Friday, October 5, 2007

Means Testing for Medicare--It's Unavoidable If Politically Problematic

Means testing is politically problematic but necessary and probably unavoidable if we are to shore-up Medicare.

The Bush administration is pushing a proposal to begin means testing on the new Medicare Part D drug benefit. They would increase deductibles and premiums on single seniors with incomes over $82,000 a year and couples with incomes over $164,000 a year.

We already have a means test on Medicare Part B premiums (the portion that pays doctor costs and other outpatient care).

The Bush administration would also freeze the thresholds at these levels instead of letting them rise with inflation--or indexing them--as is the case with Part B now.

Imposing these thresholds on Part D and freezing them at the $82,000/$164,000 level for both Part D and Part B would impact only 4.3% of seniors today and raise $10 billion over five years--$7 billion from Part B and $3 billion from Part D.

We cannot continue Medicare as it is. The Medicare Trustees say that the hospital trust fund will be depleted in 2019 and in negative cash flow as soon as 2010.

To make Medicare solvent we either have to decrease costs or increase income.

We can cut costs through more effective care management, just plain price controls, or rationing of services. Many believe the market is the best way to do that and others believe it will only happen through government management--that's another issue!

Means testing for high income seniors may be the easiest and least painful way to improve Medicare's financial outlook.

On the surface, you would think Congress would jump at the opportunity to make a big dent in Medicare's solvency problems with a progressive financing system--not unlike the progressive income tax system we have today where the rich pay more.

But means testing is very unpopular. This past March, the Senate rejected means testing of Medicare by a vote of 52-44. AARP is dead set against it. In today's Washington Post, John Rother, policy director for AARP was quoted as saying, "You say it saves money and these people can afford it, but it also eats away at the incomes of seniors. It erodes their sense of reliability on these federal programs, and it certainly erodes political support."

John is right on each point. In particular, having the rich in the same entitlement programs with the poor--both Medicare and Social Security--has been critical to maintaining the political support for these programs.

But we can't just continue to think Medicare--and Social Security for that matter--is going to just bop along as it has. Health care costs continue to rise at unsustainable levels and the Baby Boomers are about to hit the program.

Make no mistake, means testing by itself won't be enough. It will also take a concerted effort to deal with the cost side.

While I will suggest means testing is going to be an unavoidable tool in the kit toward fixing the entitlement programs, concerns that a failure to index the means test will eventually lead to higher costs for the middle class are legitimate. The current looming alternative minimum tax (AMT) crisis provides an important lesson. When the AMT was first imposed it only impacted the rich who were avoiding their taxes. Now, it is about to hit the middle class hard. Indexing is critical if the objective is to truly impact only the top 5% or 10% of seniors by income.

Ron Pollock of Familes USA, generally considered to be a liberal advocacy organization, takes, what strikes me, as a more constructive view arguing means testing makes sense as long as the thresholds rise with inflation (they are indexed), the poor have adequate support, and everyone continues to be in the program in order to maintain political support across income class lines.

Ron is dead on. Bipartisan agreement along these lines would go a long way toward shoring up our entitlement programs and maintaining the broad political support that has been so necessary.
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