Dimensions: 6'' x 9'' 188 pages AEI Press  (Washington) Publication Date: April 2007 Paperback ISBN: 0-8447-4251-1; 978-0-8447-4251-9 Price: $ 20.00 Add to Cart   Examination Copies

The Diagnosis and Treatment of Medicare argues that Medicare is in critical condition. Spending has risen dramatically since the program’s inception, growing from about $200 billion to $450 billion over the last decade. Expenditures have consistently grown at twice the rate of inflation, and at times much faster, outstripping economic growth and absorbing a growing share of federal revenue. The situation will only worsen in the coming decades. As the Baby Boom generation reaches 65, Medicare’s demands on federal revenues will climb even more sharply. Left unchecked, Medicare spending threatens to crowd out federal funding for education, energy, the environment, defense, and other important policy priorities.

Economists Andrew J. Rettenmaier and Thomas R. Saving offer an innovative remedy to Medicare’s woes. The Diagnosis and Treatment of Medicare calls for a rethinking of Medicare’s financing, its benefit structure and its future. They dissect the existing Medicare program, evaluate a series of previously suggested remedies, and put forward their own “prepayment” solution.

The Current Medicare Program:

• Medicare’s financial burden is not simply the product of an aging population. It also reflects the growing use of health services by the average Medicare beneficiary.
• Medicare has created perverse financial incentives: Doctors are paid for virtually any service they provide, while patients have almost no direct financial responsibilities and, therefore, no incentive to control costs.
• Raising taxes or increasing beneficiary premiums will not be enough to support the current program’s explosive growth in costs over the long term.
• Medicare’s very 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.

Popular Reform Proposals:

In The Diagnosis and Treatment of Medicare, Rettenmaier and Saving use an innovative model to assess the long-term impact of popular reform proposals on Medicare’s future finances. Increasing the eligibility age to match the Social Security retirement age or means-testing benefits to increase the share of the financing burden borne by the higher-income elderly would provide some fiscal relief but would not solve the long-term problem. Even extreme policies, such as eliminating first-dollar coverage, would not substantially lower the burden of the program’s unfunded obligations in the long term. The authors conclude that stronger medicine is needed for Medicare.

Real Reforms to Ensure Long-Term Medicare Solvency:

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 (i.e., individuals born during the same time period or year) would pay an annual premium throughout their pre-retirement years to secure coverage during retirement. Instead of relying on younger taxpayers to pay for retiree health benefits, as we do now, the quantity of retirement health care consumed by each birth cohort would be directly tied to the contributions made by that group during their working years.

Prepaying Medicare benefits would ultimately improve generational equity by making each age group responsible for financing the cost of its own care. Rettenmaier and Saving also support greater cost-sharing to increase cost-consciousness among consumers. That would create a health care market that is guided more by consumer choice, producing more economically efficient decisions about how much to spend on health care.

Praise for The Diagnosis and Treatment of Medicare:

"A must read. Rettenmaier and Saving cut through the heated rhetoric and inscrutable figures that plague Medicare discussions, providing a clear, readable explanation of what's wrong with the program and what's to be done. They haven't simply written a great book; they've performed a crucial public service."
--David Gratzer, senior fellow, Manhattan Institute

"This is by far the most comprehensive and compelling analysis produced to date of the long-term fiscal challenge posed by Medicare. The authors render with great clarity and precision just how and why the economic burden of financing the health care of America's senior citizens will mushroom in the decades ahead, as well as the nature and consequences for future generations of taxpayers and beneficiaries of the various generic remedies--bitter medicine all--available to federal policymakers. The book makes a strong case for fundamental reform of Medicare and aptly demonstrates that the sooner such reform is undertaken, the less onerous will be the consequences."
--John L. Palmer, university professor and dean-emeritus, The Maxwell School of Syracuse University, and public trustee of the Social Security and Medicare Trust Funds (2000-07)

"This book forces us to confront the unpleasant and unavoidable facts about the heavy financial burden Medicare will impose on future generations. The authors clearly demonstrate the shortfalls of current proposals and the painful tradeoffs among them. This book will have a significant, sobering, and positive impact on the Medicare reform debate, and will certainly be read carefully by policymakers and researchers around the country involved in Medicare reform."
--John F. Cogan, Leonard and Shirley Ely senior fellow, Hoover Institution, and professor of public policy, Stanford University

"This book is a tour de force in its description of Medicare's financial crisis. It examines several reform options and its carefully calibrated analysis shows that piecemeal reforms would not successfully avert a future fiscal crisis--even those involving seemingly draconian benefit cuts. The authors present some real approaches to soften Medicare’s future financial crunch--such as prepaid health insurance that would effectively increase our national saving, productivity, and output."
--Jagadeesh Gokhale, senior fellow, Cato Institute

Andrew J. Rettenmaier is the executive associate director at the Private Enterprise Research Center at Texas A&M University. He is an adjunct associate professor at Texas A&M University and a senior fellow at the National Center for Policy Analysis.

Thomas R. Saving is director of the Private Enterprise Research Center at Texas A&M University. A university distinguished professor of economics at Texas A&M University, he also holds the Jeff Montgomery professorship in economics and is a senior fellow at the National Center for Policy Analysis.