Medicare has a confusing and outdated set of benefits, organized into insurance policies with separate cost-sharing requirements that do not exist in modern workplace health plans.

It is past time for Congress to update and simplify Medicare’s structure – an undertaking that is even more pressing now because of the program’s financial challenges. Last year’s trustees’ report projected the hospital insurance (HI) trust fund — part A – would be depleted in 2026, and there is no reason to expect this year’s update (which is past due) will show substantial improvement.

Congress should see HI’s troubles as symptoms of a larger problem. HI accounts for only 40% of Medicare spending. The other 60% comes from the Supplementary Medical Insurance (SMI) trust fund, covering physician services, other ambulatory care and prescription drugs. Medicare enrollees pay premiums set at 25% of SMI expenses; the other 75% comes from the federal Treasury (i.e., taxpayers). Over the coming decade, the transfers from the Treasury to SMI are expected to total $5.3 trillion and grow rapidly in the ensuing years.

Medicare Trustees, 2020 report

Dividing Medicare coverage up into multiple parts, with separate cost-sharing schemes, might have made sense a half century ago, when the private sector sold separate policies for doctor care and hospitalization, but it no longer does. Today Medicare is a counterproductive mix of mandatory (part A) and voluntary enrollment (parts B, for doctor visits, and D, for drugs), with further options to enroll in privately administered Medicare Advantage or Medigap plans.)

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Interrelated reforms

Medicare can be made more affordable for taxpayers and understandable for seniors without compromising protection through a series of interrelated reforms.

The changes should begin with modernization and simplification of the benefit structure and enrollment process. Beneficiaries should be presented with the full range of their benefit options through one government-administered enrollment portal. Through it, they should be able to compare the competing offerings on an apples-to-apples basis.

Congress should combine parts A and B into one policy with a single deductible and cost-sharing designed to encourage cost-effective use of care. There should be no coinsurance for inpatient hospital stays, and the cost-sharing should be adjusted to give all beneficiaries protection against high, annual out-of-pocket costs (a “catastrophic cap”).

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The actuarial value of this redesigned benefit should equal what is required for covered benefits in current Medicare law. (This ensures no increase in federal costs.)

Enforcing this cost neutrality necessarily will push the upfront, unified deductible to levels that may seem unattractive to the program’s enrollees. Nonetheless, the distributional effects would be positive, with the sickest beneficiaries getting relief hospital expenses they cannot avoid, along with limits on their annual out-of-pocket exposure.

Because of its unique design, part D should remain a separate benefit initially and be integrated into the combined Medicare insurance plan as premium support, discussed below, is implemented for parts A and B.

The Centers for Medicare and Medicaid Services (CMS), which administers Medicare, also should make it easier for the program’s beneficiaries to see the premium implications of their coverage options. Right now, it is not a simple matter to compare the all-in costs of enrollment into traditional Medicare, with drug coverage and Medigap, versus Medicare Advantage plans offering their own version of supplemental benefits.

Next, Congress should pay for Medicare coverage differently to foster competition and lower overall costs. Medicare Advantage plans should compete against each other and the traditional program, based on the premiums they charge for standard Medicare benefits. Medicare would then provide a monthly premium payment based on the average cost offering in each market. Seniors could reduce their costs by enrolling in plans that are the most efficient.

The Congressional Budget Office (CBO) estimates this switch would reduce overall expenses by 8% and beneficiary costs by 5%. The savings could be split between closing the program’s financing gap and improving benefits.

Seniors also could lower their costs if CMS rewarded them for choosing lower-priced practitioners. Only about 40% of medical care is amenable to price comparisons in advance of the receipt of services, but the potential savings from better transparency is still substantial.

CMS is already requiring hospital systems and physicians to disclose more pricing of their services, but it should go one step further by eliciting their “all-in” prices for standard definitions of common and costly procedures. Beneficiaries could then share in the savings when getting services with prices below what Medicare would normally pay.

Medicare is indispensable to its enrollees, and it can be even more valuable in the future by updating it and making it more efficient. Using the savings from cost-reducing reforms would improve Medicare without exacerbating its burden on taxpayers.

James C. Capretta is a senior fellow at the American Enterprise Institute. He is the author of the report “Market-Driven Medicare Would Set U.S. Health Care on a Better Course,” published in July by AEI.

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