- - Tuesday, December 11, 2012

The looming “fiscal cliff” threatens to turn our fragile recovery into another full-blown recession if President Obama’s push to raise taxes on U.S. job creators is successful. It also threatens to undermine our national defense by cutting resources for our military. The cliff absolutely must be avoided.

As Washington works feverishly to reach an agreement, we should view these negotiations as merely a first step toward solving our nation’s major economic challenges. In 2013, Congress and the president must work to enact pro-growth tax reform. We must also recognize that burgeoning entitlement spending is the foremost driver of our escalating debt crisis. Without structural reforms of entitlements, our economy will ultimately collapse under an unsustainable debt.

The accompanying chart shows that Medicare spending in particular is growing substantially faster than any other federal program. Many people believe that the Medicare benefits they receive upon retirement are simply a return of the taxes they have paid into the system, but the truth is that the program has never been structured this way. Instead, Medicare is a “pay-as-you-go” system in which today’s workers pay taxes to fund benefits for today’s retirees. With an aging population and rising health costs, however, Medicare payroll taxes now cover only 38 percent of current benefits. The Urban Institute found that for the average couple retiring today, the total benefits they’ll receive from Medicare will be three times the amount of taxes they paid in, even after adjusting for inflation. This upside-down pyramid is rapidly pushing the program toward insolvency. We must uphold the guarantee of affordable Medicare coverage for future generations, but to do this, we must modernize the Medicare program and place it on a sustainable fiscal path.

President Obama has acknowledged, “It is not an option for us to just sit by and do nothing.” As the chairman of the House Ways and Means Health Subcommittee, I share this sentiment and believe we must act now to protect the Medicare program. I also recognize that it is not an acceptable solution to unilaterally impose price controls and de facto rationing of medical care, as the Independent Payment Advisory Board established by Obamacare is authorized to do.


Instead, I believe the only way to preserve Medicare’s promise for the 21st century is to reform the structural flaws that have put the program on an untenable path. This week I introduced the Save and Strengthen Medicare Act, which lays out five components of reform, each with a history of bipartisan support, based on the principle that cost savings should be driven by doctors and patients.

Congressional Budget Office (Alternate Fiscal Scenario) via Heritage Foundation
Congressional Budget Office (Alternate Fiscal Scenario) via Heritage Foundation more >

First, the Save and Strengthen Medicare Act modernizes and improves the standard Medicare benefit, which was designed for the health care system of 50 years ago. It removes archaic divisions between hospital insurance and medical care, and establishes a firm cap on out-of-pocket liabilities to provide beneficiaries with the peace of mind that a severe illness won’t bankrupt them. It also reforms inefficient and costly “Medigap” plans. This would allow beneficiaries to receive their Medicare coverage from a single plan with a single premium.

Second, my legislation strengthens choice and competition in Medicare. Beneficiaries can already receive coverage through private plans, but my proposal requires them to compete with traditional Medicare on a level playing field. Everyone would have the option to keep their current coverage, and Medicare’s premium contribution would be tied to the plans’ bids, a strategy that has proven cost-effective for Medicare’s prescription drug benefit. My plan contains strict consumer protections to prohibit plans from gaming the system, discriminating against those with pre-existing conditions, or saving money simply by shifting costs to seniors and people with disabilities. Competitive bidding lowers costs for both beneficiaries and taxpayers by rewarding plans that deliver the Medicare benefit most efficiently.

Third, the Save and Strengthen Medicare Act targets greater financial assistance to low-income beneficiaries. Individuals below or near the poverty line would receive generous benefits at minimal out-of-pocket expense. Higher-income beneficiaries would still receive a considerable benefit, but they would have to pay a larger share of their monthly Medicare premium. Better-off seniors do not need as much of a subsidy for their Medicare coverage as beneficiaries with more modest incomes.

Fourth, my legislation reforms the Medicare eligibility age. One of the great blessings of modern medicine is that people are living longer, but it’s simply not realistic to expect that we can keep working the same number of years while spending more and more time in retirement. My plan allows those who want to join Medicare at age 65 to continue to do so, but as with Social Security, those who wait longer to retire will receive a larger monthly benefit, as well as relief from the Medicare payroll tax.

Fifth, the Save and Strengthen Medicare Act helps working Americans save for their retirement health needs. According to a 2012 Fidelity Investments study, the average couple entering Medicare will spend $240,000 of their personal savings on medical expenses over their remaining lifetime. My bill allows working Americans to contribute to tax-free Health Individual Retirement Accounts that they would personally own. The accounts would be funded through automatic payroll deductions, with an opt-out for workers who don’t want to participate. Funds could be withdrawn tax-free to pay for medical and long-term care expenses after retirement. I believe these personal savings accounts are crucial to strengthening the financial security of future seniors.

Absent reforms, seniors and people with disabilities will soon experience diminished Medicare benefits and higher costs. The Save and Strengthen Medicare Act would avoid this outcome by empowering Americans to take charge of their health care choices and creating a system in which health plans and providers compete to provide the best-quality health care at the lowest cost. It is my hope that this proposal helps spur Congress to act now to ensure that future generations can continue to look forward to a secure retirement with affordable, high quality health care.

Rep. Wally Herger, California Republican, is chairman of the House Ways and Means Subcommittee on Health.