Medicare’s out-of-control spending will soon impact millions of patients and retirees. According to the latest Medicare trustees report, the Hospital Insurance Trust Fund (which foots the bill for inpatient care) will run out of money in 2028 absent drastic changes to the program’s funding structure. Yet, President Biden’s recently released budget does little to shore up America’s largest government insurance program. Instead of revamping Medicare’s payment system and increasing choice for consumers, Biden proposes to tax and price-fix his way out of the solvency crisis. These measures will punish innovation and lead to more red ink and worse patient outcomes.
The President’s budget, “proposes to increase the Medicare tax rate on earned and unearned income above $400,000 from 3.8 percent to 5 percent.” Biden also wants to close “loopholes” associated with the Medicare tax so that professionals and business owners can no longer “shield some of their income from tax by claiming it is neither earned income nor investment income.” The problem with these proposals is that there’s a strong relationship between tax rates and economic growth.
For example, a one percentage-point change in tax rates can shift Gross Domestic Product by nearly one percent just three years after the tax change. This means that attempts to “fix” Medicare by raising taxes can lead to more unemployment and less wage growth, making it more difficult for millions of workers to access healthcare services. Furthermore, as public policy scholars Veronique de Rugy and Jack Salmon note, tax hikes often backfire because they lead to new spending. Even if a tax hike raises $1 in revenue, policymakers will turn around and authorize up to $1.81 in new appropriations. In other words, rate hikes keep the tax-and-spend merry-go-round spinning at the expense of growth and prosperity.
President Biden’s attempts to price-fix Medicare drugs is similarly ill-fated. According to a “Fact Sheet” released by the White House, the Budget allows “Medicare to negotiate prices for more drugs and…[brings]…drugs into negotiation sooner after they launch.” This “negotiation” entails the U.S. government divining an arbitrary price for medications and using its massive market power to get manufacturers to agree to that price. This can result in a significant incentives issue for producers, who must set prices to offset the more than $2 billion in costs associated with bringing a medication to market. European nations such as the U.K., France, and Germany set drug prices along these lines and have learned the hard way that price-fixing leads to fewer life-saving medications on the market. According to the 2019 Medicines Shortages Survey conducted by the European Association of Hospital Pharmacists, 47 percent of pharmacists cite oncology medicine shortages as a significant issue. Alarmingly, more than a third of pharmacists have trouble getting access to anesthesia.
Fortunately, there are far better ways to save Medicare dollars. Despite obesity-related issues costing the healthcare system more than $200 billion per year, the federal insurer is barred by law from covering medications that can reduce body weight by an estimated 15 to 20 percent. Medicare could save an estimated $7,000 per patient treated with these medications over a ten year period. Additionally, Medicare is slated to roll back its telehealth coverage flexibility following the expiration of the COVID-19 Public Health Emergency. Given that an in-person visit can be triple the cost of a telehealth visit, permanently boosting telehealth access could save Medicare significant sums of money. Finally, Medicare should move toward greater cost-sharing for plans while giving seniors a means-tested lump sum to match these increased costs. Beneficiaries would be incentivized to hold onto as much of their lump sum as possible by choosing affordable, high-value services. According to a 2022 study published in the International Journal of the Economics of Business, rising deductibles can significantly blunt the impact of overall healthcare spending by encouraging cost-sharing and sensible purchasing decisions.
A consumer-centric model would be far better than the status-quo in embracing savings, innovation, and choice. Policymakers can put Medicare on a more sustainable path without harming taxpayers and patients.
David Williams is the president of the Taxpayers Protection Alliance.