Commentary | Economic Growth

Seniors need health care reform too

Seniors receiving social security benefits are on track to receive a “zero” cost of living adjustment (COLA) next year. That would make 2010 the first year since the government began automatically adjusting benefits according to inflation in 1975 that there has been no cost of living increase. Although many consumer prices have fallen, seniors will still be squeezed by this zero COLA adjustment, since health care costs continue to rise faster than overall inflation. In fact, many seniors may actually receive slightly smaller checks because rising Medicare premiums are deducted from Social Security benefits. This comes at a time when many seniors have also lost a considerable amount of investment savings and seen their housing equity decline sharply in the recent financial crisis, with oldest retirees hit the hardest.

The zero COLA highlights two important points. First, seniors need comprehensive national health reform; and second, given that Social Security benefits are already quite modest, future benefit cuts, either through rising Medicare prescription drug benefit premiums or to restore solvency to the system, are ill-advised.

Seniors need health care and Medicare reform. Older Americans are fortunate to have universal access to high-quality and generally affordable public insurance in the form of Medicare. Research shows that Medicare enrollees are much more satisfied with their health care coverage than non-seniors are with their private insurance. Furthermore, Medicare enrollees report fewer problems getting access to care and have fewer instances of medical expenses resulting in financial hardship. Medicare also does a better job of controlling costs than private insurance. Yet seniors covered by Medicare are not impervious to health care inflation. Seniors face rapidly increasing out-of-pocket spending due to higher premiums in optional supplemental “Medigap” policies and increased cost-sharing and premiums from employer-sponsored retiree health insurance plans. Previous research has shown that premiums for Medigap Plan F — the most popular option — increased by 35% between 2000 to 2005. All told, these trends have increased the risk of bankruptcy and debt for elderly families. Total out-of-pocket spending for Medicare beneficiaries has been projected to reach 30% of income by 2025 without reform.

Because of a “hold-harmless” provision for Social Security beneficiaries enrolled in Medicare, three-quarters of enrollees in Medicare Part B (providing insurance for physician-provided care outside of hospitals) will not see their Social Security benefits decrease due to increasing Medicare Part B premiums.  However, the remaining quarter of Part B enrollees — approximately 11 million seniors — are still subject to rising premiums. Those affected are new enrollees in Part B, high earners, and seniors who are delaying receipt of Social Security benefits. Premiums for part B increased by a staggering 72% between 2000 and 2005. Moreover, Medicare part D — the prescription drug benefit that was championed and passed by the Bush Administration — lacks this “hold harmless” provision. Because of this, increased Part D premium will be fully reflected in lower Social Security checks.

Measures that would save Medicare money through increased efficiency would also save seniors money and produce better quality care. This is exactly what proposals for comprehensive national health reform currently under consideration by the House of Representatives and the Senate Health, Education, Labor, and Pensions Committee would do. These proposals would partially finance the overall cost of reform by making Medicare more efficient and incentivizing higher quality care. Some have voiced concerns that these measures would jeopardize the care that seniors receive through Medicare. This is a misplaced fear. The proposed reforms to Medicare would do the opposite, improving the quality and efficiency of medical care, and ultimately making health care more affordable for seniors. They would reduce overpayments to private insurers, introduce measures to lower prescription drug costs and access to generic alternatives, cut fraud and abuse, and begin to implement measures that incentivize higher quality care through new payment mechanisms that pay for the quality, not just quantity, of care provided. Together, these reforms would also help ensure Medicare long-run solvency.

Seniors are acutely aware of the mounting cost of health care, given their dependence on the fixed monthly income of Social Security. Health reform would help make Medicare more efficient and cost-effective, reducing the burden on older Americans and increasing their quality of care.

Social Security benefits are modest but represent a significant portion of income for most retired Americans; cutting benefit levels further would be ill-advised. The COLA freeze highlights another point about Social Security: benefits are already relatively modest. The average annual benefit for retirees in January 2009 was $13,900. By comparison, the federal poverty guideline level for a single person is $10,830 a year, and the recommended income to meet basic expenses as a retired homeowner (as calculated by the Elder Economic Security Index) is $16,300. For a retired renter, the recommended income is even higher, at $20,250 a year. Yet despite these relatively low levels of benefits, Social Security represents half or more of total income for two-thirds of beneficiaries, and for one-third of beneficiaries, Social Security represents 90% or more of total income. The importance of Social Security as a source of income holds across the income distribution; Social Security provides 45% of income for seniors in the second-highest income quintile, and 18% in the top quintile.

Reform may eventually be required to correct Social Security’s long-run projected shortfall, and some have proposed benefit cuts (either directly or through an increase in the retirement age) as part of the solution. Given that benefits are already relatively low, further cuts are ill-advised. Furthermore, given that disparities in life expectancy are increasing, raising the retirement age would prove highly detrimental to minorities and low-income workers. A more sensible solution would be to change the way contributions to Social Security are collected in order to correct the erosion in tax revenues due to skyrocketing income inequality over the past twenty years. Proposals to change the amount of wages subject to taxation would not only set the program back on a course of financial stability, but potentially increase the progressivity of benefits.

It’s no shock that many seniors are skeptical of reform that proposes to use efficiencies gained from changing Medicare to fund broader health reform. For decades, Beltway pundits and economic elites have railed against Social Security and Medicare and argued for steep benefit cuts. The irony here is that those most dedicated to defending
Social Security and Medicare are also those that are most committed to passing broader health care reform. One way to help assure today’s seniors that this isn’t just one more grab at their hard-earned benefits is to provide a legislative fix that would  add a “hold harmless” provision to Medicare part D as part of the broader reform package.