Medicare: The Ends Justify The Means Test

Tying premiums to income may control costs

Congress wouldn't be struggling to add prescription drug coverage to Medicare now if it had stuck to its guns 15 years ago. In 1988, lawmakers passed a drug benefit -- but repealed it less than a year later. One reason: To finance the plan, high-income seniors paid steeper premiums than the low-income elderly. That idea, known as means testing, set off such a furor pols vowed never to tie Medicare to income again.

Now, the drug benefit is back -- and so is means testing. But this time, the idea might survive. Why? Money. The $400 billion drug benefit that Congress may soon pass will send the total Medicare tab soaring past $4 trillion over the next 10 years. And one way to trim costs is to recognize that a former CEO can pay more for insurance than his retired limo driver.

GET IT RIGHT. Many health experts favor the idea. So do key senators from both sides of the aisle. "The only way to make [the benefit] affordable is to reduce subsidies for wealthier seniors," says Senator Don Nickles (R-Okla.), who has joined with Senator Dianne Feinstein (D-Calif) on a bill to do that.

The idea remains controversial. Liberal Democrats worry it will cause upper-income seniors to abandon Medicare. Some conservatives fear a premium hike looks like a tax increase. Still, House-Senate negotiators have agreed in principle to the linkage. But they're struggling over details. Should premiums alone be tied to income, or should benefits also be cut for wealthier seniors, as the House wants? And how should higher premiums be collected?

Now that Congress is nearing agreement on the idea, it's vital to do it right. For one, premiums -- not benefits -- ought to be tied to income. The House would limit coverage for wealthy seniors with very high drug costs. That would force insurers to verify incomes before paying benefits -- a nightmare to administer. Fairness counts, too. Income-based premiums would boost costs for all wealthy seniors. But cutting benefits only targets the ill.

While they're at it, the politicians also should make wealthy seniors pay more for Medicare Part B, which provides insurance for doctor visits.

Getting this done will be politically difficult. Since tax returns provide the only way to verify income, the easiest way to collect the extra premium would be to add it to the 1040. Conservatives worry that will look like a tax grab. For their part, liberals fear that higher premiums for some would fray the principle of universal social insurance. But those concerns are abating.

Limiting government subsidies is never easy -- especially for a program as popular as Medicare. But in an era of huge deficits and staggering health-care costs, tying Medicare premiums to income is the right choice.

By Howard Gleckman

    Before it's here, it's on the Bloomberg Terminal.