Forbes

Avik Roy, Contributor

Many politicians (and many voters) duck the hard choices when it comes to Medicare reform. But what’s remarkable about the past year is that, in some ways, momentum appears to be building for real improvements to the program’s quality and sustainability. Based on a new proposal from Sens. Richard Burr (R., N.C.) and Tom Coburn (R., Okla.), the impossible seems within reach: the triumph of sound policy over interest-group politics.

Today, Sens. Burr and Coburn have put forth a new Medicare reform proposal, the Seniors’ Choice Act, which combines the ideas behind the best two bipartisan plans that came out last year. If Wyden-Ryan and Lieberman-Coburn got together to do what many people did on Valentine’s Day, Burr-Coburn would be the result.

I’d previously called Wyden-Ryan a “game changer” for its utilization of two key reform principles, premium support and competitive bidding. Lieberman-Coburn hits the other key principles of reform, including cost-sharing and fraud prevention. As I wrote last June,

I have a lengthy essay in the Summer 2011 issue of National Affairs on Medicare reform, entitled “Saving Medicare from Itself.” In it, I discuss six core concepts for real Medicare reform: (1) preserving benefits for people aged 55 and older; (2) making sure that retirees share more of the costs of their care, and thereby a stake in prudent consumption; (3) means-testing; (4) indexing the Medicare retirement age to life expectancy; (5) aggressive fraud prevention; (6) allowing seniors to shop for value in insurance plans. The Lieberman-Coburn bill hits on many of these points in a way that well complements Paul Ryan’s premium support proposal.

Wyden-Ryan hits (1) and (6), while Lieberman-Coburn hits (2) through (5). Together, they comprise the most complete Medicare reform proposal, using bipartisan policy principles, that has yet been put together. I’ve posted a detailed summary of the plan here.

Premium support and competitive bidding

Burr-Coburn incorporates something quite similar to the Wyden-Ryan system of competitive bidding and premium support, in which retirees would be able to choose among private plans and a “public option” of traditional Medicare. I’ve described the concept of competitive bidding in detail in this post discussing Mitt Romney’s similar proposal.

One key difference between Burr-Coburn and Wyden-Ryan in this regard is that Burr-Coburn implements competitive bidding and premium support in 2016, not in 2022. On the plus side, this six-year difference has a huge impact on the long-term cost savings of Burr-Coburn. On the other hand, Wyden-Ryan makes an effort to ensure that imminent retirees are not required to endure any changes to the program, instead asking those under age 55 to pay more. “The numbers require us to do something now, not in 2022,” says Sen. Burr. “So the politically smart way has been tried, but it doesn’t answer the mathematical challenges that we’re up against. Tom [Coburn] and I believe, if we say we’re saving Medicare, we want to save it on all fronts.”

Burr-Coburn creates a new independent agency, the Medicare Consumers’ Protection Agency, that would stand outside of the Department of Health and Human Services. This is key, as the HHS bureaucracy would otherwise be likely to undermine competitive bidding and premium support as to maintain its bloated Medicare budget. “The intent is not only [regulatory] compliance,” says Sen. Burr, “but also decisions around the construction of the plans, so people have the security of knowing they’re getting the plans they purchased.”

The MCPA is modeled after the Office of Personnel Management, which administers a very similar plan for the Federal Employee Health Benefits Program (FEHBP). “We see markedly less inflation [in FEHBP] than in the private market,” notes Sen. Coburn. “People start to pay attention to where they’re getting their health care and what it costs.”

Seniors would be able to change plans once every year, and unlike Wyden-Ryan, they would get to keep part of the difference if they chose a plan that is less expensive than the level of government-provided premium support, providing further incentives for seniors to engage in cost-conscious behavior.

Increasing the retirement age

As with Lieberman-Coburn, Burr-Coburn gradually increases the Medicare eligibility age from 65 today to 67 in 2027. This will allow Medicare’s eligibility age to match that of Social Security.

The failure of Medicare to keep up with rising life expectancy has had devastating effects on the fiscal stability of the program. As I wrote in my National Affairs piece,

When Medicare was enacted in 1965, the average life expectancy at birth was 70.2 years. In other words, it was anticipated that Medicare would cover an average person’s health expenditures for the last 5.2 years of his life. In 2010, the average American lived to the age of 78.4; Medicare thus covered the last 13.4 years of his life — a 158% increase in the coverage period. The U.S. Census Bureau projects that, in the coming decades, American life expectancy will continue to elongate by approximately one year for every eight years that pass.

Ideally, we would index the retirement age to life expectancy, so as to ensure that we don’t have to go through this whole exercise again in 2027. But a two-year increase in the eligibility threshold is better than none.

Improving the Medicare benefit

One thing that most people don’t realize is that Medicare, designed in 1965, has significant gaps and flaws in the design of its insurance benefit. Medicare doesn’t cover catastrophic costs, forcing many seniors to buy supplemental Medigap plans for their own protection, and giving providers perverse incentives to favor expensive hospitalizations over more efficient outpatient care.

Burr-Coburn would combine Medicare Part A (hospitalization) and Part B (outpatient physician services) into a single deductible, with a unified deductible of $550, co-insurance of 20 percent of costs until a retiree had spent $5,500, co-insurance of 5 percent until he had spent $7,500, and full coverage above $7,500.

