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Mark Miller: Remaking Retirement

5 Ways to Improve Medicare

Medicare is a significant public policy achievement, but it's time for some urgently needed reforms.

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Medicare consistently gets high marks from seniors. But healthcare has evolved since Medicare was signed into law in 1965, and so have the needs of seniors.

Today, seniors need better protection from sharply escalating out-of-pocket costs. Critical coverage gaps need to be addressed too, including dental, hearing, and vision care. The surging privatization of Medicare needs to be counterbalanced with a more level competitive playing field, and assistance for low-income seniors should be expanded.

And while we're at it, let's address the looming insolvency of Medicare Part A, shall we?

Here's my checklist of five ways to make Medicare better.

Fix Medicare Part A

Medicare has an urgent solvency problem that impacts just one part of the program: Part A, which pays for hospital bills. Unlike other parts of Medicare, Part A is funded mainly through the Medicare payroll tax; Parts B (outpatient services) and D (prescription drugs) are financed through a combination of general government revenue and premiums paid by people enrolled in the program.

The Medicare trustees project that the Part A trust fund--formally known as the Hospital Insurance Trust Fund--will become insolvent in 2026. The fundamental problem is rising healthcare costs: The payroll tax rate that funds Part A hasn't changed since 1987, while per capita spending has doubled.

An easy way to understand the problem is by thinking of the trust fund as a checking account balance that receives Medicare's payroll tax payments and then uses those payments to cover the bills. If we reach the point of insolvency, the fund would have sufficient income to pay 91% of projected benefits.

The menu of choices to fix the problem is straightforward: Either we add new tax revenue, charge seniors more, cut benefits, or cut payments to healthcare providers--or some combination of those choices.

This is no time to burden seniors with higher healthcare costs--one third of seniors in traditional Medicare already spend at least 20% of their per capita income on healthcare. Cutting payments to health providers in the midst of a public health crisis also would be ill-considered. Several viable revenue options are available; last year, the Commonwealth Fund published an excellent series of posts by Medicare experts exploring a wide spectrum of reform plans.

Control Drug Costs

The controversial new Alzheimer's drug OK'd by the U.S. Food and Drug Administration last year has put a bright spotlight on the issue of drug costs in Medicare.

Aduhelm is administered by healthcare providers, so it is covered under Part B, and it was a big factor in the eye-popping increase in the Part B premium this year. Biogen (BIIB), which makes the drug, announced in December that it would cut the drug's price in half, which might prompt an unusual downward revision in the premium this year.

But drug cost problems extend to the Part D program, too.

Part D premiums have been stable in recent years. But deductibles and other out-of-pocket expenses have risen faster than inflation. The deductible varies by plan; this year, it cannot exceed $480 (up 8% from 2021). But Part D plans have several tiers of coverage that enrollees can move through as their drug spending rises.

That initial deductible applies during the "initial benefit period," up to $4,430 in combined spending by you and your insurer. That covers you for routine prescription drug costs. But people who need expensive drugs to treat conditions such as cancer, diabetes, and rheumatoid arthritis can very quickly move into the program's coverage gap. At that point, you pay 25% for branded and generic drugs until your combined spending reaches the so-called "catastrophic" level of spending--$10,690 in 2022. At that point, you pay 5% of drug costs for the remainder of the year.

President Biden's now-imperiled Build Back Better bill contains several important reforms that help address this problem. The bill caps out-of-pocket Part D costs at $2,000 a year, starting in 2024, increasing annually based on the rate of increase in program costs. Medicare would also be able to negotiate the price of some high-cost drugs and limit cost-sharing for insulin to no more than $35 per month.

Cover Dental, Hearing, and Vision Care

Medicare has never covered dental, hearing, or vision care, with a few exceptions. These gaping holes in care are bad for the well-being of seniors, and they lead to additional health problems that boost overall program costs. Studies have linked poor oral health with higher rates of diabetes, cardiovascular disease, and pulmonary infections. Vision loss and hearing loss are associated with a higher risk of falls, depression, and cognitive impairment, and hearing loss with higher rates of hospitalization.

Earlier versions of Build Back Better proposed expanding Medicare to cover all three of these care needs. The most recent version scaled back to cover only hearing, and even that may not survive.

Level the Playing Field

Medicare has been privatized on a massive scale over the past two decades, mainly through the Part D and Medicare Advantage. Advantage is on track to cover half of all enrollees by 2030, with very little public discussion of the implications for government spending and the well-being of participants.

Medicare Advantage is popular with many seniors. But in part, it's growth stems from some unfair competitive advantages as compared with the traditional fee-for service program.

We need a more level playing field, starting with a uniform out-of-pocket cap for these two Medicare options.

The current traditional Medicare system comes with no built-in out-of-pocket cap. Some enrollees solve this by purchasing a commercial Medigap plan; others have coverage through Medicaid or a retiree health benefit. Meanwhile, Medicare Advantage does have a built-in cap--the average ceiling in 2021 was $5,091 for in-network services. Since Medigap policies are not available for Advantage enrollees, you're exposed to your plan's ceiling in years when your use of healthcare is high. But the bottom line is that Advantage enrollees spend a lot less up front on premiums.

A uniform out-of-pocket maximum could be set at the current Advantage average, or scaled according to income. Medicare also should have a more simple, uniform deductible structure for Part A, B, and D services.

Taken together, these cost-sharing changes would simplify Medicare and make the traditional program more competitive with Advantage. It also would save money for many seniors, since they might not need Medigap policies at all.

Improve Protections for Low-Income Seniors

Affluent seniors are well-equipped to cope with the rising cost of Medicare. Higher premiums and out-of-pocket costs may be painful, but well-off seniors don't need to contemplate skipping their medications or choosing between buying groceries, rent, and healthcare bills.

But half of Medicare beneficiaries had per capita income below $29,650 in 2019--and 25% lived on an income below $17,000. For these seniors, the caps on out-of-pocket costs discussed above won't help much, if at all.

That's why we need to improve Medicare's two existing programs aimed at assisting low-income seniors--the Medicare savings program, which helps cover premiums and cost-sharing requirements for Part A and Part B; and the low-income subsidy, which helps beneficiaries with Part D premiums, deductibles, and cost-sharing.

The federal government sets income and asset requirements for these programs. The pandemic crisis prompted some policymakers to propose expanded eligibility for assistance--and it makes sense, because the current income tests are more strict than those used for other health insurance assistance programs. Broader access could be achieved by expanding income and asset criteria.

The creation of Medicare is one of the most important public policy achievements in our country's history. The time has come to make it even better.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to The New York Times and WealthManagement.com. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.

Mark Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.