Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.

Sustaining Medicare: Controversies and Alternatives

Clarke E. Cochran


June 14, 2013

By Clarke E. Cochran

Medicare is among the most successful public entitlement programs in American history. Medicare is in deep trouble.

The very success of Medicare is a source of its predicament. Because of Medicare, America’s elderly and disabled now live longer and healthier lives. Yet the pathologies of the United States health care system, combined with the baby boom generation reaching age 65, ensure that federal expenditures for the program are unsustainable.

In normal political times, these problems would be difficult, but not intractable. The vicious ideological trench warfare of the last decade, however, makes it very thorny to craft policies to extend Medicare’s successes, while keeping it fiscally solvent. In general, Democrats and progressives wish to preserve Medicare’s current structure, making modest changes to improve quality and to ensure financial sustainability. Republicans and conservatives support fundamental changes in Medicare’s design.

The Center for Public Justice affirms the importance of a successful Medicare program, while also being committed to responsible public policy that is sustainable and adequately and fairly funded. To meet these goals, Medicare must change.

Modest Reform Proposals

The Affordable Care Act (aka “Obamacare”) included provisions to save Medicare dollars. Reducing payments to Medicare Advantage plans, reducing payments to providers, and imposing higher Medicare taxes on upper income earners and beneficiaries could achieve savings of approximately $700 billion over ten years, helping push the estimated exhaustion of the Part A Trust Fund from 2017 to 2026.

Additionally, the ACA accelerated health care delivery system reforms that had been initiated in the Clinton and Bush administrations, changes that may be summarized as moving Medicare from “payment for quantity” of services to “payment for quality.”

President Obama’s FY14 Budget outlined modest reforms to preserve Medicare. The budget would increase revenues by raising income-related premiums under Medicare Parts B and D, increasing Part B deductibles for new beneficiaries, and imposing a surcharge on new beneficiaries who buy expensive Medigap policies. The President’s proposals reduce Medicare expenditures by lowering the target growth rate for Medicare spending to GDP + 0.5 percent for 2020 and after. He would require drug manufacturers to provide rebates for Part D plans equivalent to the current Medicaid discount, reduce bad debt payments to providers, reduce payments to Critical Access Hospitals, and increase fraud and abuse enforcement. Finally, the President’s budget would enhance Medicare’s quality and benefits by closing the Part D “donut hole” five years earlier than specified by the ACA and by moving away from fee-for-service payment to acute care providers toward “bundled payments” for episodes of illness.

Other advocates propose increasing Part A premiums paid by working adults, simplifying Medicare’s structure by combining Parts A and B, raising the age of eligibility for Medicare from 65 to 67 or 70, and allowing Medicare to negotiate drug prices under Part D.

As beneficial as these changes might prove, they are likely too modest. Medicare’s chassis and engine were designed fifty years ago when the practice of medicine was far different. Critics argue that modest reforms fail to create a modern Medicare.

Fundamental Structural Changes

Defined Contribution. These proposals call for Medicare to transition from “defined benefit” to “defined contribution,” often called “premium support.” For example, present recipients and those now under age 55 could have the choice of moving to the new design, which would be mandatory for those turning 65 in 2024. Medicare would give a defined contribution to each recipient per month to purchase competing Medicare insurance plans. Recipients would pay the extra cost for any plan costing more than the Medicare contribution. By controlling the payment, government controls its Medicare spending and preserves the program’s solvency.

However, unless the contribution rose as fast as health care inflation, the premium would be worth less and less over time, forcing people to use more of their own funds to purchase adequate coverage, especially burdening low-income seniors. Moreover, the free market seldom works effectively in medicine. The idea of elderly and disabled persons negotiating the health insurance marketplace is tragicomic.

Capitation. Currently, health spending in the United States is 18% of GDP. In this reform, Medicare payments would be indexed to GDP growth, with the full program transitioning from fee-for-service to capitation.

Under the current fee-for-service system, providers receive a payment for every service. The incentive to maximize services has led to cases of rampant overtreatment and wasteful procedures. Capitation means that providers receive a monthly payment for every patient under their care. Because the payment does not rise if the patient is ill or if the number of treatments increases, the providers are motivated to keep the patient as well as possible.


Medicare change advocates have fundamental strategic and principled disagreements. (I will evaluate the proposals summarized above in a longer piece that CPJ will publish next fall). Here I list reforms that would be most in line with CPJ principles:

Short and Medium Term

  • Continue the ACA’s delivery system reforms.
  • Enhance revenues by increasing premiums and deductibles in Parts B & D for upper income recipients.
  • Reform physician payment incentives toward primary care.

Long Term

  • Withhold Medicare payment for new technologies until they are proven by rigorous comparative effectiveness research.
  • Transition Medicare to premium support.
  • Ensure that premium support payments to Medicare beneficiaries rise at GDP growth plus 0.5 percent and are adjusted to the health and income status of beneficiaries.

- Clarke E. Cochran is Vice President of Mission Integration at Covenant Health in Lubbock, Texas.

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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”