The New Deal and Great Society policies of Medicare and Social Security started out as small programs in the Thirties and Sixties, but this year’s Medicare expenditures will total about $391 billion. The Medicare Trustees have issued a “funding warning” for the program in their last two annual reports. According to the Medicare Trustees 2008 statement,
“Underlying health care costs per enrollee are projected to rise faster than the wages per worker on which payroll taxes and Social Security benefits are based. As a result, while Medicare’s annual costs were 3.2 percent of GDP in 2007, or nearly three quarters of Social Security’s, they are projected to surpass Social Security expenditures in 2028 and reach 10.8 percent of GDP in 2082.”
Without Medicare reform, the entitlement program’s costs could consume one of every ten income tax dollars by 2010, notes a new National Center for Policy Analysis (NCPA) policy paper. But Dr. John C. Goodman, originator of health savings accounts (HSAs), believes that under his new plan Medicare could cost no more of America’s national income by mid-century than it does today.
In his September policy report, the president and founder of NCPA proposed reforming the Medicare system to mandate pre-funded health insurance retirement accounts (HIRA) for each American worker. “Here’s the bottom line: In return for making small sacrifices today, very realistic simulations show that we can reach midcentury—when today’s teenagers reach retirement age—with a Medicare system no more burdensome (relative to national income) than the program is today,” asserted Dr. Goodman.
Under this new system, current workers would pay an additional 2% payroll tax, matched by their employers, which would then be deposited into the HIRA. Participants receiving pay-as-you-go benefits under the traditional Medicare program would gradually be phased out of the system.
Upon retiring, Dr. Goodman says that workers’ HIRAs could be converted into
• a conventional Medicare Standard Comprehensive Plan (SCP);
• an annuity used to pay for private health insurance premiums; or
• a government-regulated HIRA from which owners can deduct a certain percentage for the payment of premiums.
“Like the current Medicare program, the reformed system we propose would be mandatory,” writes Dr. Goodman, the creator of health savings accounts (HSAs). “However, it would be much closer to a completely private system than what we have today.” The plan would
• invest HIRA funds in “diversified, conservative, international portfolios;”
• encourage 5-year contracts between patients and their providers;
• “financially reward people who reduce taxpayer obligations,” especially through rebates;
• and pay providers more money for initial treatments such as surgery, provided doctors and hospitals reduce the occurrence of medical complications.
However, the plan still provides for considerable government influence throughout each step of the process, including:
• mandatory participation;
• taxes on “overfunded” HIRAs which are designed to redistribute wealth to the poor;
• government caps on HIRA withdrawals; and
the possibility of Congress changing the laws in the future.
Dr. Goodman describes American workers as “nominal owners” of their HIRA’s, with their “rights to these funds…contingent on several factors,” including overall wealth and an individual’s age at time of death. “The Core and Intermediate Models would allow for the HIRA balances in the large or “overfunded” accounts to be taxed to make risk-rated premium payments on behalf of individuals with ‘underfunded’ accounts,” wrote Dr. Goodman. He later continued,
“It will also contribute more to insurance for the sick (who will require larger risk-adjusted insurance premiums), than for the healthy. In this sense, the role of the government is to redistribute from high-income to low-income and from the healthy to the sick within each age cohort.”
The plan, however, would change the current system from merely promised healthcare benefits into individually-owned accounts that “enjoy the full protection of due process of law” and “the government will not be able to seize the funds any more than it can seize the funds in someone’s [Individual Retirement Account],” argued Dr. Goodman.
“Whereas today, 86 percent of all Medicare spending is funded through taxes, by 2080, taxes will be needed for only one out of every four dollars of spending,” wrote Dr. Goodman of his proposed reforms. This is because, he explains, “whereas there is no prefunding of Medicare today, 60 percent of all Medicare spending [under this plan] will eventually be funded through savings generated by beneficiaries during their working years.”
70 percent of Dr. Goodman’s anticipated reduction in Medicare costs stems from “the effects of pre-funding,” or the additional 4% payroll tax. 20 percent comes from improved demand-side incentives such as an emphasis on “efficiency” and rebates from the government. 10 percent of the reduction stems from “better supply-side incentives,” such as increasing physician efficiency, and more efficient “reimbursement arrangements” for insurers.
However, taxes could increase, or decrease, over time depending on healthcare costs. “Since it is impossible to accurately predict the cost of healthcare 40 years into the future, there is no particular reason to believe that the initial mandatory contribution rate will need to be kept constant,” Dr. Goodman wrote. “Every five or 10 years we expect adjustments to be made, as new information about the futures becomes available.”
Dr. Devon Herrick, speaking on behalf of Dr. Goodman, explained this policy further. The NCPA senior fellow told this correspondent via email that “The point of the 4% payroll tax is to get away from the pay-as-you-go and begin to have people begin saving for future medical needs while they are still young. However, it the 4% replaces the current Medicare payroll tax deduction, the lost revenue will have to be made up somehow during the transition period.”
“However, this transition will be much easier if undertaken now rather than waiting 70 years when it will require 90% of income tax to cover seniors’ Medicare and Social Security costs,” he wrote.
While some might argue that Medicare should be done away with altogether, Dr. Goodman finds this outcome politically unlikely, to say the least. “Why does participation have to be mandatory? It doesn’t,” wrote Dr. Goodman. “And it shouldn’t if we are willing to allow people to live with the consequences of their own decisions and their own bad luck.”
“However, there is no evidence of any such willingness.”
When asked what experiences brought him to this conclusion, Dr. Goodman tersely answered, “Watching the U.S. Congress.”
Bethany Stotts is a staff writer at Accuracy in Academia.
