Everyone agrees that government spending on medical care and social security has been on a trajectory so that it could well become a major drag on the United States’ economy. The Affordable Care Act (Obama Care) was supposed to slow down entitlement growth, but it is far from clear at this point how it will accomplish this since spending on Medicaid will expand significantly. I concentrate my discussion of entitlements on spending on the elderly, and propose ways to reduce this spending without any significant additional rationing of care.
Estimates of future spending on Medicare, the main government program for medical spending on persons over 65, indicate that it will rise by 2035 from its present level of about 3% of GDP to almost 6%. This is a ballpark estimate, and it makes assumptions about the growth over time in the number of persons of different ages who will be over 65, medical spending at different ages for those over 65, and the rate of growth of GDP over this time period. The growth in the number of persons over age 65 is the only one of these quantities that can be forecast reasonably accurately.
Despite this uncertainty about what actual spending will be, I have a couple of suggestions to slowdown the growth of Medicare spending. The first one is the easiest in principle to implement; namely to raise the age of eligibility for Medicare (and for social security as well) to age 70. Social security was introduced in the 1930s when life expectancy at age 65 was more than seven years below what it is now. Moreover, the quality of life after age 65 was also much lower at that time since men and women were generally already “old” at age 65. Although Medicare was not introduced until the late 1960s, both the quality and quantity of life have also increased rapidly since then- for example, life expectancy at age 65 has risen by five years.
The more numerous and healthier men and women currently who reach age 65 should be encouraged to continue working for at least several more years- probably to age 70- instead of being encouraged to retire to collect social security benefits and Medicare payments. Those between ages 65-70 would remain in employer’s health insurance plans or buy individual insurance. In either case, they would have greater incentive to economize on their health spending.
Exceptions to the 70 eligibility age would be made for men and women who are not healthy enough to continue working after 65. At present, individuals can stop working and collect disability insurance if they can “prove” they have work-related disabilities. Workers between 65 and 70 could be folded into this disability program, and a corresponding one for Medicare eligibility, with suitable modifications to speed up the disability litigation process, and to reduce the complexity of the decisions on whether someone qualifies for disability payments.
The other main reform to Medicare is to put a larger share of medical payments onto individuals who have sufficient resources. A simple approach would be to introduce vouchers for Medicare spending, whereby lower income and wealth individuals would receive full vouchers to cover their Medicare expenses. Families with higher incomes and wealth would receive partial vouchers, with the voucher rate falling as incomes and wealth became higher. Families with partial vouchers presumably would generally purchase private health insurance to fill in gaps in their Medicare coverage.
Many of those purchasing this private “supplementary” health insurance would take sizable deductions and significant co-pays to reduce the size of their insurance premiums. These deductions and co-pays would increase the incentives of the elderly to economize on medical spending since marginal health spending will come partially or wholly out of their own pockets.