The wrong and right ways to reform Medicare.

• Author: Bandow, Doug

Raising the payroll tax, increasing premiums, reducing reimbursements, and forcing the elderly into managed care will not address the problem. Instead, Congress should increase the age of eligibility, raise deductible levels, and allow the elderly to opt out of the system.

OFFICIALLY DESIGNATED Title XVIII of the Social Security Act, Medicare was enacted in 1965 as one of the cornerstones of Pres. Lyndon Johnson's Great Society. Johnson claimed, "No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings that have been so carefully put away over a lifetime so that they might enjoy dignity in their later years."

Increasingly, his words are being revealed as an illusion. Medicare is failing. According to the system's trustees, the Hospital Insurance Trust Fund, which finances Medicare Part A, will be broke by 2001. Part B, which pays for physician services, diagnostic tests, and other outpatient services, is funded through general revenues and premiums from the elderly and therefore is not going broke. However, its rapidly escalating costs may bankrupt the country.

Nearly all Americans automatically are enrolled in Medicare Part A, whether they like it or not, on their 65th birthday. In addition, individuals under the age of 65 who are receiving disability-based Social Security benefits are eligible for Part B after a two-year waiting period, as are most individuals suffering from chronic kidney disease. Part B is voluntary. People age 65 or older may choose to enroll in the program by paying the monthly premium, as can those under age 65 who are eligible for Part A because of disability or chronic kidney disease.

More than 32,000,000 elderly and 4,000,000 disabled Americans are covered under Part A, while over 31,000,000 aged and almost 4,000,000 disabled persons are enrolled in Part B. Combined spending for Parts A and B exceeded $181,500,000,000 for Fiscal Year 1995, approximately 12% of the entire Federal budget. If the Medicare system does not undergo serious systematic reform, disaster looms. However, the reforms currently being discussed in Washington are unlikely to address the system's fundamental flaws.

Medicare is unsustainable on three counts: demographics, technology, and third-party payment. First, America is growing older because the baby-boom generation is aging and life expectancy is increasing. In 1965, when Medicare was established, the average American lived just over 70 years. Today, life expectancy has risen to nearly 76 years. By 2025, Americans can expect to live more than 78 years, on average, even without any major new life-prolonging medical breakthroughs. Three decades from now, the proportion of Americans over the age of 65 will climb from 13% of the population to more than 20%, and the number of those over 70 will double. Americans age 85 and older are the fastest growing segment of the population. With medical breakthroughs and new technology, life expectancy probably will continue to increase, leading to even greater numbers of elderly.

The older people become, the more--and the more expensive--health care they consume. Individuals over the age of 65 see physicians nearly twice as frequently as do younger Americans and enter the hospital twice as often. Average per capita health care spending is approximately four times higher for the elderly than for the nonelderly. In general, half of a person's lifetime health care expenses are incurred after age 65. Therefore, as the number of elderly people continues to grow, Medicare expenses will continue to increase.

Second, medical treatments and technologies exist today that were not even dreamed of when Medicare was conceived. These have...