How to Eliminate Waste, Fraud, and Abuse in Medicare

To contain Medicare spending, Congress must restructure the program

Photo from Getty Images

This post first appeared on the Cato at Liberty blog.

President Trump and Senate Republicans will consider measures to eliminate waste, fraud, and abuse in Medicare. Along with Medicaid, Medicare is the primary contributor to our federal debt, which has now reached $30 trillion—equal in size to the entire US economy—and is still growing.

Affluence-test Medicare premiums. The most politically viable option is to require high-income Medicare enrollees to pay higher premiums. As former Democratic Sen. Claire McCaskill (MO) said, “Donald Trump may need medication, but he certainly doesn’t need the government to pay for it.” Neither does Bill Gates (age 69). It’s hard to argue that forcing low-income taxpayers to subsidize health care for billionaires isn’t wasteful.

Many Democrats have supported increasing means-testing in Medicare, including McCaskill, former Sen. Dianne Feinstein (D‑CA) (“High-income beneficiaries can afford to pay a larger share of Medicare’s costs”), former Sen. Joe Manchin (D‑WV), former Rep. Kurt Schrader (D‑OR), former Rep. Stephanie Murphy (D‑FL), Rep. Emanuel Cleaver (D‑MO), Senate Minority Whip Dick Durbin (D‑IL), and former President Barack Obama (“You can envision a situation where, for somebody in my position, having to pay a little bit more on premiums or co-pays or things like that would be appropriate”).

Since Medicare enrollment is voluntary, higher premiums merely reduce the net subsidy an enrollee receives. Medicare already requires high-income enrollees to pay higher premiums for Parts B (physician services) & D (prescription drugs). Yet, “Despite current means-testing policies, wealthier Medicare enrollees currently have 15 to 65 percent of their estimated Part B costs subsidized by taxpayers,” to say nothing of their hospital or drug subsidies. Congress should expand means-testing to more high-income enrollees and expand it for high-income enrollees it already affects.

The Congressional Budget Office projects that gradually increasing Medicare Part B premiums from covering 25 percent to 35 percent of Part B outlays would reduce future deficits and debt by $510 billion over 10 years. A decent target for greater means-testing would be to produce one-half or two-thirds of those savings.

Just give enrollees cash. There is no better way to reduce waste, fraud, and abuse in Medicare while preserving for each enrollee the benefits they value most than to convert Medicare into a Social Security-like cash-transfer program.

When seniors receive their Medicare subsidy as a fixed cash payment, they will spend their subsidies far more carefully than anyone does today. They will avoid scammers, eliminate wasteful expenditures, and punish high-price producers (including insurers)—because enrollees themselves will reap the savings. Prices would plummet—the most important ingredient in making health care universal—while quality improves.

As I recommend in Recovery (2023), Congress should:

• “give Medicare’s entire budget directly to enrollees as cash (“Medicare checks” );

• “give higher payments to enrollees with lower lifetime incomes and higher disease burdens, in a budget-neutral manner;

• “eliminate quality-suppressing regulations (e.g., community-rating price controls) and regulations that favor particular levels or types of health insurance for Medicare enrollees;

• “limit the growth of Medicare spending to gross domestic product growth (at most)”

These changes would operationalize traditionally Democratic “public option” principles by applying them to Medicare. They are compatible with means-testing; when necessary, Congress could directly reduce Medicare subsidies for affluent individuals.

Other savings ideas. The CBO and others have proposed lots of technocratic changes that would reduce Medicare spending, including reducing Medicare Advantage subsidy “benchmarks” (10-year savings projection: $489 billion), expanding enrollee cost-sharing ($129 billion), reducing Medicare subsidies for “bad debt” ($54 billion), reducing Medicare subsidies for graduate medical education ($103 billion), reducing (insurer gaming of) Medicare Advantage risk-adjustment subsidies ($1 trillion), reducing hospital outpatient subsidies ($157 billion), reducing subsidies to “340B” hospitals ($74 billion), increasing the age of eligibility for Medicare subsidies to 67 ($22 billion), and reducing “quality bonus” subsidies to Medicare Advantage plans ($94 billion).

Many of these reforms are meritorious and would save money. (Medicare Advantage is particularly wasteful and ripe for cuts.)

But these changes would not save as much as the CBO predicts. This is mostly because they would not fundamentally alter the lobbying game that keeps Medicare spending high. When Congress tries to cut subsidies to insurers, or hospitals, or providers broadly, the segments of the industry whose revenues those cuts threaten then mobilize to defeat the cuts or to undo them in later years. They usually succeed because the health sector spends six times what the defense industry spends lobbying Congress (see figure), and the reformers eventually stop paying attention.

To contain Medicare spending, Congress must break the grip the health care industry has on Medicare. The best way is to turn Medicare into a Social Security-style cash-transfer system. When Congress starts converting Medicare subsidies to cash, then hospitals, insurers, doctors, and pharmaceutical companies would no longer have any confidence that money they spend lobbying to keep Medicare spending high would produce benefits for them. The health care industry’s incentive to lobby for greater Medicare spending would all but vanish.

“Third-rail” nonsense. The idea that Medicare is untouchable or a “third rail” is nonsense. Obamacare, the Inflation Reduction Act, and Kamala Harris’s Medicare-expansion proposal all involved efforts to reduce wasteful Medicare spending. Democrats just don’t like it when Republicans do it. And vice versa.

Michael F. Cannon is the Director of Health Policy Studies at the Cato Institute. Follow him on X: @mfcannon and on Substack:

Michael F. Cannon