Wednesday, May 09, 2007

Saving on Saving Medicare

In today's Wall Street Journal (subscription required), Thomas Saving sees a way forward on the looming fiscal problem called Medicare:

In general, no reform should be taken very seriously unless it is specifically designed to slow the rate of growth of health-care spending. On the demand side, someone must choose between health care and other uses of money. That is, someone must decide that the next MRI scan or the next knee replacement, for example, is not worth the cost. Such decisions could be made by seniors themselves, by the government (as it is in other countries), or by private insurers operating under government rationing rules. On the supply side, the way health care is produced must fundamentally be changed, replacing cost-increasing innovations with cost-reducing ones.

To examine consequences of beneficiaries making their own rationing decisions, my colleague Andrew Rettenmaier and I estimated the effects of creating reformed Medicare based on a $5,000-deductible Health Savings Account (HSA), beginning with the baby boomer retirees. The size of the deductible and the HSA would grow through time (as health costs grow), and since deposits would be made with after-tax dollars, withdrawals for any purpose would be tax free. In this way, beneficiaries would be encouraged to make their own tradeoffs between health care and every other good or service. We estimate the effects would result in a reduction in Medicare's unfunded liability by between 25% and 40%.