Republicans Want to Make These 2 Monumental Changes to Medicare

By Sean Williams Markets Fool.com

Fixing Social Security may be one of the top priorities of lawmakers in Washington, but the honest truth is that Medicare, the program that provides subsidized healthcare coverage to roughly 56 million people (most of them seniors), is probably in deeper trouble than Social Security.

Continue Reading Below

According to the Medicare Board of Trustees 2016 report, the Hospital Insurance Trust, which funds Part A, the component of Medicare that covers in-patient hospitals stays, procedures, and long-term skilled nursing care, is slated to burn through its spare cash by the year 2028.

Image source: Getty Images.

The silver lining here for senior citizens is that a depletion of Medicare's spare cash doesn't mean the program is bankrupt or insolvent. However, it would mean the program would become budget-neutral. In such an event, reimbursements to physicians and hospitals would drop by an estimated 13%. The danger of such a drop is that Medicare, which is accepted by more than 90% of physicians and hospitals across the U.S., may wind up being dropped if reimbursements aren't deemed to be sufficient.

What's more, Medicare's importance for America's retirees is growing. A study from the Urban Institute showed that the average earning male turning 65 in 2015 would be expected to receive $294,000 in lifetime Social Security benefits and $195,000 in lifetime Medicare benefits. However, by 2055, average lifetime Medicare benefits are estimated at $501,000, compared to $496,000 for Social Security.

What's wrong with Medicare, in a nutshell

Continue Reading Below

Medicare's problems essentially boil down to four factors.

First, the number of eligible beneficiaries aged 65 and up is climbing thanks to the retirement (and aging) of the baby boomer generation. There's still well over a decade left for boomers to hit the eligible age for Medicare (65), so the number of beneficiaries is expected to move significantly higher.

Secondly, not only are there more eligible Medicare enrollees, but those who are eligible are living longer. Life expectancies have risen by nine years over the past five decades, according to data from the Centers for Disease Control and Prevention.

Image source: Getty Images.

Third, Urban Institutes' study highlights that far less is being collected in payroll taxes for Medicare than members actually receive in lifetime benefits, which is unsustainable. As of 2015, the average earning male is only paying $70,000 in lifetime Medicare taxes, but is collecting an estimated $195,000 in lifetime benefits.

And finally, drug developers and service providers have an inordinate amount of pricing power in the United States, meaning that medical inflation is handily surpassing the wage growth of workers and the cost-of-living adjustments that seniors receive from Social Security.

Something clearly needs to be done to preserve Medicare, and congressional Republicans believe they may have the solution.

Republicans want to make two major changes to Medicare

During the latter portions of Barack Obama's presidency, not a lot of legislation was making its way through the legislative branches of government. Of course, that's not uncommon with a split government. However, with Republicans in control of Congress and the presidency, they may be looking to make two major overhauls to Medicare.

1. Tie subsidies to average Medicare premiums

As reported by The New York Times, the first monumental change would involve allowing the market to dictate a premium support model for eligible Medicare enrollees.

Image source: Getty Images.

As it stands now, Medicare members understand that a certain percentage of their eligible medical costs will be subsidized by the government (around 80%). Drugmakers and medical service providers know this, too. This creates an escalating cost system that forces the government to devote more money to Medicare with each passing year.

The Republican solution would be to tie a premium subsidy to the average premium of all Medicare plans, including private plans, traditionally known as Part C, or Medicare Advantage. This is already how things are done for Part D, the prescription drug portion of Medicare. Currently, bids are collected for all Part D plans, then a subsidy is set at 74.5% of the average bid. The consumer then makes up the difference.

Why would Republicans look to tie subsidies to the average premium of all Medicare plans? Simple: It would put more responsibility of cost on the consumer and likely lessen the rate at which costs are rising. By tying premium support to the average Medicare premium, or say the second lowest-cost premium (sort of like how the Affordable Care Act tied premiums to the second lowest-cost silver plan, known as the benchmark plan), the federal government could put more of the cost burden on consumers who want more encompassing coverage.

There would also be additional subsidies provided to lower-income beneficiaries.

Image source: Getty Images.

2. Cap subsidy growth

The other component to the Republican plan would involve capping just how much premium support it contributes from one year to the next. In a similar fashion to tying subsidies to the average Medicare premium, the federal government could place a cap on how much more it's willing to pay out the following year. Presumably this would be a figure set by Congress either annually, or a few years in advance.

The obvious benefit to capping subsidy growth is that it could give Congress an opportunity to narrow the federal budget deficit or redirect spending elsewhere if there's a defined level of Medicare support spending on a year-to-year basis.

But will it work?

Of course, the only thing that really matters is whether or not this plan would work. As you might imagine, there are pluses and minuses to this two-pronged fix.

On the positive side, the Republican Medicare fix would probably lengthen the longevity of Medicare via its capped growth model and by tying subsidies to premiums. The aim would be to create a competitive marketplace and require consumers who want more encompassing coverage to pay their fair share for a beefed-up plan.

Image source: Getty Images.

On the other hand, there's clear concern about pushing more medical costs onto seniors given that Social Security's cost-of-living adjustments have trailed medical care inflation in 33 of the past 35 years. The average retired worker is only netting about $16,300 from Social Security annually, and more than 60% of seniors are reliant on Social Security for at least half of their annual income. Putting more of the burden on seniors to pay for their own medical costs could prove disastrous.

Another concern is that the Republican Medicare reform plan would weaken traditional Medicare. Some pundits have suggested that private plans (Medicare Advantage-approved insurers) would underbid traditional Medicare plans, pushing consumers to opt for private plans as opposed to traditional Medicare. If traditional Medicare enrollment narrows, it could lose some of its already muted bargaining power.

As with practically all Medicare reform plans, it's not perfect and it'll probably need some refining. But the fact of the matter is that Medicare needs help, and this could be the first step in getting Medicare back on a sustainable path.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.