HomeHealth Care NewsMedicare Cuts Loom–Time to Modernize - Commentary

Medicare Cuts Loom–Time to Modernize – Commentary

President Biden and former President Trump have made the same promise to voters: they won’t touch Social Security or Medicare.

That’s not merely disappointing. It’s irresponsible. According to the latest Social Security and Medicare Trustees Report, in the very near future, the trust funds supporting these two programs will be depleted. If the president and Congress do nothing in the interim, the law requires automatic cuts in benefits.

In just eight years, nearly 78 million Medicare beneficiaries will face an automatic 11 percent payment cut in their hospital insurance benefits, and these cuts could come sooner and strike even deeper if America is hit by a recession. In 10 years, 66 million Social Security beneficiaries will see their monthly benefit checks cut by 23 percent.

That is just the short-term problem. Looking further into the future, the trustees’ report reminds us we have made promises to millions of workers who are paying payroll taxes today, and the future cost of those promises far exceeds the expected revenues dedicated to supporting them. Further, the gap between promises and future revenues keeps getting larger over time.

Looking into the indefinite future, the trustees tell us the combined promises in both programs exceed expected revenues by $163 trillion. That number is in current dollars, and that unfunded liability is almost seven times the size of today’s entire economy.

No Money, No Plan

In a sound retirement system, we would have $163 trillion in the bank earning interest—so the funds would be there to pay the bills as they arise. In fact, we have no money in the bank for future expenses and there is no serious proposal to change that.

So, what can be done?

Hoover Institution economist David Henderson argues Medicare is the easier program to reform. The reason? Social Security benefits come in the form of cash. Medicare benefits are in-kind services. Henderson cites a well-regarded academic finding that Medicaid beneficiaries value enrollment in Medicaid at as little as 20 cents on the dollar, which means if you offered the enrollees membership in Medicaid or a sum of money equal to a little more than one-fifth the cost of Medicaid, a great many enrollees would take the money.

Is it possible the value seniors place on Medicare is similarly much below what Medicare actually costs? If so, there would be an opportunity to spend less on medical benefits, give seniors a cash rebate, and lower the taxpayers’ burden—all at the same time.

A mechanism for accomplishing that would be a Health Savings Account, which allows younger people to make choices between medical care and other uses of money. A similar account for seniors, but with after-tax deposits and tax-free withdrawals (like a Roth IRA), would avoid the charge the deposits are a tax dodge. But it would allow seniors to conveniently avoid unneeded care and bank the savings for other purposes.

Modernizing Medicare

This is one of a number of ideas proposed in Modernizing Medicare, a multi-authored Johns Hopkins University publication, edited by Heritage Foundation scholar Robert Moffitt and former Heritage vice president Marie Fishpaw.

Of course, in order to give Medicare enrollees the full freedom to choose between health care and other uses of money, seniors would have to have a wider choice of plans, and insurers would need greater freedom to offer innovative alternatives.

In one chapter, former Congressional Budget Office Director Douglas Holtz-Eakin envisions putting Medicare on a budget. Seniors would be given “premium support,” allowing them to buy private insurance of their own choosing. The government’s contribution would grow through time but somewhat more slowly than spending under the current system. Holtz-Eakin estimates such a reform would save taxpayers $1.8 trillion over 10 years and save beneficiaries $­­333 billion.

Build on Medicare Advantage

Contributing authors point to Medicare Advantage (MA), which already enrolls half of all beneficiaries, as the vehicle for change. In this program, seniors enroll in private plans similar to the employer-provided plans they had while working. Medicare pays a large share of the cost of the premiums.

American Enterprise Institute economist Joe Antos points out that in MA, seniors pay one premium to one plan. By contrast, in traditional Medicare, they pay three premiums to three plans: Part B, Part D, and Medigap coverage. Antos says traditional Medicare must become more like MA, which saves seniors money and allows for integrated care—such as combining medical and drug coverage in the same plan.

In a chapter by yours truly, I argue for several reforms to make MA work better—including continuous open enrollment and the right to return to traditional Medicare.

If the enrollees’ medical conditions change, they should be able to switch to a plan more appropriate for their care. If diabetes emerges, enrollees should be able to switch to a special needs plan specializing in diabetic care. If enrollees develop heart disease, they should be able to switch to a special needs plan for congestive heart failure. No one should have to wait 12 months to enroll in the plan that best meets their medical needs.

Currently, if a senior stays in an MA plan for more than a year and then chooses to return to traditional Medicare, there can be financial penalties. If people knew they could easily return to traditional Medicare when needed, enrollment in MA plans would be more desirable.


John C. Goodman, Ph.D. (johngoodman@goodmaninstitute.org) is co-publisher of Health Care News and president and founder of the Goodman Institute for Public Policy Research. A version of this article appeared on The Goodman Institute website on June 3, 2023.

See related article, July 28, 2023:  Market Solutions to Fix Medicare Insolvency

John C. Goodman
John C. Goodman
John C. Goodman is president of the Goodman Institute for Public Policy Research.


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