What will happen with Medicare?

Daniel Shaviro writes:

While the future is inevitably opaque, here is a forecast. The next few years may see the adoption of policies that widen the fiscal gap, including the enactment of unfunded prescription drug benefits that keep getting larger through a political bidding process [good call here!]. By 2010-20, however, the entitlement programs’ fiscal prospects will look grave enough to prompt significant tax increases that are now unthinkable. These will include the enactment of a VAT that is officially earmarked to one or both of the entitlements, because the lure of a dedicated money machine will have grown too great to pass up.

Medigap will be addressed at some point, because cross-subsidization is so hard to defend, but the impact of the change will be unduly deferred. Copayments will increase and the Medicare eligibility age be postponed, though again with a deferred effective date. Explicit means-testing within Medicare is unlikely…And Medicare will continue to misdirect its insurance coverage toward the low end as opposed to the high end…

Inflation will be used to narrow the fiscal gap…these might include eliminating or reducing the indexing of income tax rate brackets and Social Security benefits. Medicare will benefit fiscally from inflation because it permits payments to providers to decline in real terms without declining nominally. Indeed, doctors will drop out of Medicare in increasing numbers as its payment fees shrink relative to those that patients with the cash are willing to pay…

We are then told that we will see health care rationing, lower investments in health care human capital and technology, and growing disparity between rich and poor in terms of health care access.

For a useful comparison, here is Shaviro on what should happen.

The bottom line: The fiscal burdens of Medicare are, by far, the biggest economic problem in today’s America. David Cutler (p.77 of the book) estimates that restoring long-term fiscal balance to the program would require immediate benefit cuts of 38 to 61 percent. That’s not going to happen.


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