Senator Lieberman Proposes Medicare Reform

Update: Estimates updated

Today, Senator Joseph Lieberman (I-CT) proposed a plan to reform Medicare, but to do so working within the current system rather than through more fundamental reforms, such as a move to "premium support". As Sen. Lieberman argued, "Medicare is hurtling toward its demise... [w]e can and must work together to fix Medicare now. Doing so would send a powerful and necessary signal to financial markets that we are addressing our long-term fiscal challenges." (With this statement, the Senator joins the Announcement Effect Club)

Sen. Lieberman's plan relies on five major changes:

• Raising the Medicare Retirement age by two months every year, starting in 2014 until it reaches 67 in 2025.
• Replacing Medicare's complicated cost-sharing rules with a unified dedutible, co-pay, and catastrophic cap.
• Increasing premiums for all new enrollees, beginning in 2014, from 25% of costs to 35%.
• Reforming 'Medigap' rules to reduce overutilization.
• Raising the payroll tax by 1% on income above $250,000.

Sen. Lieberman claims that these changes will save "at least $200 billion in Medicare spending over the next 10 years" and extend Medicare’s solvency "by approximately 20 years." Though we don't have enough details to know for sure, we estimate that his plan could save significantly more -- perhaps close to $370 billion over ten years ($430 billion with interest). According to our estimates, in 2021 the plan would save $75 billion ($90 billion including interest), and those savings would continue to grow as the Medicare age reached 67, more new retirees were subject to the higher premiums, and the cost-sharing changes put some downward pressure on cost growth.

Note: Numbers are rounded to the nearest five and are CRFB estimates. For the Medicare age change, we rely on CBO's Budget options. For Medigap and cost-sharing, we assume the parameters in CBO's Budget options and distribute the interaction proportionally. For premium increases, we begin with the CBO's Budget option but adjust it substantially downward to account for the fact his proposal only applies to new retirees. The payroll tax estimates are very rough, and assume the increase starts in 2014 and is no applied to investment income.

This plan doesn't go nearly far enough to solve our Medicare problems, but it does make a substantial downpayment and does so in a way that would help address both health care cost growth and population aging, while also recognizing that rising health care costs will require the public to contribute more. Sen. Lieberman should be praised for offering this approach and for taking Medicare's problems seriously. As he explains:

I offer these ideas as a starting point for discussion to show we can extend the solvency of Medicare and reduce our national deficit and debt. The truth is that we cannot save Medicare as we know it. We can save Medicare only if we change it. I realize that each of the reforms is bound to make some people unhappy and that supporting such legislation entails political risk. But unless members of Congress are willing to take risks together, the big losers will be our great country and the people who elected us to lead it.