Committee for a Responsible Federal Budget
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Marc Goldwein: 'Big 3' Burden: Entitlement Costs Simply Untenable

Jul 5, 2017 | Health Care| Social Security

Marc Goldwein is the senior vice president and senior policy director of the Commitee for a Responsible Federal Budget. He recently wrote an opinion piece for The Hill.

Despite claims to the contrary, the GOP "repeal and replace" bills would significantly reduce Medicaid benefits. The Affordable Care Act (aka “Obamacare”) provides states with extra federal funding to expand coverage to those up to 138 percent of the poverty line. The GOP repeal bills withdraw that funding, and surely most states will respond by dropping coverage.  

According to the Congressional Budget Office, the most recent version of the Senate bill would increase the number of uninsured, relative to current law, by about 22 million people in 2026. Most of the budgetary savings from this coverage loss would go toward tax cuts, largely for the rich. 

But lost in the debate is the fact that Medicaid — along with Social Security and Medicare — is growing at an unsustainable pace. There is no need to slash any of the programs; but a variety of smart and potentially bipartisan reforms could reduce their projected cost growth while continuing to offer benefits more generous than today’s. 

Social Security, Medicare and Medicaid are three of the largest and fastest growing parts of the budget. As recently as the year 2000, those three programs cost only $700 billion, or about 7 percent of the economy. Today they cost nearly $2 trillion, about 10 percent of the economy. By 2050, as a result of an aging population, rising health costs and growing benefit levels, Social Security, Medicare and Medicaid will spend 15 percent of the economy. 

This trajectory is unsustainable. No program can indefinitely grow faster than the economy, just like no household or business expenses can indefinitely grow faster than household income or business revenue.

For Social Security and Medicare Part A, which are funded by dedicated payroll taxes and dwindling trust funds, this spending growth will soon lead to insolvency. Meanwhile, rising entitlement costs will crowd out important investments in education, research and national security and drive up the already-massive national debt. 

Entitlement cost growth cannot continue indefinitely, and as economist Herb Stein once said, "If something cannot go on forever, it will stop.” Yet, it matters how. Rather than making deep cuts to Social Security, Medicare and Medicaid — either today or in the future — we should enact gradual and thoughtful changes that ensure most future beneficiaries are better off than today’s.

Policymakers should begin with Social Security reform, where the current formula leads new benefits to grow rapidly over time — especially for the wealthiest Americans. We should progressively slow the growth of initial benefits so those for the highest earners grow with inflation rather than wages; index the retirement age to grow with life expectancy and encourage delayed retirement; and lift the payroll tax cap to ask for more revenue from those who can most afford it.

These changes, plus a few others, will ensure solvency and allow for expanded benefits for the most vulnerable. (Don’t like this suggestion? You can design your own package and tell me about it ).

For Medicare, policymakers should look to bend the healthcare cost curve. Medicare costs per person have nearly tripled in the last three decades, but quality and outcomes have not improved nearly as much. The right reforms can help us get more (or at least almost as much) for less and can actually reduce out of pocket costs for most seniors.

To accomplish this, we should advance payment models that reward doctors and hospitals per-incident and for quality of care, not for the quantity of tests and treatments administered. We should promote more consumer-driven healthcare, while offering protection against catastrophic costs and relief from burdensome “Medigap” premiums.

Finally, we should ensure Medicare is getting the best prices on everything from prescription drugs to home health visits to medical equipment to private insurance fees. If all that isn’t enough, we can raise more revenue by applying the Medicare tax to fringe health benefits, which would help slow health costs in the employer market. 

Medicaid is trickier to reform than Social Security and Medicare, since it is administered by the states and serves a vulnerable population. Policymakers should tread carefully in efforts to control Medicaid costs. Yet Medicaid need not — and must not — continue to grow at its current rate. Instead, we should encourage states to pursue their own cost-control ideas.

To ensure states focus on cost savings rather than cost-shifting, the federal government should close various loopholes — like provider taxes — that let states inflate their declared spending solely to enhance their federal match. The federal government should also be more flexible in granting state waivers and more proactive in helping states find new ways to coordinate care for “dual eligibles” — those who receive both Medicare and Medicaid.

A per-capita cap on spending growth, like the one in the GOP "repeal and replace" bills, is also worth considering. But that cap must be set at a rate which can be reasonably met primarily with efficiencies and reforms; not at a rate that will ensure deep cuts and cost-shifts that likely won’t be continued anyway.

Millions of Americans rely on Social Security, Medicare and Medicaid, and there is no need to slash these important social insurance and safety net programs. But they cannot — and so will not — continue to grow at their current pace. If we make thoughtful reforms now, we can avoid painful ones later and ensure that future generations are better off than those who came before them.

"My Views" are works published by members or staff of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.