Medicare for Beginners

This isn’t a post explaining how Medicare works in detail. It’s a post about why Medicare matters to you.

The basic “problem” with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The “solution” proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I've described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle.

We created Medicare in the 1960s because retired people did not have another viable way of getting affordable health insurance. Medicare forces workers to pay for retirees' health insurance, but since workers become retirees someday, it's in their own interests to do so, assuming the system remains in place.

Forty-five years later, the same factor that is creating the projected Medicare deficit — health care inflation — is also making it even harder for non-working people to get affordable health insurance. On its face, this should make it even more important to preserve the basic structure of Medicare, even if it requires a higher payroll tax: you pay now, but in return you get decent health insurance later. But instead of being concerned with ordinary people — the workers who will need Medicare when they retire — the political class is concerned with the abstraction called the government deficit. Hence its overriding concern is providing cost certainty to the government, even if it means eliminating Medicare's most important feature — guaranteed insurance.** In addition, the political class seems to think that cutting spending is always better than increasing taxes — even though, to some extent, the two are equivalent.

To put it another way, think about it from the perspective of someone who is working now. She may have a stable job, a good income, and decent health insurance through her employer. But someday she is going to stop working. In a world without Medicare, or one where Medicare has become a voucher system, that means she has to buy insurance on the individual market. And the most important thing about the individual market — more important than the high prices and the lousy policies — is that no one has to sell you a health insurance policy. If you have the wrong medical profile, you could be simply uninsurable. That's how a free market works.***

This is an enormous source of financial insecurity. If you are forty years old and healthy now, you simply cannot insure yourself against the risk that you will be uninsurably unhealthy when you are sixty-five. And this is not a poverty problem. If you have a major illness, you will not be able to pay for all of your medical care without insurance unless you are truly, deeply rich; being merely affluent or “high net worth” won't cut it. In other words, the upper-income need Medicare just as much as the poor.

So how much would you pay just for the certainty that, when you turn sixty-five, you will be insurable? How much would you pay on top of that for the certainty that your premiums will not depend on how healthy you are? How much would you pay on top of that to have heavily subsidized premiums when you retire (Part A is paid for by current workers and Part B is subsidized by general revenues)? Right now we pay 2.9 percent of our wage income. I would pay a lot more than that — again, because it protects me from a risk from which I cannot protect myself any other way.

That is the question that matters. I believe that if people were to understand the options, they would rather pay considerably more than 2.9 percent of their wages today to get real Medicare in the future than pay 2.9 percent of their wages today to get a voucher in the future — especially when the voucher is designed to be worth less than they need to buy health insurance, and there is no assurance that they will even be able to find an insurance policy that they can use the voucher on.

In short, Medicare is a great, great thing for participants, by which I mean both workers and retirees. The very factor that threatens its fiscal stability — health care inflation — makes it an even better thing for workers. Because the risk of future health care inflation (and therefore the financial risk of future bad health as well) is so much greater than it was in 1965, we should be willing to pay more to insure ourselves against that risk — especially when we have no other way of insuring ourselves.

I realize that simply raising payroll taxes periodically to compensate for health care inflation is not a complete solution. In the long run, we need to find a way to control health care costs (something, incidentally, that Medicare does better than private insurance companies today). We need more effectiveness research and, more importantly, we need incentives to push providers toward actually applying effectiveness research. (A single payer system could solve this problem, but I'm not holding my breath.) But in the meantime, the insurance component of Medicare — by which I mean not that Medicare is an insurance program, but that Medicare insures you against the risk of not being able to buy insurance — is more valuable than ever.

As Jonathan Oberlander discusses in The Political Life of Medicare, political elites have been primarily concerned with cost control since Medicare’s beginnings, even while the public was willing to pay more for better benefits. Today, the public should be willing to pay more to preserve Medicare's most important benefit. Someone in Washington should be willing to take up this fight. But who?

*Medicare Part A is paid for by a dedicated 2.9 percent payroll tax. Part B is paid for by beneficiary premiums and by general revenues, but general revenues also grow with GDP, not with health care costs.

**This is not just a Republican position. For example, Alice Rivlin co-signed an earlier version of the Ryan Plan, although she opposes the latest version.

***Things may not be quite so bad today. The Affordable Care Act (i.e, “ObamaCare”) prohibits medical underwriting and pricing of policies based on health characteristics, and it also provides subsidies for lower-income households to buy insurance. But — the Ryan Plan eliminates the individual mandate and the subsidies, which are the very mechanisms that make insurance affordable for people with modest incomes, such as many seniors.

Update: Here's another way to put it. Medicare is like an insurance company that sells a unique product. You pay 2.9 percent of wages while you work. In exchange, you get a decent policy that kicks in at age 65 and covers you until you die; during that period, you only have to pay an artificially low premium as well as some cost sharing. No one else sells that policy for any price, nor should you trust any insurer that sells that policy for any price, because the only entity that could reliably deliver on such an open-ended, long-term promise is the government.

Now, Medicare is realizing that it's not charging enough for that policy. Paul Ryan says that therefore we should scrap the whole thing. Instead, the first question to ask should be whether Medicare can raise prices. Given the fact that there is no even remotely comparable substitute available on the market, how much would you be willing to pay for it? I think most people would pay more than 2.9 percent. That should be the first option on the table.