Peddled as a means of saving old people too poor to afford medical coverage in their declining years, Medicare is more of a creation of America's weird tax code, which rewarded offering health insurance as a benefit to current employees, often unavailable to those who move on to new jobs or retirement. Since then, it has largely displaced private alternatives even as it consumes an ever larger share of the federal budget—and of GDP. As it is, the program is unsustainable and is a good target for the Department of Government Efficiency (DOGE) and Congress to consider for replacement by alternatives that offer lower costs, more freedom, and better care.
A Program Born From the Tax Code
Before Medicare was introduced in 1965, about 70 percent of Americans had health insurance, mostly provided as a benefit by employers. That arrangement emerged because "employer-provided health insurance benefits were not subject to federal income taxation," as noted by Michael A. Morrissey in Health Insurance. Workers effectively paid lower taxes by taking part of their compensation in health benefits rather than holding out for a higher salary and paying for standalone medical coverage.
Unsurprisingly, coverage was lower among retirees because "many of these persons who had insurance coverage before retirement were unable to retain the coverage after retirement…because the policy was available to employed persons only," according to a 1964 federal survey of health insurance coverage. Even so, according to the survey, roughly half of those over 65 had hospital and surgical insurance.
Medicare's Runaway Costs
Once introduced, Medicare did what government programs tend to do: It grew in size and expense. "Since 1960, U.S. national health expenditure (NHE) growth rates have typically outpaced economic growth rates," according to the Medicare trustees 2024 annual report. As a result, the report projects that Medicare expenditures will rise from 3.8 percent of GDP now to over 6 percent—or over 8 percent under alternate assumptions (it was 0.71 percent in 1970). As a percentage of the federal budget, Juliette Cubanski and Tricia Neuman of KFF forecast in 2023 that Medicare would "rise from 10% of total federal spending in 2021 to 18% in 2032" (it's already 15 percent, so is likely to exceed that prediction). Even so, the Medicare trustees say, without increases in physician reimbursement, "quality of health care received by Medicare beneficiaries would, under current law, fall over time compared to that received by those with private health insurance."
Even without that increase, find Jagadeesh Gokhale and Kent Smetters of the Penn-Wharton Budget Model, the unfunded obligations of Medicare and Social Security—the gap between what they've committed to spend and taxes to cover those commitments—"are twice the size of explicit Treasury debt."
Something has to give. That's either the U.S. economy or the current structure of Medicare. Fortunately, there are better ways to provide health coverage than to push Americans into an expensive and poorly structured federal program.
"Medicare is junk insurance," the Cato Institute's Michael F. Cannon commented in 2022. "Medicare spends vast sums on medical care that provides little or no benefit to patients. Medicare subsidies encourage the consumption of low-value care, while the rules Congress attaches to those subsidies reward low-quality care and discourage many quality improvements."
Cannon points to research finding that at least one-third of Medicare spending produces no value, including evidence that, on net, the program didn't save any lives among patients during its first 10 years. Other expenditures produce some value for patients, but at such a low level that many people would have preferred to spend the money on something else.
Reforms Emphasize Choice and Save Money
As an alternative, Cannon suggests that "Congress should allow workers to put their full Medicare payroll tax payment (generally 2.9 percent of earnings) in a personal savings account. Workers could invest those funds in a number of vehicles and augment those funds in retirement with other savings." Cannon suggests that Congress could make these contributions voluntary to maximize choice.
Along similar lines, John C. Goodman of the Independent Institute points to already-popular Health Savings Accounts as a model. "A similar account, but with after-tax deposits and tax-free withdrawals (like a Roth IRA) for seniors would…allow seniors to conveniently avoid unneeded care and bank the savings for other purposes."
Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, calls for converting Medicare into a voucher-like system of "premium support" for private health insurance.
"Instead of directly paying all of the costs of care in, for example, [Medicare] Parts A and B," Holtz-Eakin writes, "under premium support insurers would bid for the right to provide a defined bundle of services to seniors, and the federal government and beneficiary would provide the insurer a fixed contribution that would vary by the health needs of the beneficiary—more support for those with greater medical needs."
Like Cannon, Holtz-Eakin emphasizes that this would be a big gain in the form of expanding people's options rather than shoehorning them into a one-size-fits-some government program. But given Medicare's crippling financial situation, it's important to point out that he also predicts that this proposal would result in "savings totaling over $1.8 trillion in taxpayer costs over 10 years and $333 billion in savings to beneficiaries."
Medicare Advantage, highlighted by many reformers, already provides an example of a popular quasi-private alternative to traditional Medicare. That's evidence that further emphasizing choice and reducing the government's role would control costs, improve outcomes, and be well-received by the public.
And here's the thing: With the trustees themselves admitting that Medicare spending is growing faster than the U.S. economy and gobbling up a greater share of the federal budget and GDP, the program has to change in important ways. Converting a government boondoggle that came into being largely because of a peculiarity of the tax code into something more consistent with America's tradition of choice would be a welcome step away from the financial brink and towards more freedom.
In their quest for a smaller, leaner government, the DOGE and Congress should look at reforming Medicare.
The post Medicare Deserves Attention From DOGE and Congress appeared first on Reason.com.
