Why can't we fix Medicare once and for all?

@FortuneMagazine June 20, 2011: 6:05 AM ET

FORTUNE -- We can try to fix Medicare in two ways. One is a proven winner, the other a proven loser. The stakes could scarcely be higher -- and right now we're betting on the loser.

Medicare has become the largest issue in America because it threatens the country's economic future. Ten former chiefs of the Council of Economic Advisers, from both parties, warned in March that if we don't get the national debt under control, the result will be "a crisis that could dwarf 2008." The first worrying signs have since appeared; the cost of insuring against a once-unthinkable U.S. debt default rose by more than 50% in late May, and Moody's and S&P have warned that the country's debt rating is in peril. By far the largest element in America's worsening debt outlook is the growth of Medicare. If we don't fix it the right way, the country will become dramatically poorer and weaker.

Geoff Colvin
Geoff Colvin

One way to fix it is the Brute Force approach. That's the concept on which Medicare was built. The federal government dictates which services are covered and how much will be paid to doctors, hospitals, and others for everything they do. To keep costs under control, Washington restricts what it covers or dials down what it pays.

How well has the Brute Force approach worked? "It never works," says Mark McClellan, former head of the Centers for Medicare and Medicaid Services. The House Ways and Means Committee predicted in 1967 that the new Medicare program would cost $12 billion in 1990. Actual 1990 cost: $110 billion. (2010 cost: $523 billion.) The problem is that eternal irritant to grand Washington plans, the market. Turns out that if you unilaterally cut prices, some providers will quit providing services and some patients won't get care, so you can't cut too much. And if you pay providers barely profitable rates when they perform a given service, they will overperform those services, grossly inflating the government's costs. That's what has happened.

The other way to fix Medicare is the People Aren't Dummies approach. It's the concept on which most markets operate. Let people spend their own money -- even if it's given to them -- and let providers compete for it. Providers aren't dummies, so they'll innovate in ways that bureaucrats would never think of. Consumers aren't dummies, so they'll choose what works for them. Quality rises, and costs stay reasonable.

The People Aren't Dummies approach has a proven record, and it's the opposite of Brute Force's record. Medicare Part D, which took effect in 2006, lets users choose from competing private plans for prescription-drug coverage. "Most of those plans aren't at all what the law envisioned," says McClellan. Instead, they're what consumers actually want. And Part D costs are about 45% below what was predicted when it was created.

So which approach are we banking on? You guessed it. Brute Force is the guiding principle for controlling Medicare in the health care reform law. An Independent Payment Advisory Board would control costs in any ways it sees fit; in practice its choices would be limited to cutting prices or limiting care. We've seen this film before.

The approach that would work, People Aren't Dummies, is at the heart of Rep. Paul Ryan's Medicare rescue proposal and has been demonized by Democrats and even some Republicans. But in fact it has a long history of bipartisan backing. Premium support, as it's called in Ryan's plan, was first proposed by two Democratic economists, Henry Aaron and Robert Reischauer. The Bipartisan Policy Center's Debt Reduction Task Force last year proposed gradually converting Medicare to premium support. The proposals' details differ, and hammering out agreement wouldn't be easy. But the basic approach is solidly in the center.

That's the good news. The bad news is that reasoned debate on Medicare seems to have become impossible. Just remember: Our future depends on choosing what works. So far we aren't choosing it.  To top of page