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The Future of Medicare

  • Karen Davis

    Professor Emerita in the Department of Health Policy and Management, Johns Hopkins Bloomberg School of Public Health

  • Karen Davis

    Professor Emerita in the Department of Health Policy and Management, Johns Hopkins Bloomberg School of Public Health


Today, Medicare works to provide access to care and financial protection for 50 million seniors and disabled beneficiaries. These men and women contributed to the program throughout their working lives and continue to contribute substantially to their own medical expenses through premiums for supplemental coverage and out-of-pocket expenses. Although Medicare covers people who are poorer, sicker, and more expensive to care for than private insurance plans do, it is a better buy than private coverage. Medical and administrative costs are lower than those in private coverage because of administrative efficiencies and the leverage Medicare exercises as the largest purchaser of health care in our country.

The Affordable Care Act is projected to achieve estimated Medicare savings of $716 billion between 2013 and 2022. This will be achieved by phasing out the overpayments to private Medicare Advantage plans, reducing provider payment productivity updates (which has been accepted by the hospital industry in large part because covering the uninsured will reduce hospitals’ bad debts), and various provider payment changes and improvements. The Affordable Care Act’s major payment and delivery system reforms are projected to slow Medicare spending per beneficiary to 3.1 percent annually over 2012–2021, extending the solvency of the Medicare Hospital Insurance (Part A) Trust Fund to 2024.

A major concern, however, is that the retirement of the post-World War II generation will increase the numbers of beneficiaries at the same time that the decline in fertility rates in the 1970s and 1980s has lowered the number of active workers in the labor force. As a result, expenses are projected to grow faster than payroll tax revenues.

To bring the Trust Fund into balance, more revenues will be needed, spending growth will need to be further restrained, or beneficiaries will need to pay more of their own health care expenses either directly or through premiums.

Given this dilemma, a national debate on the future of Medicare, with careful consideration of the consequences of alternative strategies, is appropriate. Converting Medicare to a fixed sum of money capped at the growth of the economy, without effective health care cost control, would shift costs to beneficiaries who already struggle with out-of-pocket medical expenses and limited incomes. An alternative approach of continuing guaranteed benefits and rewarding hospitals and physicians for providing high-quality care in an efficient manner has the potential to achieve needed budgetary savings while reducing, not increasing, financial risk to beneficiaries.

Premium Support and Repeal of the Affordable Care Act

The philosophy behind premium support holds that patients are best positioned to eliminate overuse of services, shop for lower-cost care, and pick lower-cost health plans. Rather than guaranteeing that Medicare will pay the cost of a defined set of benefits, under the most recent Medicare premium proposal advanced by vice presidential candidate Rep. Paul Ryan, chair of the House budget committee, beneficiaries would receive an allowance based on their age, health status, and income to be applied toward the purchase of a health plan. Over time, the dollar allowance would be capped at the rate of gross domestic product (GDP) growth per person plus 0.5 percent.

Governor Mitt Romney endorses this Medicare premium support strategy. Because the federal government would cap future allowances by the rate of economic growth rather than the rising costs of health insurance premiums or medical care cost, this approach would result in the federal government spending less over time as beneficiaries spent more, assuming health care costs continued to rise at current rates. The value of the allowance or defined contribution for private insurance would erode over time, resulting in higher premiums for beneficiaries and/or reductions in benefits.

The Congressional Budget Office (CBO), in fact, estimated that the latest Ryan premium support proposal, which shaped the 2012 House Budget Resolution, will raise costs for beneficiaries, with beneficiary cost rising over time. Our estimate is that average private health insurance premiums would exceed the allowance by $4,250 in 2030.

It is also important to weigh the merits of choosing among competing private plans. As previously noted, private health insurance is more costly than public coverage given its larger administrative costs, higher provider payments, and less-efficient risk pooling. CBO estimates that utilizing private coverage for a set of benefits similar to what is currently covered by traditional Medicare would be 12 percent more expensive than traditional Medicare in 2022. By 2030, private coverage of the same benefits would be about 40 percent more expensive than traditional Medicare.

The nation’s experience with the Medicare Advantage program suggests that beneficiaries would be less satisfied and more likely to experience access problems when opting for a private plan. Thirty-two percent of Medicare Advantage beneficiaries report at least one access problem because of cost, compared with 23 percent of those with traditional coverage.

