Two Cheers for the Coburn–Lieberman Medicare Proposal

Robert Moffit / June 28, 2011

Senators Tom Coburn (R–OK) and Joseph Lieberman (I–CT) unveiled a major Medicare proposal. Based on preliminary estimates provided by the Congressional Budget Office (CBO), the proposal would reduce total Medicare spending by more than $600 billion in the next 10 years and cut the program’s long-term (75-year) unfunded liability by approximately $10 trillion.

This is a serious start. Without remedial action, Medicare faces a long-term unfunded liability of almost $37 trillion. The Medicare hospitalization trust fund is running a deficit of $34.1 billion this year alone. While the program has become an engine of deficits and debt, the first step toward reform is revamping the traditional Medicare program. That is what the Coburn–Lieberman proposal would accomplish. The next step would be to move the program from a defined benefit to a defined contribution for the coming generation of retirees.

While legislative language is not yet available, if the legislative language comports with the narrative description of the proposal, these would be welcome changes to the traditional Medicare program. These changes are consistent with long-term Medicare reform. A number of these proposals, while differing in certain details, are also broadly similar to the Medicare policy prescriptions embodied in The Heritage Foundation’s comprehensive budget, tax and entitlement reform proposal, “Saving the American Dream.” Specifically, the Coburn–Lieberman proposal would:

• Create a catastrophic Medicare benefit and simplify Medicare cost-sharing. Senior and disabled citizens would henceforth be protected against the financial devastation of catastrophic illness under the Medicare program directly. This would reduce the seniors reliance on more expensive supplemental coverage. The Coburn–Lieberman proposal would impose a cap of $7,500 annually on a beneficiary’s total out-of-pocket spending. Meanwhile, the complex cost-sharing arrangements of Medicare would be replaced with a single deductible ($550 annually) for Medicare Parts A and B hospital and physicians services. Medi-gap (and presumably other supplemental insurance policies) would be limited to coverage of 50 percent of the Medicare coinsurance up to the catastrophic cap of $7,500 but not the initial $550 of a beneficiary’s cost-sharing.
• Increase Part B premiums from 25 to 35 percent. The proposal would increase the standard premium for physician and drug benefits by 2 percent per year for a period of five years. This would mean an extra $15 to $20 per month for beneficiaries, but it would reduce the large taxpayer subsidy in these voluntary parts of Medicare, which are not financed by the payroll tax. Under current law, beneficiaries pay just 25 percent of their premiums, while taxpayers pick up 75 percent of the costs through general revenue transfers. While the Coburn–Lieberman proposal would increase beneficiaries’ share of the cost of their benefits, it would fall far short of the initial “Great Society” requirement that Medicare beneficiaries pay 50 percent of the costs of their Part B benefits.
• Expand income-related cost sharing and phase out Part B and D subsidies for the very wealthy. Currently, Medicare imposes higher premium requirements for upper-income beneficiaries. For 2011, for example, while the standard monthly Part B premium is $115.40, it would be $369.10 for a person with an annual income of more than $214,000.The Coburn–Lieberman proposal would build upon this policy by raising out-of-pocket caps (and thus reducing taxpayer subsidies) for wealthy individuals and couples. For example, while the standard cap would be $7,500 for almost all beneficiaries, the new caps would increase so that wealthier enrollees would pay a greater share of their own health care costs. Under the Coburn—Lieberman proposal, the caps would be: $12,500 for married couples with annual incomes of $170,000 to $214,000; $17,500 for couples with annual incomes between $214,000 and $320,000; and $22,500 for married couples with annual incomes of $320,000 or more. Couples with annual incomes of $300,000 or more would also pay the full cost of their Part B and D premiums.
• Raise Medicare’s age of eligibility to 67. The Coburn–Lieberman proposal would gradually raise the age of eligibility for Medicare to 67 by 2025. The eligibility age would be raised by two months every year for persons who were born in 1949.
• Make physician payment and other program changes. The Coburn–Lieberman proposal provides for a three-year “doc fix” financed by savings from the proposal, as well as a reduction of taxpayer subsidies to hospitals for bad debts and improvements in Medicare administration to reduce the waste, fraud, and abuse that plagues the program.

The Coburn–Lieberman proposal is a serious step toward comprehensive Medicare reform. Beyond changes in the traditional program, full-scale reform would include the creation of a premium support system of Medicare financing that would allow seniors to take their private coverage into retirement and allow choice of plans other than traditional Medicare fee for service. But the addition of a catastrophic benefit, the broader application of income-related taxpayer subsidies, a rational increase in Medicare Part B and D premiums, and an increase in the age of eligibility are all policy prescriptions advanced by The Heritage Foundation and other reformers. If America is to be rescued from ruinous debt and crushing taxation, further Medicare reform is indispensable.

A senior fellow at Heritage’s Center for Policy Innovation, Moffitt is the co-author of Why Obamacare is Wrong for America (HarperCollins/Broadside, 2011).