Volume 18, Issue 2

On Medicare’s 50th anniversary, we use the Future Elderly Model (FEM) – a microsimulation model of health and economic outcomes for older Americans – to generate a snapshot of changing Medicare demographics and spending between 2010 and 2030. During this period, the baby boomers, who began turning 65 and aging into Medicare in 2011, will drive Medicare demographic changes, swelling the estimated US population aged 65 or older from 39.7 million to 67.0 million. Among the risks for Medicare sustainability, the size of the elderly population in the future likely will have the highest impact on spending but is easiest to forecast. Population health and the proportion of the future elderly with disabilities are more uncertain, though tools such as the FEM can provide reasonable forecasts to guide policymakers. Finally, medical technology breakthroughs and their effect on longevity are most uncertain and perhaps riskiest. Policymakers will need to keep these risks in mind if Medicare is to be sustained for another 50 years. Policymakers may also want to monitor the equity of Medicare financing amid signs that the program’s progressivity is declining, resulting in higher-income people benefiting relatively more from Medicare than lower-income people.

Medicare today is a better program on almost every dimension than it was just after July 30, 1965 when Lyndon Johnson signed public law 89–97. Nonetheless, short-comings, limitations, and inadequacies remain. What should be done to make Medicare a better program? What should Medicare look like in 2030? In this paper we try to answer these questions. Three perspectives are relevant: that of beneficiaries, current and future; that of policymakers and administrators, the program’s stewards; and that of society at large. We posit certain objectives and goals that we believe – and that we think a broad swath of Americans would agree – should be pursued to improve the Medicare program. Those goals include (a) affordability for Medicare beneficiaries, (b) affordability for the working population that is paying and should continue to pay for much of the current cost of the program, (c) reduction in what we regard as needless complexity, and (d) stability and continuity in several different senses. We restrict ourselves to changes that we judge to be affordable and feasible – politically, technically, and administratively – if not today, then over the next decade or two. We believe that changes in Medicare will remain incremental, as they have been for the last 50 years. We shall assume that the ACA takes root and that the exchanges, whether managed by states or by the federal government on behalf of the states, continue to operate. We shall assume that federal and state officials eventually surmount the administrative challenges they still confront. In particular, we assume that the exchanges come to serve a growing share of the American population and that they increasingly exercise the rather considerable regulatory powers over insurance offerings that the ACA grants to them. We divide Medicare reforms into four categories: payment reform, benefit reform, quality reform and management, and the role of private insurance plans (Medicare Advantage [MA]).

About 30 percent of Medicare beneficiaries enroll in private Medicare Advantage (MA) plans but do so at a relatively high-cost. This paper explores the advantages and challenges of introducing competitive bidding among MA plans (Plan One) or among MA plans and Fee-for-Service (Plan Two or Premium Support). We conclude that competitive bidding could reduce the cost of Medicare, especially in densely populated urban areas. However, there would be serious challenges in rural areas and risk adjustment methodology would have to be substantially improved. In Plan Two, sicker beneficiaries might move to Fee-for-Service and beneficiaries might have to pay more to stay with a preferred provider or broader network. If these problems are addressed, we believe that premium support can be a meaningful improvement to the MA program.