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March 26, 2015

Medicare's Becoming A Means-Tested Welfare Program, And That Could Be A Good Thing

  Forbes.com

President Lyndon Johnson did not want his signature legislative achievement, the 1965 passage of the Medicare program, to be a means-tested (i.e., income-dependent) welfare program.

And Johnson’s not the only one. In July 2011, AARP Senior Vice President Joyce Rogers released this statement after President Obama indicated he might be willing to consider expanding means testing in Medicare:

“Medicare is not a welfare program.  Seniors pay into Medicare their entire working lives based on the promise that they’ll have secure health coverage when they retire.  Applying a means test for their earned benefits would erode the popular support that has sustained these programs for years and made them so effective in helping older households."

Those fighting to keep Medicare from becoming a means-tested welfare program are losing the battle, but that might be the only way we’re ever going to get real Medicare reform.

While there appears to be little support for making Medicare eligibility dependent on income, there has been growing bipartisan support for imposing higher costs on high-income seniors, who now pay significantly more for some of their Medicare benefits.  The reason for forcing some seniors to pay more is to try to reduce costs in the financially imploding entitlement program.  But if Congress keeps eroding the value of the program for millions of seniors, its public support could decline.

A new Kaiser Family Foundation report breaks down the means-testing elements.

To begin with, everyone taking Medicare is automatically enrolled in Medicare Part A, which covers hospital expenses, and is funded by the FICA payroll tax.  There is no means testing in Part A—yet.

Currently, 50.8 million seniors pay a monthly premium to be enrolled in Medicare Part B, a voluntary program that covers physician expenses.  Those premiums are supposed to cover 25 percent of the program’s costs, with the federal government covering the rest from general revenues.
Of that group, 6 percent (2.9 million seniors) pay higher, income-related Part B premiums—35 percent of the program’s costs.  The income range for that group is $85,000 to $107,000 for a single person ($170,000 to $214,000 for married couples).  There are currently four income brackets; with premiums in the top bracket covering 80 percent of their physicians’ costs.
In other words, higher-income seniors are getting very little help from Medicare paying their doctors’ bills—or for that matter, prescription drugs.
Congress has imposed the same premium structure on Medicare Part D, which pays for prescription drugs.
Fewer seniors participate in Part D, 42.4 million, and 2.1 million of them (about 5 percent) pay the higher, income-related premiums.
While defenders might argue that the number of seniors subject to the higher premiums is still relatively small, that’s changing.
When the Democratic-led Congress imposed the first income-related premium hikes in 2007, and signed by President George W. Bush, the premium levels were adjusted for inflation.  But Democrats changed that in the Affordable Care Act by fixing the income thresholds at the 2011 levels.  So each year the number of seniors paying means-tested premiums can grow.
In addition, the legislation to fix Medicare’s Sustainable Growth Rate (SGR) provision, often referred to as the “doc fix,” expands the means-testing provisions to help “pay for” the cost of the doc fix.  According to the current proposal:

The portion of the Medicare Part B and Part D premium that a beneficiary pays is based on the beneficiary’s income.  This policy beginning in 2018, would increase the percentage that Medicare beneficiaries with modified adjusted gross income (MAGI) between $133,501 and $160,000 ($267,001-$320,000 for a couple) from 50 percent to 65 percent.  Beneficiaries that earn $160,001 and above ($320,001 and above for a couple) would pay 80 percent.  Additionally, current law freezes the income thresholds through 2019, at which point the income thresholds would be indexed to inflation as if they had not been frozen.  Starting in 2020, this policy would update the threshold for inflation based on where they were in 2019.

The Congressional Budget Office estimates that this change will save the federal government more than $34.3 billion between 2018 and 2025, but that just means it costs seniors about that much.

The doc fix problem needs to be addressed and the money should be found to cover the costs—or at least most of them.  But this solution only continues nibbling at the edges of the problem.  Medicare will still be financially unsustainable.

A better long-term solution is for Republicans to return to a proposal conservatives have championed for decades, though those voices aren’t very loud these days: privatizing Medicare.

Instead of giving their 2.9 percent FICA payroll tax to the government (even more for very high-income earners), workers should be able to put that money in a personal retirement account that operates similar to a 401(k).  At retirement, they could withdraw an annual premium and give it to a private health plan—similar to the way Medicare Advantage plans currently operate—or hand it over to Medicare for comprehensive coverage. House Ways and Means Committee Chairman Paul Ryan has proposed something similar, but without the pre-funding of personal accounts, which is critical to fixing the problem.

If workers were putting their own money aside for health care after retirement, it wouldn’t make any difference when they retire, as long as they had set aside an amount above a set threshold, because the workers would be using their own money.

Yes, there are transition challenges moving from the current pay-as-you-go Medicare system to a pre-funded system.  But when former Texas Senator Phil Gramm proposed just such a plan in the late 1990s, he pointed out the transition costs would only grow the longer we wait.  That warning is as true today as it was then.

Increasing Medicare’s means testing could come back to haunt those pushing it, mostly Republicans, as more and more seniors become angered that their benefits are repeatedly being cut.  But that anger might also open up an opportunity for an enterprising Republican presidential candidate to propose a bold Medicare reform plan that empowers workers and seniors to manage their own money and health care in retirement.


 

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