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Medicare as we know it today cannot be sustained over the next fifty years and probably will run into financial difficulties within the next fifteen. Even before the addition of the Part D drug benefit, continuation of Medicare’s current coverage package and the trend toward adoption of new technologies would, under virtually any plausible set of assumptions about demographic change, workplace productivity growth, and changes in input prices and new technology, require very high income and payroll taxes.1 In the judgment of many, those tax rates are politically implausible and economically undesirable. The additional cost of the new drug benefit, even under hopeful forecasts, will add to the financial challenge. Although some observers think that improvements in health or other unrecognized boons may save the system, many argue that something will have to change; here I take the need for change as a given. In this paper I discuss a dramatic change in Medicare design and philosophy embodied in incipient form in the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 that could make a major contribution toward solving the long-term financing problem. That change is the introduction, in explicit if still small-scale fashion, of formal means-testing of premiums and benefits in Medicare. I consider the political and economic feasibility and desirability of preserving Medicare by what is, in effect, a plan to reduce its net benefits for the wealthiest Americans. I discuss not only the current provisions but also the rationale and possible forms of extending means-testing in the future. Any realistic plan for Medicare’s survival must have multiple elements, including tax increases and benefit modification; however, I argue that it is desirable to preserve and expand means-testing.
The present small window of surpluses (predicted to be closed this fiscal year) in the Medicare Part A budget offers hope for
those who think that benefits could yet be enhanced. There is likely to be a race between support for closing the drug
coverage gap, on the one hand, and the worsening financing situation of Medicare’s earmarked revenue sources and the overall
federal budget, on the other. It is likely, however, that means-tested premiums for Part D will remain, and it is plausible
that the budgetary stringency will win the race.
Mitigating the future problems of Medicare by having the wealthiest Americans pay more and get less from that program appears
to have some appeal. The idea that social insurance benefits should be limited for the wealthy was discussed favorably by
Sen. John Kerry (D-MA) during his 2004 presidential campaign, although in the context of the less financially troubled Social
Security program.4 Of course, if it were possible to continue Medicare in its current uniform-coverage format, most people
would probably want to do so. This change is in prospect not because people generally want to move in this direction but
because of the near-necessity of doing something.
Here are some illustrative numbers to indicate the nature of the future funding problem; they are based on estimates in the
Medicare trustees’ report but differ slightly from the projections presented there in dealing less formally with the range of
uncertain values. (For the moment, I ignore the taxes needed to fund the new drug benefit.)
Example of another Article
On the premium side, the law will change the way the Part B premium is calculated for households at different income levels. Above a relatively high income, the Part B premium will be set at a higher fraction of average Part B costs than the current approximately 25 percent benchmark. Beneficiaries with adjusted gross incomes of $80,000 (single) and $160,000 (joint) will be subject to higher premiums. The increase will be phased in over a five-year period, with the goal of increasing the percentage of average Part B expenses covered by premiums from the current 25 percent to 50 percent for these high-income beneficiaries. The short-run difference in revenue arising from this provision (compared with the continuation of uniform Part B premiums) is estimated to be less than $2 billion per year.2 The other means-testing provision in the bill makes premiums lower and benefits greater for the Part D drug coverage for low-income beneficiaries than for other beneficiaries. For those with incomes below 135 percent of the federal poverty level and with low wealth, the premium would be completely subsidized, and cost sharing would be limited to no more than $5 per prescription. The subsidy and the reduced cost sharing adjust on a sliding scale, phasing out at an upper limit of 150 percent of poverty. Note that this means testing occurs within an entirely federally funded program, not, as in the past, through supplementation of uniform federal Medicare by state-administered Medicaid programs for the poor. The revenue consequences of this change, compared with uniform benefits and premiums, are substantial, probably amounting to about a quarter of the forecast cost of the Part D benefit.