, and Isabel Sawhill of the Brookings Institution write in this morning's
Washington Times on a number of options available to the new Congress to address the rising costs of entitlement programs. Concord, Heritage and Brookings have all been participants in the Fiscal Wake Up Tour (which I've been happy to take part in on occasions).

Washington may bail out Wall Street. But who will bail out Washington? Sure, foreign investors have been bailing out Capitol Hill for years - pouring billions annually into "safe" government securities. But how much longer will they do so? And at what price? We all know the pragmatist's version of the Golden Rule: He who has the gold, rules. Do we really want to be in hock to China to the tune of trillions of dollars? Fiscally speaking, the U.S. government has been living on borrowed time for decades. It has promised massively expensive benefits - mainly Social Security, Medicare and Medicaid - heedless of the enormous tax burdens these promises implicitly place on our children and grandchildren.

If you think saddling taxpayers with a $700 billion bailout was extravagant, consider that taxpayers will have to cough up more than 50 times as much to cover the unfunded liabilities of Medicare alone. Medicare currently faces a long-term funding gap of $36 trillion. That's trillion with a "t." For more than two years, now, the three of us have crisscrossed the country on a "Fiscal Wake-Up Tour, warning of a pending fiscal inferno fueled by unsustainable "entitlement" promises - especially those of Medicare. In more than 40 cities, we've presented the numbers and the graphs that prove we must fundamentally reform these programs. Otherwise we will leave our children and grandchildren with a staggering financial burden.

And in more than 40 cities, people get it. They understand the need and want serious action now. But just as Americans are recognizing the need to recast Medicare, along comes a seductive idea suggesting a different, less difficult solution. "We don't really have a fiscal problem," the argument goes, "We have a health-care problem. Medicare's rising cost mainly reflects rising per-person health costs. So don't worry about Medicare; just fix the entire health-care system."

This argument is misleading for several reasons. For starters, a big chunk of Medicare's $36 trillion long-term funding gap occurs because the number of beneficiaries will almost double over the next 20 years. Yes, growing costs per beneficiary may play the larger role. But you can't simply ignore the fiscal wallop of this demographic reality.

Second, most proposed system "fixes" - from more use of electronic medical records to more emphasis on prevention and coordinated care - would save relatively little money. Those most likely to save big money - such as changing practice patterns to better reflect evidence about what works - would take decades to implement. That's time we can't afford.

Third, Medicare reform could, itself, help reform the entire health system. Medicare is the system's biggest customer, paying roughly 20 percent of the nation's total health-care bill. Other federal programs cover another 13 percent. That kind of market share positions the federal government to lead us toward a more efficient health system by collecting data on what works and reimbursing providers in line with evidence on effectiveness.

Medicare has led before and can do it again. Why hold Medicare reform hostage to a global "fix" of health care?

Instead, here's what we should do:

• Use Medicare to leverage wholesale change in reimbursement policies, encourage use of electronic medical records, and experiment with new health-care delivery methods. Also, institute competitive bidding on medical equipment for home-based seniors; it would save huge sums.
  
• Reduce the commitments we've made - seriously, but fairly. For example, premiums for Medicare Parts B and D, which mainly pay doctors' bills and prescription drugs, cover only 25 percent of these program costs. Reducing premium subsidies for upper-income seniors would help dig us out of the hole while protecting truly needy seniors.
  
• Look for savings in Medicare payments. One place to look: the increasingly popular Medicare Advantage program. It provides extra benefits by paying private plans 13 percent more per beneficiary, on average, than traditional fee-for-service Medicare.
  
• Finally, put Medicare (and Social Security and Medicaid) on a budget, with automatic "triggers" to make sure spending stays within budgeted amounts. Currently, all this spending increases automatically, year after year, with no set limit.
  

If the Wall Street crisis has taught us nothing else, it has shown there are financial limits - even for America. Unfunded financial promises will one day fall due. With a vengeance.

Health-care reform is a good and noble goal. But if we do only that - without fundamentally redesigning the Medicare commitment - our grandchildren will inherit a crushing financial burden.

I looked at the question of rising per capita health care costs versus the rising number of health care beneficiaries here. Overall, I found that around half the total cost increases in Social Security, Medicare and Medicaid are due to population aging, with the other half due to rising per capital health costs. While this doesn't necessarily mean that any solution must be "half and half" – meaning half traditional fixes such as raising the retirement age, and half structural fixes to health care financing – it does imply that we should pay attention to both sources of the problem.