Making Medicare Work Better
AEI Newsletter

On April 23, the Medicare trustees met to sign and release their 2007 annual report. They once again urged Congress to address Medicare's long-term financial shortfall. Medicare's fiscal challenge is examined in AEI Studies on Medicare Reform, a new series of books and papers to be edited by Joseph Antos and Robert B. Helms. In the series' first book, The Diagnosis and Treatment of Medicare (AEI Press, April 2007), authors Andrew J. Rettenmaier and Thomas R. Saving dissect the existing Medicare program, evaluate a series of previously suggested remedies, and put forward their own "prepayment" solution.

Medicare's current financial burden is the result of an aging population, the growing use of health services by the average Medicare beneficiary, and perverse financial incentives for providers and patients. Moreover, Medicare's structure pits the interests of its patients against the younger workers who are paying the bills. Medicare's payment structure is built on transfers from taxpayers to retirees, with future generations shouldering larger costs as health spending spirals upward year after year. Even raising taxes or increasing beneficiary premiums will not be enough to support the current program's explosive growth in costs over the long term.

Rettenmaier and Saving examine a number of reform proposals, concluding that increasing the eligibility age, means-testing benefits, or eliminating first-dollar coverage would not substantially lower the burden of the program's unfunded obligations in the long run. The authors conclude that stronger medicine is needed for Medicare.

Rettenmaier and Saving propose a fundamental change in the way the program is financed: prepayment for retirement health-care spending. Under this plan, members of each birth cohort (individuals born during the same time period or year) would pay an annual premium throughout their working years to secure Medicare coverage during retirement. The authors also support greater cost-sharing to increase cost-consciousness among consumers, thus producing more economically efficient decisions about how much to spend on health care. The authors of The Diagnosis and Treatment of Medicare offer a reasonable, realistic prescription for what ails Medicare.

Medicare was also the subject of an April 3 panel discussion at AEI. Speakers addressed the Medicare physician payment system and suggested alternative policies. Bruce Steinwald of the Government Accountability Office (GAO) gave a brief history of Medicare's physician payment policies since the 1980s, which led in 1998 to the creation of the Sustainable Growth Rate (SGR), a system Congress expected would control increases in physician payments by implementing automatic cuts. Many fear the cuts called for under the SGR system will create access problems for Medicare beneficiaries. Steinwald also spoke about an ongoing GAO study of physician efficiency in Medicare.

Mark Miller of the Medicare Payment Advisory Commission outlined two possible pathways for dealing with the SGR program: eliminate the target expenditure system and replace it with new approaches for improving value, or implement a new system of expenditure targets for all of Medicare alongside efficiency incentives and better information on practice patterns. Edward Langston of the American Medical Association emphasized the access problems that would be caused by the proposed cuts in physicians' fees, and suggested that an effective physician payment updating system must adequately reflect increases in medical practice costs and distinguish between appropriate and inappropriate cost growth. Gail Wilensky, a former administrator of the Health Care Financing Administration, recommended that Congress enact a more aggregated fee schedule to improve incentives and to better control costs.

For more information about this book, visit For more information about AEI Studies on Medicare Reform, visit For a video and summary of this event, visit

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