Scalpels, Not Axes, Will Fix Medicare

As the Republican Congress begins considering two versions of a fiscal 1996 budget, there will be much talk of "reforming" Medicare. The federal government's health-care plan covers 34 million elderly Americans at a cost of $178 billion this year and growing by 10% a year. The system is enormously expensive and rapidly going broke. But choosing the right approach to solve both problems will require some carefully crafted policy changes and some experimentation, not just wholesale spending cuts.

With Social Security off the table, Medicare is the only place where congressional budget committees seeking to eliminate the deficit by 2002 can find the big bucks. That's because expenses for the health entitlement have been growing faster than any other portion of the budget.

The question is precisely how to cut Medicare spending. The Senate budget proposal ducks the issue by suggesting a bipartisan commission, but the temptation of the budget-cutters will be simply to cut the rates at which hospitals and physicians are reimbursed for the care they provide. This solution, though, has been tried several times in the past and found wanting. The trouble is that hospitals and doctors have to make up for the decrease in fees by charging other, non-Medicare patients more and by increasing the number of procedures and tests for their Medicare patients. In the end, the Medicare bill keeps growing, while making health care more expensive for everyone else.

Instead, Congress needs to change substantially the way the Medicare program is run. That means trying a variety of approaches to see which ones work best. In addition to cutting Medicare fees, any reform should include significant incentives for the elderly to join managed-care networks, which should lower costs for the government. Seniors could be given vouchers to buy their insurance or health care, and they could be encouraged to economize by being allowed to bank the excess. Corporations that provide their employees with health insurance should be urged to keep retirees in their managed-care networks, with Medicare picking up part of the tab.

Medicare needs to be fixed, whether Congress passes a tax cut or not. But it won't be easy--and if the Republicans simply hack away at the program, the result may be even worse than what's there now.

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