Can Consumers Save Medicare?
About This Event

Medicare spending is on autopilot, and it is coming in for a crash landing. Costs are projected to double to $900 billion over the next decade, and there is increasing evidence that Medicare does not provide good value for the money spent--paying too much or too little for necessary services, or paying for inappropriate and ineffective ones. Is it time to give beneficiaries a stronger voice in choosing the insurance plans and health services they receive through Medicare?

In two recently released studies in AEI's Studies on Medicare Reform series from the AEI Press, Mark V. Pauly of the Wharton School and Roger Feldman of the University of Minnesota argue that consumers can make sensible decisions if they are given the opportunity and means to do so. In Markets Without Magic: How Competition Might Save Medicare, Pauly addresses the unsustainable financial burden Medicare will place on taxpayers over the next few years and beyond. Rather than relying on tighter bureaucratic rules to limit program spending by controlling the use of health services, he suggests replacing Medicare's open-ended entitlement with a market-based credit that preserves the purchasing power of seniors but does not provide a blank check.

In How to Fix Medicare: Let's Pay Patients, Not Physicians, Feldman proposes to replace the current system of administered prices for physician services with medical indemnities--giving Medicare beneficiaries money to cover the cost of their treatments but allowing them to shop for the combinations of services, providers, and prices that most closely meet their needs.

Following Pauly's and Feldman's presentations, Paul Ginsburg, president of the Center for Studying Health System Change, and Michael Morrisey, director of the Lister Hill Center for Health Policy at the University of Alabama at Birmingham will discuss the role of consumer empowerment in Medicare. AEI visiting fellow Bill Thomas--former chairman of the House Ways and Means Committee, cochairman of the National Bipartisan Commission on the Future of Medicare, and chief architect of the Medicare Modernization Act--will give a keynote speech on the political and practical challenges of reforming Medicare.

9:45 a.m.
Roger Feldman, University of Minnesota
Mark V. Pauly, Wharton School, University of Pennsylvania
Paul Ginsburg, Center for Studying Health System Change
Michael Morrisey, University of Alabama at Birmingham
12:00 p.m.
Keynote Speaker:
2:00 Adjournment
Event Summary


Market-Based Medicare Reforms Would Empower Patients, Control Costs



WASHINGTON, AUGUST 4, 2008--Medicare is a very popular government program, but it is hurtling at "ninety miles per hour toward the wall," said Mark V. Pauly at an AEI conference last Thursday.  If Medicare continues to grow at historical rates, the taxes necessary to fund the program will have to nearly quadruple, growing to 10.2 percent of GDP by 2035. The conference brought together a group of influential health policy experts to discuss the fiscal future of Medicare and solutions to the challenges facing Medicare in the coming decades. Pauly, along with Roger Feldman--both health economists--presented the conclusions from their recently published AEI Press books, and former House Ways and Means Committee chairman Bill Thomas described the political impediments to meaningful market based reform.

In Markets Without Magic: How Competition Might Save Medicare, Pauly identifies two major drivers of the explosion in Medicare costs:

  • Demography. The success and popularity of Medicare is predicated on the fact that as long as there is a perpetually growing population, every generation can receive more than they paid in, what Pauly called "the magic of social insurance." However, the retirement of the baby boomers has upset this demographic providence, as retirees will outnumber new entrants into the workforce as early as 2012.
  • Technology. As Pauly and AEI scholar Joseph Antos explain, "By itself, this demographic shift is not a big problem. But technological advances in health care are extending life and making those extra years more worthwhile--good news that, unfortunately, comes at a price of rapidly rising spending per beneficiary, a price we might not be able to afford."

Pauly's solution limits the growth of Medicare spending by turning Medicare into a cost-constrained voucher program. Under his plan, Medicare would give seniors a risk-adjusted voucher that grows at an annual rate, which they could then use to buy a Medicare plan from a menu of publicly and privately provided options. Some plan options would cost more but provide greater access to beneficial but costly new technology as it is developed. Others would cost less and guarantee an acceptable level of care but restrict new health technology access. Patients would be forced to assess their own tolerance for risk and choose an appropriate program. By controlling benefit growth, this system would create a ceiling on future Medicare costs while maintaining flexibility and creating a variety of options for patients.

In How to Fix Medicare: Let's Pay Patients, Not Physicians, Feldman attacks a different feature of the Medicare cost crisis. Medicare creates a serious moral hazard for both patients and doctors. Because so much of the cost burden of treatment is covered by Medicare, there is no incentive for patients to limit the costs of their treatments, and because doctors are paid fixed fees per service provided, they recommend costly treatment options. In order to create greater accountability for patients and doctors, Feldman proposes that patients receive an indemnity payment for certain well-defined conditions, a system similar to auto insurance. Patients would have to pay out of pocket for "gold-plated bumper" care and would be allowed to pocket the difference if the treatment costs were below the indemnity payment, which would ameliorate the current incentive misalignment. Feldman acknowledged that in order for his plan to work, other changes would need to be instituted--two he mentioned were the abolition of supplemental insurance and a requirement that the indemnity be spent on medical care. By better aligning the incentives of patients and doctors, Feldman said, indemnity payments could provide immediate and significant efficiency gains to Medicare.

Despite the potential gains from market-based solutions, Bill Thomas--a visiting fellow at AEI--pointed out that political realities are aligned against the implementation of these reforms in the current context. He described the challenges he faced during the passage of the Medicare Modernization Act in 2003, when Republicans controlled both houses of Congress. "When you talk about the micro-changes that we talked about behind closed doors," he said, "you will not believe how much was left on the cutting room floor--very creative ideas that couldn't pass the political test." He emphasized that the biggest criticism of most market-based solutions is that they create "two-tiered" access to healthcare. According to Thomas, whether John McCain or Barack Obama wins the presidency in November, the Democratic majorities in the House and Senate will quash any hopes for substantial market-based reform in the near future.


For video, audio, and event information, visit

More information about Pauly's book is available at More information about Feldman's book is available at For information about AEI's Studies on Medicare Reform series, visit

For media inquiries, contact Sara Huneke at 202.862.4870 or [email protected].


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