Deficit Reduction Plan Shifts Medicare Costs To Individuals. Oh No!

The best you can say about the deficit reduction proposal put forth by founding Congressional Budget Office director Alice Rivlin and former New Mexico Senator Pete Domenici is that it's a mixed bag (which, granted, is probably to be expected from any proposal that aims for bipartisan appeal). As Reason columnist Veronique de Rugy explains over at NRO, the plan relies calls for a tax on sugary sodas and a 6.5 percent "debt-reduction sales tax," which de Rugy argues would likely lead to the addition of a VAT. Now, there might be a case to be made for scrapping the entire tax system and relying instead on a streamlined VAT. But since the odds of that happening soon are somewhere between not-gonna-happen and ha-ha-you're-kidding, the main reason to get behind a VAT ends up being that you're really, really interested in increasing the already-considerable suction power of the federal tax siphon. (See Reason boss-man Matt Welch's take on the VAT here.)

So what's good about the proposal? For one thing, it cuts the corporate income tax rate from its current high of 35 percent down to 27 percent in hopes of making the U.S. more competitive internationally.  

Rivlin and Domenici also propose a significant revamp of Medicare, shifting it toward a premium support model, which could allow for private plans to compete with traditional Medicare. As the CBO reported in 2006, premium support could result in a fair amount of Medicare savings:

Under such a system, the federal government would contribute an amount that beneficiaries could use to purchase Medicare coverage either by enrolling in the traditional fee-for-service (FFS) part of the program or in a private plan. The government's contribution would be based on the bids of competing plans or set at a predetermined amount. Beneficiaries who enrolled in plans whose premiums exceeded the government's contribution would be responsible for paying the difference between the two, while those who enrolled in lower-cost plans would receive additional benefits or a rebate. An important feature of this system is that Medicare's fee-for service part of the program would compete for enrollees on the same terms—its bid, as well as the quality of services it provides—as private plans.

…Depending on how the government's contribution was determined, such a system could restrain federal spending on Medicare (that is, spending after subtracting the premiums that beneficiaries pay to the government). Moreover, proponents assert, premium support could reduce total system wide spending on Medicare benefits (including beneficiaries' premiums and cost sharing) by stimulating greater price competition among plans and making beneficiaries more cost conscious in their choice of plans. In that way, proponents maintain, premium support could lead to a more efficient Medicare program, one in which the government and beneficiaries received more for the money that is spent on Medicare, whatever that level of spending might be, than they do today.

The downside, according to the CBO report, is that Medicare recipients might have to pay more. But that's sort of the point. As the full Rivlin/Domenici proposal says, the idea is to make folks on Medicare more "cost conscious." Increase cost-sharing and you increase consumer awareness about the price of medical services. It's a way to mitigate, if not dispel, the expansionary effects of third-party payment, which incentivizes both patients and providers to seek ever more services regardless of their cost-effectiveness.

It isn't a perfect solution by any means. It still relies on taxpayer-funded subsidies and government-managed competition. But combined with increased competition amongst plan providers—which the plan's authors suggest "will incentivize plans to manage care-delivery efficiently and to offer the public evidence that the plans achieve quality outcomes at comparatively low cost"—it might prove some help in keeping Medicare growth in check.

Or at least it might if there were any political appetite for it. As this KHN report indicates, the politics of Medicare reform are such that any plan that might increase costs for beneficiaries doesn't have much of a chance with either party:

[Premium support] has never drawn much political support over the years. "It's hard to see either party embracing a full blown premium support plan," said Henry Aaron, a Brookings Institution expert who helped develop the idea in the mid-1990s. "The Democrats would be largely against it because of cuts in benefits and not enough Republicans would have a stomach for it. It would mean big benefit cuts and a substantial increase in out of pockets costs."

AARP Executive Vice President John Rother said his group would oppose premium support. Of the overall task force report, he said it "raises lots of questions because of how it shifts more costs to individuals."

Of course, letting Medicare spending grow at its current unsustainable rate also raises expenses for individuals, and not just present Medicare beneficiaries either. In the end, everyone who pays taxes to fund the entitlement ends up shouldering the burden of the program's runaway costs.