National Review
March 12, 2013

Is Reform on the Menu?

The president, it seems, has only just discovered that congressional Republicans do not photosynthesize, and thus must take nutrition in the form of meals. Either that or a pair of recent dinners, one with House Budget Committee chairman Paul Ryan (R., Wis.) and the other with a group of Senate Republicans, is indicative of a renewed interest from the White House in the elusive “grand bargain” on deficit reduction and the budget.

If it is the latter, we can count on Mr. Obama to call for a “balanced approach” — that is, to ask Republicans to raise taxes for the second time in three months. For that conversation to get beyond the cheese course, the president will have to commit to serious entitlement reform — serious enough, at minimum, to entice six or seven Senate Republicans and cobble together a majority in the House.

Unfortunately, what the president has so far offered does not meet that threshold. His avowed willingness to consider the adoption of chained CPI, a more accurate measure of inflation, in tax and entitlement calculations might be considered an exception, as it would cut into the growth of Social Security spending. But it would also let Washington capture an even greater percentage of economic growth than it already does. The rest of what is on offer consists of vague promises for sundry “health-care savings” and explicit promises to institute greater price controls in Medicare. The latter are not just insufficient to the task of reforming health-care entitlements — they are antithetical to it, reinforcing the perverse incentives and top-down micromanagement of individuals’ consumption choices that have made Medicare the mess that it is today.

Fortunately, there is a bundle of entitlement reforms already on the table that would help stabilize the nation’s finances and put the welfare state on more sustainable footing. Most recently proposed by Senate Finance Committee ranking member Orrin Hatch (R., Utah) last month, these measures enjoy a bipartisan provenance and are worthy of conservative support.

First, as Americans are living and working longer, the eligibility age for Medicare should be gradually raised from 65 to 67. If phased in by just two months per year, this move would in itself reduce government spending on Medicare by as much as $148 billion through the next decade (or as little as $113 billion, under a scenario that assumes people exiting Medicare would transition into other entitlements as they are currently structured), according to a 2012 study from the Congressional Budget Office. In the longer term, the move would reduce total government spending on Medicare by 5 percent, or roughly a third of a point of GDP, by 2035. Additionally, raising Medicare’s eligibility age would put the program in line with Social Security, harmonizing entitlement incentives on work and retirement.

Next, the disparate deductibles and copays for Medicare Part A and Part B should be combined into a single structure in a way that discourages overconsumption of health services and simplifies choices for seniors. This can be combined with a cap on out-of-pocket expenses that protects seniors from catastrophic costs.

Relatedly, private Medigap policies, which provide supplemental insurance to Medicare recipients, are in need of restructuring. Currently, almost a third of Medigap beneficiaries get some “first-dollar” coverage (i.e., they have no out-of-pocket expenses), skewing the program’s cost-sharing structure (which otherwise gives seniors an incentive to economize) and causing them to dramatically over-consume relative to other Medicare enrollees, whose costs they help drive up.

Elsewhere, private insurers should be more involved, and Congress should allow private plans to compete with fee-for-service Medicare, giving seniors the flexibility to pick the option that is best for them.

Lastly, federal Medicaid spending should be subjected to per capita caps, with each state receiving a fixed amount of money, indexed to some reasonable rate of growth, per Medicaid enrollee. The caps, which can be thought of as a compromise on block-granting, were once supported by President Bill Clinton and would encourage states to manage their Medicaid programs more efficiently, rather than grow them unnecessarily in an effort to extract greater matching funds from Washington.

Each and every one of these proposals, either alone or as part of a bundle, has been advocated by both Republicans and Democrats, and each would make a real dent in the entitlement crisis that threatens America’s fiscal future — and its present. If the president is serious about a grand bargain, he should indicate it by publicly backing this package of reforms. It might bring Republicans to the table for something more than post-meal banter.

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