Medicare: Usual and Customary Remedies Will No Longer Work - Defined Contribution Approach

Oct 13, 2026

Vledicare established in 1965 to ensure quality health care for older Americans, with Medicare as a central source of economic security for retirees. Under current tax and spending rules, Medicare is projected to become insolvent by 2001 due to rapidly rising health care costs and constrained budgets. A recent budget agreement extends solvency but relies on cost controls that may harm care quality. The commentary argues for a defined contribution approach to restore consumer cost consciousness, strengthen incentives, boost competition, and reduce the growth of health care prices and Medicare outlays.

LanguageEnglish

CategoryHealthcare

FormatPDF

Pages9

Reading Time23 min

AccessFree to download

Onset of the Problem

Cost-Control Remedies

by Jagadeesh Gokhale Vledicare was established in 1965 toensure that all elderly Americans haveaccess to quality health care.After So-cial Security,the Medicare program—which coversalmost everyone over theage of 65—constitutes the most impor-tant source of economic security forretirees.!Without its benefits,many ofthe nation's elderly would find it diffi-cult to pay their medical bills and stillmaintain more than a minimum standardofliving. Medicare's own financial projectionsshow that under current tax and spendingrules,the program will be insolvent by2001(see figure 1).²The reason is bur-geoning health care costs.In the comingyears,the government will be forced todevote a growing share of the federalbudget to providing medical coverage forthe millions of seniors who have beenpromised Medicare benefits.The strainon both the nation's health care resourcesand the budget will become especiallyseverewhen the baby boomers begin toretire in just over a decade.Then,main-taining Medicare's current financingstructure and benefit rules will meanimposing back-breaking payroll taxes onyounger and future generations. Medicare:Usual and CustomaryRemedies Will NoLonger Work The recent balanced-budget agreementbetween Congress and the administrationwould slash Medicare growth by $115billion over the next five years,extendingthe program's solvency until 2007.³Un-fortunately,most of the cuts would comefrom additional cost-control measures,which could harm the quality of care pro-vided to the elderly.The structural short-comings that have promoted overcon-sumption in the health care industry andthat have spawned Medicare's long-termfinancial woes are left untouched. This Economic Commentary describesthe structural deficiencies that have ledto Medicare's impending bankruptcyand discusses the merits of alternativeapproaches to extending the program'slong-term viability.4 When all the evi-dence is weighed,I argue that the bestsolution may be the "defined contribu-tion”approach,which would inducebeneficiaries to economize on spendingby requiring them to pay the last dollarof their health care coverage.Con-sumers'greater cost consciousness inmaking marginal health care decisionsis likely to translate into more competi-tion among medical providers and insur-ers.Better incentives for both benefici-aries and caregivers should reduce thegrowth in health care prices in generaland Medicare outlays in particular. April1,1997 Medicare is projected to be insolventby the year 2001.The budget for fiscalyear 1998 pushes that date ahead afew years by introducing additionalcost-control measures,but it will notrectify the structural deficiencies as-sociated with the current system.Moreover,it is likely to worsen thequality of care for Medicare enrollees.A better approach—one that willhelp solve Medicare's problems in thelong run—is to adopt a“defined con-tribution”plan that will restore con-sumers'interest in economizing onhealth care services and boost competition among providers and insurers. ■ Onset o the Problem In 1983,Congress revised the Social Se-curity system to restore solvency over a75-year horizon.Unfortunately,no sucheffort was undertaken for Medicare.Since its inception in 1965,Medicare'sfinancing problems have been addressedby repeatedly extending the program'sviability for a few more years,mainlythrough increased payroll taxes In part,this policy was dictated by thedifficulty of projecting total Medicareoutlays over long horizonsFuture out-lays depend on the prices,volume,andintensity of demand for covered medicalservices,all of which are influenced bymarket forces,technological advances,and demographic changes that lie out-side lawmakers'control. Since the early 1980s,health careprices have risen much faster than thegeneral price level,as measured by theConsumer Price Index(see figure 2).Real per capita spending on medicalservices has also soared,a sign thatmore services are being used moreintensively.The increase in both the

FAQs

Why is Medicare projected to become insolvent?

The program’s insolvency is linked to burgeoning health care costs and the need to devote a growing share of the federal budget to promised coverage for seniors.

What does the commentary say about recent cost-control cuts?

It states that most cuts come from additional cost-control measures that could harm the quality of care, while leaving structural shortcomings that drive long-term financial problems untouched.

What alternative approach does the commentary recommend?

It argues that a defined contribution approach would encourage beneficiaries to economize by requiring them to pay the last dollar of health care coverage, improving incentives and competition among providers and insurers.

Oct 13, 2026

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