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A blueprint for America’s fiscal future

Adam Newman | Thursday, April 12, 2012

Social Security, Medicare and Medicaid are fundamental to American society. They provide much-needed financial security to the poor, disabled and elderly. But as I wrote last time, these programs are growing at unsustainable rates, and there are economic, fiscal and moral imperatives for reform. Too often lawmakers and other commentators speak about the need to reform these programs without offering solutions (as I did in my last article.) To break this trend, I am going to explore the best policy options for reforming each of these programs.

There are only two changes that can be made to Social Security in order to avoid it going bankrupt in 2036: raising the amount collected through payroll taxes and lowering future benefits. Raising the payroll tax (currently paid at 6.2 percent of income by both employer and employee) and the income cap (currently at $110,000) are necessary, but projections show that neither alone will be enough to fund Social Security over the long term. Thus, along with tax increases, benefit increases will have to be slowed for most but raised for the neediest seniors. The retirement age will have to increase by a year or two but exempt those who are in physically intensive labor professions.

What usually gets lost when examining Social Security is that it was never meant to provide a retiree’s entire source of income. Currently, Social Security provides only half of what a middle class American would need for a comfortable retirement. Thus, to promote better savings, the government should reform the tax code and create mandatory 401Ks for retirement (in addition to Social Security) that would give people the flexibility to choose how they invest.

Many people currently believe that Social Security poses a larger fiscal problem than Medicare and Medicaid. This is partially due to the fact that the Social Security trust fund will go bankrupt in 2036 and currently makes up the same percentage of the federal budget as Medicare and Medicaid combined (roughly 20 percent.) However, as health care costs grow, Medicare and Medicaid will grow much faster than Social Security, which is why reforming these two programs should have much higher priority than reforming Social Security.

The overall issue with Medicare and Medicaid is that they simply reimburse for the high cost, low quality care that has become the trademark of the American health care system. Most people believe that our system is the best in the world, and on some metrics (usually inputs) they are correct: doctors, technology, treatments and prescription drugs. However, on other metrics, (usually outcomes) the U.S health care system is mediocre: child mortality, life expectancy and even preventable deaths. Even with mediocre outcomes, America spends more on health care per person and as a percentage of GDP than any other country.

The remarkable thing about health care is that changing how it is delivered can actually allow us to receive higher quality care while paying less. This can be achieved by implementing within the health care system the “Three I’s,” a concept belonging to Stanford University Professor Victor Fuchs: infrastructure, incentives and information.

Infrastructure: America’s health care system does not have a seamless infrastructure where health care providers coordinate patient care. Instead, America has a fractured infrastructure where thousands of independent providers provide care to Americans without coordination. A robust health care infrastructure amongst other characteristics, would mandate collaboration amongst providers for patient care and incentivize a group of providers to provide care to patients as a team.

Incentives: America’s health care system utilizes “fee for service” reimbursement, meaning providers are reimbursed for every test, procedure and visit regardless of the health outcome. Incentives need to be realigned in the health care system by shifting from a fee for service reimbursement system towards a “fee for value” reimbursement system. A fee for value reimbursement system would reimburse providers not for how many tests and procedures they utilize, but for the health outcomes of their patients.

Information: Currently, there is a lack of information to inform doctors and insurers about the cost-effectiveness of different treatments, known as comparative effectiveness research, or CER. Research shows that over 50 percent of treatments are not backed by any research into cost-effectiveness. If CER is funded and disseminated, the insurers could incentivize providers to practice the treatments that are the most “cost-effective.”

I do not think I have ever produced a more boring article in my entire life, but I probably have not produced a more important one either. Reforming Social Security, Medicare and Medicaid may be one of the most politically difficult, logistically challenging and most important things we can do as a country. There is no question that these programs are going to be reformed; the only question is whether it will be before or after an American sovereign debt crisis.

Adam Newman is a junior finance major. He can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.