Medicare Privatization

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Last week, members of Congress’s bipartisan “supercommittee,” which was charged with coming up with a plan to cut the federal budget deficit by $1.2 trillion over the next 10 years, announced that they would not reach an agreement before their deadline of last Wednesday. This means that unless Congress creates a separate plan or the supercommittee reaches a late agreement, automatic spending cuts affecting Medicare, the military, and other programs will take place starting in 2013. As we noted in a post in August, the Medicare cuts would represent about 2% of the program’s budget and would most likely result in slightly lower reimbursements for health-care providers.

But many members of Congress, in both parties, are unhappy with the automatic spending cuts and would like to reduce the federal deficit differently. Most Democrats insist on raising taxes on the wealthy, so that spending cuts need not be as deep as they would be otherwise. Most Republicans insist on not just cutting 2% from Medicare, but taking more drastic measures to limit how much is spent on the program. To this end, many of them support privatizing Medicare in some manner. What, exactly, would this mean?


A recent article from Reuters examines the common features of privatization proposals — such as those offered by Rep. Paul Ryan, chairman of the House Budget Committee, and presidential candidate Gov. Mitt Romney — and how they would affect the federal budget as well as seniors. According to the article, privatization could take the form of premium supports — payments to seniors that would be tied somehow to the cost of private health insurance plans they would be expected to purchase — or vouchers, which would not be tied to the cost of insurance. Currently, Medicare defines the benefits that seniors receive under the program and pays health-care providers directly, without a private insurance company in between. (The one exception is the Medicare Advantage program, in which the government pays private insurance companies a certain amount per enrollee to administer their own plans — but these plans must cover at least everything that regular Medicare does and cost the same to enrollees.) Therefore, privatization would shift some financial risk from the government to individual seniors, since they would need to directly cover any increase in premiums not covered by vouchers or premium supports.

There is no doubt that privatizing Medicare would reduce the government’s spending on the program, by directly limiting how much it spends — rather than under the current system, in which the government pays a defined price for each medical procedure or service but does not set an overall limit on spending. But Republicans and Democrats tend to disagree over whether privatization would lead to lower overall health-care spending, by both the government and individuals. Republicans claim that letting private insurance companies administer plans would create competition and thus lower costs. Democrats point out that government-run Medicare actually has a better record of controlling costs than private insurance does, with per-person spending growth between 1970 and 2009 that is one-third lower than the growth of private health insurance premiums during the same period. Furthermore, the nonpartisan Congressional Budget Office estimates that under the Ryan plan, which freezes Medicare spending, a typical 65-year-old in 2022 would pay $12,500 in yearly health insurance premiums, rather than $5,630 under Medicare. Many Republicans, however, disagree with this analysis, claiming that it does not account for the effects of competition.

What do you think — is privatizing Medicare a good idea? Would it most likely lower health-care costs by promoting competition, or would it shift too much risk to seniors? Would you support alternative ways to limit Medicare spending such as charging higher premiums to seniors with greater income, raising the age of eligibility for those without major health problems, or paying doctors a set amount to treat a health problem rather than by individual procedure? Or should Congress leave Medicare alone and focus on other ways to reduce the federal deficit — such as raising taxes or cutting military spending — even if Medicare costs continue to grow quickly? Leave a comment below!

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