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Saving Money Now for Medicare Expenses Later Would Stabilize Program for Long Term, Experts Say

By Whitney Blair Wyckoff, CQ Staff

June 20, 2008 -- Allowing individuals to set aside money for health care expenses now that can be used when enrolled in Medicare later can help solve the impending Medicare crisis, said researchers at a Hudson Institute briefing.

"When we wrote up this proposal, we called it a medical reform everyone can love," said Andrew J. Rettenmaier, a senior fellow at the National Center for Policy Analysis who presented the plan at Tuesday's briefing. The proposal recommends a system in which workers would contribute a fixed percentage of their wages to a health insurance retirement account, or HIRA.

Both the National Center for Policy Analysis and the Hudson Institute are conservative think tanks.

Once workers reach retirement age, workers would receive annual annuities based on how much they contributed during their lives. The base deductible would grow at the same rate as per capital Medicare costs, meaning it would rise over time. Contributors who are low-income and therefore have contributed less to their accounts would receive money from the government to add to their deductible.

Accounts could not be accessed until age 65, and they could not be inherited, said Rettenmaier, who also serves as executive associate director of the Private Enterprise Research Center at Texas A&M University. Beneficiaries will use their HIRA annuities to pay for a share of their Medicare costs and any funds remaining at the end of the year can be withdrawn tax free and spent on anything.

Co-presenter Thomas R. Saving, a senior fellow at the National Center for Policy Analysis and director of the Private Enterprise Research Center at Texas A&M University, said that when people are in control of their health care, it encourages them to look for the best deal. This, in turn, would encourage providers to make prices more competitive.

"Every dollar I take out of my pocket I care about," Rettenmaier said.

Rettenmaier pointed to the cosmetic and lasik surgery fields, which are often paid out of pocket, as proof that this shift would occur.

"We're looking for people to shop," Rettenmaier added.

The authors' proposal is part of last year's book, "The Diagnosis and Treatment of Medicare," in which Rettenmaier and Saving suggest rethinking how to finance the program. In a 2007 review of the book, Prentiss Taylor of Rush University in Chicago contends that the actual solution to the Medicare problem also would need more than just economics. It would require an "evidence-based medical management model." Taylor's review, which appeared in the Journal of the American Medical Association, criticized the book for not considering, as a way to lower costs, improving the management of chronic disease, which he said generates 50–70 percent of health care costs while affecting 10 percent of the population.

"The idea with our proposal is to bring market forces to bear on the allocation of health resources," Rettenmaier said later in a phone interview. He added that it was important to look into incentivizing people to manage and prevent chronic diseases. "We're relying on them to make those choices," he said.

The authors said that prepaid retirement accounts would lead to stability in the long term. Saving said the plan would appeal to liberals and conservatives alike because it encourages competitive markets while redistributing wealth.

Rettenmaier said that the issue "can be put off" for a few years—"Up till 2011, we're about where we are now, so it isn't going to matter much," he said. "It's only going to matter the next decade after 2011."

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