Fundamental Health Care Reform must be part of any solution

• Fundamental health care reform must be part of any solution. Rising costs throughout the health care system exacerbate the long-term budget problem in two ways. They increase federal spending by raising the per-person cost of providing health care through Medicare and Medicaid. (Per-person costs are rising in these programs at about the same rate as in the health care system as a whole, including the public and private sectors.) In addition, rising health care costs shrink federal revenues by increasing the share of the nation’s income that is exempt from taxation. Employer-provided health benefits are excluded from taxable income, and various other provisions of the tax code allow individuals to pay some health care costs from pre-tax income. Thus, when health care costs grow faster than the economy, the share of total income that is exempt from taxation increases.

A major effort is needed to expand our currently limited knowledge about ways to reduce the rate of growth in heath care costs in the public and private sectors alike, while improving the quality of care system-wide. Medicare can play an important role in these efforts, and policymakers should promote initiatives that both restrain cost growth in Medicare and serve as a model for reforms applicable to the system as a whole. Examples include eliminating the large overpayments that Medicare makes to private insurance companies that participate in the Medicare Advantage component of the program, altering Medicare’s payment systems to reward quality and efficiency, and strengthening primary care and care coordination.