Sunday, May 8, 2011

A Viable And Realistic Way To Fix Medicare: Focus On Increasing The Supply Of Medical Services Instead Of Restricting Demand

Congress is facing a politically difficult problem of finding ways to continue Medicare, while facing a huge future Medicare revenue shortfall. It is politically difficult to promote ideas and legislation that will shift more medical costs to the elderly or increase everyone's tax burden, even if the reality is that the government itself in the future will no longer be able to bear the expected Medicare cost.

Over the next three decades, the number of Medicare enrollees will double and that will double Medicare's total inflation adjusted cost. Additionally, if medical cost increases follow their historical trend and grow above the inflation rate, let say at about 2 percent over the CPI, per enrollees inflation adjusted costs will double even without an increase in the number of enrollees.

The two factors, an increase in number of Medicare enrollees and increases in medical costs above the inflation rate, in total, over the next 3 decades, will cause Medicare's total inflation adjusted costs to increase fourfold.

Meanwhile, the workforce will only increase by 28 percent over the next three decades and therefore tax revenues from the current level of the Medicare payroll tax will also increase by only 28 percent. Even if Congress doubled the Medicare payroll tax rate and revenue, Medicare will see only see a 56 percent increase in revenues, which will be significantly below the 400 percent expected increase in total cost. Individual and corporate income tax increases will not be able to close the 350 percent revenue shortfall gap.

Most of the general and political discussions and suggestions to date to control medical costs for the government and for families focuses on the demand side of medical costs. Costs are controlled by limiting the amount paid by the government for specific medical services or by excluding certain medical services from the services covered and paid under Medicare or health insurance.

A More Politically Acceptable Practical Medicare Solution

Politically and practically, it may be easier to solve Medicare's expected funding shortfall on the supply side. Congress needs to find ways to substantially increase the supply of lower cost medical service providers to the elderly.

If there were significantly more medical providers to the elderly than there currently are, cost will go down. The number of elderly is expected to double in the next few decades. Meanwhile, there are an insufficient number of new doctors in the pipeline to meet that growing need.

Congress needs to find ways to allow the medical provider market to grow to meet the demand and to grow in sufficient amount to lower costs. Additionally, Congress should fund colleges and nursing schools expansions in student enrollment for 2 and 4 year programs that will graduate people who can be medical providers to the elderly. Most of the care that the elderly receive is non-specialized and can be delivered with high quality at a much lower cost than if a doctor provided the service.

Providing incentives to individuals and to schools to significantly increase the supply of low cost medical providers will lower future Medicare costs without restricting future access to medical services.

Politically, I believe it is much easier to have a public discussion about increasing medical training and increasing the availability of lower cost medical services, than it is to have public discussions about finding ways to fund Medicare's revenue shortfall or to find ways to shift costs to other parties.

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