“Joe Lieberman, the retiring, formerly Democratic Senator from Connecticut, has come up with his own plan for Medicare reform. As he put it last week in the Washington Post, “Democrats are right when they say the public wants to keep Medicare as a government-run program. Republicans are right when they say that the current Medicare benefit structure is unaffordable.” His plan doesn’t go far enough—whose does? But it does include some serious ideas that would help curb Medicare’s runaway growth.
1. Raise the Medicare eligibility age from 65 to 67
Lieberman proposes raising the eligibility age from 65 to 67 on a graduated basis, concluding in 2025. This would put the eligibility age for Medicare back on par with that of Social Security. This is a simple and obvious reform that is actually gaining wide public acceptance.
A better reform, however, would be to index Medicare eligibility to life expectancy. In 1965, when Medicare was passed, the average life expectancy at birth was 70.2 years. In 2010, it was 78.4. In other words, in 1965, Medicare was intended to provide health care for the last 5.2 years of one’s life. In 2010, it covered, on average, the last 13.4 years of life: a 158% expansion of the average coverage period.
2. Merge Medicare Parts A and B
One of the odd and inefficient artifacts of Medicare is that seniors pay separately for hospitalization insurance (Medicare Part A) and non-hospital (outpatient) physician and nursing services (Medicare Part B). Because Part A is more generous than Part B, seniors are often incentivized to seek expensive hospital care when cheaper outpatient care might suffice.
Medicare Advantage, a.k.a. Part C, serves a quarter of the Medicare population through privately-administered health plans, and Part C plans do integrate hospitalization and outpatient services.
3. Raise premiums
Lieberman points out that, at Medicare’s inception, retirees paid 50 percent of the program’s costs in premiums. Today, they only pay one-quarter. He proposes raising those premiums in Part B and Part D, the prescription drug plan, to 35 percent of program costs, beginning in 2014. This is fine, but an even better reform would be to give seniors the choice between plans that charge higher premiums, and those that charge lower premiums but contain higher deductibles.
4. Reform Medigap supplemental insurance
Medigap plans are supplemental plans that allow seniors to pay a small premium in exchange for wiping out the co-pays, deductibles, and other cost-sharing features that help discourage wasteful medical spending. As Lieberman points out, “Many studies have found that Medicare enrollees who have supplemental coverage use as much as 25 percent more services than those with only traditional Medicare coverage.” He doesn’t offer a specific proposal for dealing with Medigap—but it has long been clear that a key element of Medicare reform must be to eliminate, or severely curtail, the use of Medigap plans.
5. Tax the rich (i.e., the upper-middle class)
Lieberman proposes a 1 percent surtax on personal income above $250,000. Given that Medicare costs will continue to rise at a faster rate than the economy, a more efficient idea would be to cut benefits for those making $250,000 by the same amount as his proposed tax increase.
Liebercare: Modest, but directionally positive
Sen. Lieberman’s plan is modest. But it’s certainly far better than the plan proposed by Senate Democrats, which is to do nothing. “We will not allow cuts to seniors’ benefits,” declared Sen. Chuck Schumer yesterday. Except that Schumer was a champion of Obamacare, which included $500 billion in Medicare cuts (albeit ones that may never materialize).
The problem is, Lieberman is an independent—most Democrats won’t listen to him. Plus, he’s retiring—so he has more freedom to say what he thinks, with little need to steer public sentiment in his direction.
For many left-of-center economists, the inexorable rise of health-care spending is a head-scratching mystery. But the story is quite simple: Medicare massively subsidizes excessive health spending by divorcing ordinary patients from the cost of their care. The best way to change this is to restore seniors’ incentives to stop wasting other people’s money. Lieberman’s plan inches us toward that goal.