Reforming Entitlements Benefit Patients and Taxpayers Alike

by Charles Katebi

Entitlements used to be considered the "third-rail" of American politics. Now the public recognizes that without major changes to Medicare and Medicaid, both programs threaten our fiscal future. Fortunately, there are reforms that not only save taxpayers money, but also deliver better healthcare to the elderly and needy.

But before we can identify solutions, we must first identify these entitlements' problems. And they have many. Both programs are rife with waste, fraud, and abuse. And they drown providers in onerous regulations

But the most fatal flaw inherent in Medicare and Medicaid is that they encourage unnecessary and unaffordable healthcare. Because both programs cover virtually all medical expenses, patients have no reason to demand healthcare that is affordable, necessary or cost-effective.

Even the Medicare Payment Advisory Committee admitted:

"Medicare payment systems have created little or no incentive for providers to spend additional resources on improving quality. In fact, undesirable outcomes may result in additional payments, and sectors with [higher] payments may have little incentive to improve quality."

Everyone's healthcare needs are unique. Rather than trap patients in two broken one-size-fits-all programs, the federal government should let them make their own healthcare choices. One possible reform would provide recipients a flat cash-subsidy in a personal tax-exempt Health Savings Account. These could be used to buy private insurance, or pay for their healthcare directly through a concierge practice. Such a reform would expand healthcare choices for enrollees while also encouraging them to seek the most cost effective care.

It's long been recognized that patients are better stewards of their health care than government bureaucrats. In 1998, Bill Clinton's National Bipartisan Commission on the Future of Medicare proposed letting seniors purchase private coverage using public subsidies, or "premium support."

Then in 2011, Congressman Paul Ryan unveiled his Path to Prosperity budget plan, which included a robust premium support option for seniors. Under his plan, retirees could choose from a variety of health insurance plans for their healthcare needs. Low-income and chronically ill seniors would receive more support while higher-income and healthier retirees would receive less support or none at all.

In addition to expanding healthcare choice, premium support would also lower costs for taxpayers. Since patients would be on the hook for their premiums, copays, and deductibles, they have an incentive to choose the most affordable and cost-effective plans. A report by the Congressional Budget Office found that reforming Medicare along Paul Ran's approach would save the federal government up to $45 billion every year, and as much as $275 billion by 2023. When we're exposed to healthcare's true cost, we demand the best value for our dollars.

Transitioning Medicaid's patients onto private insurance would also benefit taxpayers. Avik Roy of the Manhattan Institute noted in his book, How Medicaid Fails the Poor, that Medicaid would cost 42 percent less simply by enrolling beneficiaries in private catastrophic health plans for major health expenses and concierge practices for routine primary care.

These reforms don't just work in theory; they also works in practice. For decades, Switzerland has successfully provided affordable healthcare for the elderly by letting them enroll in subsidized private insurance. Because the Swiss are far more exposed to the cost of care than Americans on Medicare, they buy only the most cost effective insurance for their healthcare needs. This is why healthcare in Switzerland costs just $1,281 per person, which is less than 13 percent of the cost of an average Medicare patient.

Singapore has gone even further in making healthcare both less expensive and more personalized. In Singapore, citizens invest earnings over their lifetime into tax-exempt health savings accounts, called Medisave, which they use to pay for their healthcare. And since it's their money they're spending, Singaporeans demand better care rather than more care. It's no wonder Singaporeans spend less than $800 per person for their healthcare.

Both Switzerland and Singapore hold important lessons for how to improve (or replace) Medicare and Medicaid. Patients don't need armies of state and federal bureaucrats micromanaging hospitals and doctors. What they need is the freedom to buy the best healthcare for themselves, and for the government to get out of the way.