The widespread use of competing private plans under a premium support scenario has the potential to undermine the stability and effectiveness of Medicare by fragmenting the risk pool. Even if Medicare beneficiaries retained a choice of enrolling in traditional Medicare as called for in the latest Ryan proposal, physicians and hospitals could receive substantially higher payment from private plans and would be likely to opt out of participation in traditional Medicare, nullifying it as a genuine choice for beneficiaries. Dividing Medicare beneficiaries across multiple private plans would undermine the leverage the program currently has to drive efficiency among providers and widespread change across the entire U.S. health system.

Moreover, while the premium support proposal contained in the latest House budget resolution included some protections against risk selection (or “cream-skimming”) by private insurance companies, officials would need to be particularly vigilant about plans covering a relatively low number of beneficiaries with complex health care needs.

Along with premium support, Governor Romney endorses increasing the age of eligibility for Medicare by two months per year starting in 2022 until it reached 67 in 2033. Romney also calls for the full repeal of the Affordable Care Act, including the coverage and Medicare benefit improvement provisions as well as repeal of the Medicare savings provisions. Repeal of the ACA would increase the federal budget deficit by $109 billion over the next decade and shorten the time until the Medicare Part A Trust Fund becomes insolvent from 2024 to 2016. Romney would also replace Medicaid with a block grant to states, which could put long-term care benefits for Medicare and Medicaid beneficiaries at risk, and sharply restrict the growth in the federal budgetary commitment to Medicare and Medicaid over time.

Continuing Medicare as an Essential Benefit by Building on the Affordable Care Act

A different approach to preserve Medicare’s guaranteed benefits would be to retain and build on the innovations in the Affordable Care Act. Instead of shifting financial costs onto beneficiaries, this approach would hold health care providers accountable for achieving high-quality care, excellent outcomes for patients, and ensuring that the total cost of health care is in line with what the nation can afford. It puts the accountability in the hands of those directly responsible for providing care.

The Affordable Care Act permits physician-led accountable care organizations to share in savings if they hold costs below a target rate of growth. The Center for Medicare and Medicaid Innovation is testing a variety of pilot payment innovations to reward providers for lowering cost while improving quality. It also gives the Secretary of Health and Human Services authority to spread successful innovation throughout the Medicare program if innovations lower cost, improve quality, or both, without being to the detriment of either.

President Obama, in continuing to implement the Affordable Care Act, would expand Medicare beneficiaries’ access to preventive care, reduce the cost of prescription drugs, provide more help for low-income beneficiaries, provide better information for beneficiaries to make more informed health care choices, and encourage more coordinated care. The Affordable Care Act also places payments to private Medicare Advantage plans on an equal footing with traditional Medicare, slows the increase in provider charges, and raises premiums for high-income beneficiaries, extending the solvency of the Medicare Hospital Insurance Trust Fund.

IMPORTED: __media_F5DE1F3AEC794C019003B22485B79C4F_h_226_w_300.gif President Obama’s continued implementation of the Affordable Care Act would change how care is organized, delivered, and paid for. Many of the law’s provisions are focused on Medicare, as well as Medicaid and the Children’s Health Insurance Program, but it encourages the participation of multipayer initiatives that include both the public and private sectors. Models that emphasize the role of primary care and the need to coordinate care across providers and settings, like the patient-centered medical home and the accountable care organization, are being developed to improve care and stabilize costs.

The Affordable Care Act would give physicians, hospitals, and other health care providers an incentive to reduce the rate of growth in Medicare outlays by creating opportunities for them to share in savings. President Obama has further stated that through these reforms he would attempt to hold the rate of growth in health care spending to GDP plus 0.5 percent, the same goal as under the premium support proposal. However, under the premium support strategy, the beneficiary is at financial risk when private insurance premiums exceed the Medicare spending target (Exhibit ES-1). Under the shared savings strategy, providers have the opportunity to reap benefits when costs are below the target for Medicare spending. Beneficiaries also gain from lower Medicare costs, as their premiums and out-of-pocket expenses are reduced by the slower growth in Medicare spending.

As policymakers and the nation confront the urgent need to control health spending while continuing to improve the quality and efficiency of care delivered, these activities provide a foundation on which to build, with the potential to control health spending while moving toward a high performance health system.

This blog post is based on Karen Davis's oral testimony during the House of Representatives Democratic Steering and Policy Committee's "Forum on Saving Medicare for Seniors Today and in the Future" on October 2, 2012.

Publication Details



K. Davis, The Future of Medicare, The Commonwealth Fund Blog, October 2012.