Means-testing

Burr-Coburn requires greater cost-sharing for people with higher incomes: a far superior solution to raising taxes to subsidize these individuals. Those with incomes above $85,000 as individuals or $170,000 as married couples would be subject to a higher cap on out-of-pocket costs: $12,500 instead of $7,500.  For those with incomes above $107,000 individual or $214,000 family, the cap would be higher ($17,500) and even higher ($22,500) with those making $160,000 as individuals or $320,000 as married couples.

In addition, the plan would charge lower Medicare premiums to lower-income seniors, and higher premiums to higher-income retirees. Today, there are 60,000 retirees making $1 million or more that get fully-subsidized Medicare coverage. Why on earth, in this time of fiscal crisis, are we funding Medicare for millionaires? Burr-Coburn starts to change that.

Cost-sharing reform

One of the worst aspects of Medicare is the way it is almost intentionally designed to waste money. Medigap plans are a big part of this, by providing private-sector supplemental coverage that undermines Medicare’s ability to incentivize seniors to be mindful of wasteful medical spending. Burr-Coburn makes a modest step in the right direction, by barring Medigap plans from covering the first $500 of a retiree’s liabilities, and capping Medigap coverage to 50 percent of the next $5,000 of his out-of-pocket costs.

“We don’t let anyone buy their way into first-dollar coverage,” says Sen. Burr. “It’s done on a sliding scale so low-income seniors would have some skin, but high-income individuals…will be conscious of the decisiosn they make with their health care.”

Burr-Coburn reforms cost-sharing in three other ways. By combining Medicare Part A and B as I described above, it eliminates some of the perverse incentives around hospitalization. In addition, by introducing competitive bidding into Medicare (see below), the bill would allow for the design of new plans that could manage cost-sharing in a more efficient way, that seniors would migrate to voluntarily.

Finally, the plan gradually increases Medicare premiums by 2 percent a year, in order to ensure that seniors paid for premiums equaling 35 percent of the program’s costs. Originally, premiums paid for 50 percent of the program’s costs, but this number has declined to 25 percent today. Reforming this was a key aspect of Joe Lieberman’s original proposal.

Flattening the “doc fix”

One of the worst and most persistent problems with federal budgeting has been the Medicare Sustainable Growth Rate, introduced by Newt Gingrich in 1997 as a global cap on the growth of Medicare payments to doctors and hospitals. Here’s what I wrote about that recently in National Review:

Another dubious part of the 1997 Gingrich-Clinton budget deal was the Medicare Sustainable Growth Rate, in which the Gingrich-led House passed what has become one of Washington’s favorite accounting gimmicks: pretending to drastically cut Medicare payments to doctors and hospitals in the future, so as to make the long-term budget outlook appear better than it is, while in reality passing “doc fix” legislation each year that keeps Medicare payments on their prior trajectory. The “doc fix” that Congress is contemplating for 2012 will cost $22 billion, a figure that goes up over time as the gap widens between what the 1997 law prescribed and what Medicare costs today.

Because the global cap doesn’t keep up with the rise in the cost of health care, and provides no incentive for doctors and hospitals to be more efficient in the way they provide care, Congress has had to routinely step in with “doc fix” legislation that jacks up Medicare spending.

Burr-Coburn would take a middle course, by freezing Medicare reimbursement at current rates: not cutting them, as the SGR would mandate, but not allowing them to go up indiscriminately either. “How well have caps worked?” asks Sen. Coburn. “Look at SGR. The caps don’t work. You think any of the caps we’ve set worked? They haven’t…[Medicare’s prescription drug benefit] uses market forces to bring down costs. We’ve tried everything [with traditional Medicare] except market forces to control health costs.”

Repeal IPAB, Obamacare’s Medicare rationing board

Obamacare’s vision of government-rationed health care was on full display with the enactment of its Medicare Independent Payment Advisory Board, a new bureaucracy that seeks ultimately to control which treatments seniors can receive, based on the board’s view of their cost-effectiveness.

There are several problems with this approach, despite its enduring appeal to central planners. First is that rationing has done nothing to control the growth of health spending, as Britain has shown. In addition, “cost-effectiveness” is subjective, and imposes a one-size-fits-all formula on a diverse country of 300 million people, who respond differently to different treatments. (For more on this topic, see my report on my appearance before Congress at an hearing on IPAB.)

Burr-Coburn repeals IPAB and replaces it with a system that allows seniors to voluntarily chose the benefits and plans that best suit their needs.

What will Congress do?

It’s an election year, of course, and President Obama has already stated his intention to campaign against market-based Medicare reform. As my co-blogger Robert Book noted this week, the President’s budget cuts Medicare by $300 billion over the next ten years. But Obama’s cuts are blunt and clumsy: they take the politically easy way out by cutting payments to doctors and hospitals, which will force more and more doctors to drop out of the Medicare program, making it harder and harder for retirees to get the care they need.

So the chances that Burr-Coburn make it into law this year are about zero. But the plan is still extremely valuable. It gives Presidential and Congressional candidates something to campaign on in the fall, allowing the broader public to think through the arguments for and against Medicare reform. Change may come to Washington in November, and if it does, thanks to Richard Burr and Tom Coburn, real entitlement reform may move from a dream to reality.

UPDATE 1: Sens. Burr and Coburn have released some additional materials related to the Seniors’ Choice Act, including: responses to anticipated policy questions; how the proposed Medicare Consumers’ Protection Agency compares to IPAB; how the act builds on bipartisan proposals; and four illustrative scenarios of how differing seniors would be affected by the proposal.

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