Biden Proposes Medicare Restructure

There is a pattern that comes with every warning about Medicare’s fragile finances. Republicans express concern with vague references to spending reductions; Democrats whistle past the graveyard and accuse the GOP of trying to kill Grandma.

President Biden broke the pattern (at least the graveyard bit) this morning (WaPo):

The White House on Tuesday proposed raising taxes on Americans earning more than $400,000 and reducing what Medicare pays for prescription drugs in an attempt to ensure that the health-care program for seniors is funded for the next two decades, challenging Republicans over an imminent funding crisis.

As forecasters warn that a key Medicare trust fund will run into major financial problems within five years, the administration proposed three key changes — including the tax hike and new rules to reduce prescription drug costs — to bolster the program for at least 25 years.

First, kudos for Biden for presenting a plan in the first place. Democrats have dismissively waived away warnings about Medicare’s coming insolvency because it was politically successful to do so. Biden will not follow that tempting but dangerous pattern. He deserves credit for that.

That said, the plan itself could use some work.

The proposed higher taxes on investment income is just about the worst way to increase revenue. The income stream is unstable as it is (i.e., you’re not likely to have the tax base you think); tax elasticity is usually higher (i.e., you’re not likely to have the tax base you think, again); and taxing investment income discourages funds for new business formation.

Personally, I’d prefer progressive consumption taxes to income taxes of any kind, but they suffer the same risks. So, if more revenue is required, it would be more sensible (and stable from a funding perspective) to raise the ceiling on the Medicare/SS “payroll tax.” Yeah, that’s a Bernie Sanders idea, but broken clocks….

The other major part of this is the government using its monopsony power to lower drug prices. Ten years ago, I would have serious problems with this. Now that I’m aware of how the AMA uses Medicare as a monopoly-by-proxy, I’m less worried, but there is still the risk that the government goes overboard and creates an artificial shortage in medicine. This needs to be monitored closely in comparison to market conditions.

Speaking of market conditions, that gets to two matters left out. One – the AMA’s role in Medicare price setting – is a direct and unnecessary cost increase to Medicare. The other, the raft of states suffering health care shortages under Certificate of Need regimes, doesn’t directly affect Medicare but does contribute to higher medical prices (and exacerbating Medicare’s fiscal problems). Ending these practices can and should be part of a larger health care reform. The first is assuredly germane to Biden’s efforts to put Medicare on firmer financial footing.

All in all, though, this is a discussion we need to have, and Biden deserves credit for making it meaningful.

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