The grand bargain

Democrats and Republicans have drawn lines in the sand: “no structural Medicare reform” and “no new taxes,” respectively. Unfortunately, the facts of our nation’s fiscal situation prove inconvenient for both sides.

As we testified on Nov. 1 before the Joint Select Committee on Deficit Reduction, the principal driver of long-term federal deficits is the rapidly mounting cost of healthcare, particularly Medicare. Over time, healthcare spending per capita has grown about 2 percentage points per year faster than the economy. This trend is clearly unsustainable. 

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The aging of the population and the retirement of the baby boomers, however, is a separate, additional problem. Paying for this influx of seniors to Medicare and Social Security requires new revenue. 

Any complete solution, therefore, requires that Democrats agree to structural reform of Medicare to slow its cost growth and Republicans agree to increase revenue to pay for the retirement of the baby boomers. 

Fortunately, fundamental reform of our arcane tax code to create a simpler, pro-growth system can increase revenue. Clearing out the myriad loopholes and deductions will remove tax considerations from decisions on how to work, invest and spend, thereby improving economic efficiency and accelerating growth. Significantly lower marginal tax rates will improve incentives to work, save and invest. And despite a low top rate, the new tax system proposed by the Bipartisan Policy Center’s Debt Reduction Task Force, which we co-chair, will be more progressive than the current system.

Structural Medicare reform need not abolish current Medicare nor force any beneficiary to leave it. The Domenici-Rivlin Protect Medicare Act allows beneficiaries not only to stay in traditional Medicare if they wish but also presents them with competing private plans as alternative options. The competition will control program spending by driving down the cost of care. In short, the Domenici-Rivlin plan preserves Medicare for those who want it, protects low-income beneficiaries from cost increases and reduces federal expenditures by flattening the steep Medicare spending trend.

Today, Medicare gives providers little reason to deliver better care at a lower cost. It is largely a “fee for service” system in which providers are paid to deliver specified services — the more services, the more fees — regardless of quality or outcome. The government pays every bill. Medicare has limited reimbursement to providers for each service, but that just creates incentives to supply more — and more costly — services, and eventually will cause providers to withdraw from the program.

Under Domenici-Rivlin, a new federally run Medicare Exchange — a truly competitive marketplace — will allow beneficiaries to choose among private comprehensive healthcare plans and traditional Medicare. This competition among healthcare plans will encourage providers and plans to innovate to deliver quality care efficiently.

Our proposal establishes regional competitive bidding among health plans, including traditional Medicare, to account for geographic disparities in costs. The contribution will reflect actual costs of providing services in every region and guarantee the elderly across the country at least the coverage they enjoy today under the Medicare program.

As the private insurance market exchanges established by the Patient Protection and Affordable Care Act get under way, many more people will be accustomed to choosing among plans. Moreover, healthcare plans will be in an excellent position to offer individuals turning 65 uncomplicated transitions to plans on the new Medicare exchange when they retire. So, many seniors becoming eligible for Medicare would be able to stay with the health plan they already like.

If these reforms fail to control costs sufficiently, the growth in per-beneficiary federal support will be limited to a defined rate set in the legislation. If costs rise faster than the established limit, Medicare beneficiaries will have to pay higher premiums. Beneficiaries with low incomes, however, will be exempt from this cap, and will be guaranteed access to traditional Medicare with no additional premium. 

Because competition will encourage creation of cost-effective benefit designs, we believe the premium cap will prove superfluous. But the American people understand that costs cannot simply continue to grow at their current rate. The Affordable Care Act already established a cap on the growth of Medicare. Moving to competition and choice, with today’s Medicare as an option, creates the incentives to slow costs even more without today’s continual threat of provider payment cuts. 

Solving the U.S. debt crisis requires structural changes to slow Medicare’s cost growth plus significant new revenue to accommodate the retirement of the baby boomers. Any plan without those two essential components should go back to the drawing board.

Domenici, a Republican from New Mexico, served as chairman of the Senate Budget Committee. Rivlin was the founding director of the Congressional Budget Office and a director of the Office of Management and Budget in the Clinton administration. They co-chair the Bipartisan Policy Center’s Debt Reduction Task Force.