Medicare as a Catalyst for Competitive Reforms

By James C. Capretta

The US is an outlier among advanced economies in that its national government does not fully control, through regulation and budgeting, health insurance coverage and the provision of medical care. The government is a major force, of course, but there is more room than in other countries for private enterprise and initiative, and many transactions take place beyond the government’s reach.

Key Points:

  • Medicare’s complex regulations and opaqueness make it difficult for program beneficiaries to seek out high-value and low-cost health care.
  • The program’s multiple parts and split trust funds are also outdated and impede sensible reforms.
  • A competitive marketplace with beneficiaries making informed choices requires price transparency and greater comparability and standardization of options.
  • Further, policymakers should update the program by combining Parts A and B into a single insurance plan, with one deductible and cost-sharing structure and one trust fund.

Even so, the nation’s health system is hardly an “anything goes” free market, despite frequent claims to the contrary by those wishing to blame today’s dysfunctions on market ideology. Even with boundaries, the federal and state governments are far and away the most decisive forces directing the allocation of resources in the health system. What now exists in the US is not a market-driven health system but rather a complex interplay between the public and private sectors that does not fall neatly on one side or the other of the government-market divide.

For most Americans, the arrangements now in place, unplanned and fragmented as they are, are generally good enough and often excellent. The combination of public insurance for the elderly (Medicare) and the poor (Medicaid) and privately purchased insurance for the working-age population and their families (mostly by employers) gives the vast majority of citizens and legal residents ready access to health services from a large network of hospitals and physician practices that have the skill and resources to deliver world-class care.

The major challenge in the current system is the absence of an organized and intentional regimen of cost and quality discipline. The government is not fully in control, and the markets for both insurance and medical care are highly compromised, by both government interventions and inherent limitations. The result is runaway costs. The rise in unchecked expenses, often for care that provides little value to patients or is vastly overpriced, is forcing aside other priorities, such as spending by households on educational expenses or improved housing. Rising health system costs are also the most important contributor to current forecasts of ever-widening annual deficits for the federal government. Left unchecked, the predictable result of continued rapid health cost inflation will be runaway debt, followed by higher taxes and premiums for all consumers.

Medicare is central to all of this, both good and bad. The program is understandably popular among the elderly because of the access to essential services it provides. At the same time, Medicare’s rules for paying hospitals, physicians, and other service providers are the single most important factors influencing how care is delivered to all patients, not just those enrolled in Medicare. In other words, as Medicare changes, the ripple effects throughout the health system are substantial.

And therein lies an opportunity. For advocates of a market-driven health system, Medicare reform is essential because of its influence. Critics contend the elderly will never serve as effective consumers, but existing evidence already says otherwise. Several studies have shown that when Medicare beneficiaries enroll in Medigap insurance, their use of services increases because they no longer pay out-of-pocket for many services.1 Congress needs only to modify the program to give its enrollees the right tools and incentives to benefit directly from making cost-reducing choices.

A Structured Market

Over the past half century, market advocates have advanced some successful reforms to the health care system, such as creating health savings accounts in 2003, but the overall direction of change has been toward tighter government control rather than vigorous competition and consumer choice. One impediment has been confusion over what is required for a market to function properly. As Kenneth Arrow articulated in 1963, the market for medical services will sputter without some regulation because of the nature of what is being consumed.2

Patients must entrust their well-being to trained clinicians because they lack sufficient expertise to make decisions on their own. This alters the normal supplier-consumer dynamic that allows other markets to operate efficiently. It also follows that the public expects physicians and others who largely determine what services patients will receive to apply ethical principles to their professional decisions irrespective of the financial consequences. This is not an expectation that applies in most other sectors.

Further, the probability of needing medical care is skewed toward those with high risks, which makes it difficult for an unregulated insurance market to provide acceptable access to all patients, including those with limited resources. Without some restraint, insurers would set premiums for those at the highest risk well above what healthy consumers pay. As just one example, cancer survivors would face a lifetime of high premiums. Most Americans would see this as unfair.

These tendencies, however, do not mean markets can never work or are not worth attempting in this slice of the American economy. The potential remains for incentives to deliver better results for consumers, measured by cost efficiency, innovation, and ever-improving quality and convenience. Rather, the predictable failings of a fully unregulated market point to the need for establishing structure around consumer decisions, so that patients and insurance enrollees can readily see meaningful price differences among their options.

Building an effective health care market will require helping consumers, including those enrolled in Medicare, see value differences when choosing among their coverage options—plan-focused competition—and when deciding from whom to get individual medical services when circumstances are conducive to consumer discretion.

Plan-Focused Competition. The value proposition of managed care insurance plans, especially health maintenance organizations (HMOs), is that they can control costs for their enrollees better than unmanaged fee-for-service (FFS) insurance can. With plan-level competition, consumers would hire agents—HMOs and other types of managed care—to control costs on their behalf. Health plans that successfully keep expenses in check could charge lower premiums than their competitors do and thus attract more enrollees.

Strong competition among plans is essential for spending discipline because overall costs are concentrated in a relatively small number of expensive cases, and only experts who fully understand the care process can use clinical data to identify opportunities for greater efficiency. Spending on patients in the top 10 percent of per capita expenses accounts for two-thirds of all medical care spending.3 Competing health coverage plans, including those affiliated with service providers, would separate themselves by getting better at managing total costs.

Government policy is essential to making the market for managed care insurance work as intended. Insurers must offer standardized benefits to ensure premium differences are due entirely to varying levels of efficiency and not indecipherable coverage details.

Further, the sponsor of the coverage—which, in the case of Medicare, is the federal government but could also be employers or states—must provide its support in the form of a fixed contribution that does not vary based on the costs of the plans enrollees select. As an example, the level of premium support could be tied to the costs of the average plan; enrollees selecting more expensive coverage would pay the added premium out of pocket. With fixed contributions, the participants would have strong incentives to seek out high-value options, which is crucial for sending the right signals to the insurers running the plans.

Provider-Focused Competition. Consumers can drive efficiency and cost reduction when shopping for individual services and not just their insurance plans, which was the motivation for creating health savings accounts. Not all medical care is amenable to consumer discretion (for instance, emergency care usually is not), but some services allow for scheduling and comparison shopping. When the conditions are right, putting structure around the choices will intensify competition and lower costs.

The first step is meaningful price transparency. For decades, the pricing for individual services has been opaque and overly complex. That is beginning to change with new transparency regulations on hospitals and insurers, implemented across administrations and on a bipartisan basis. The new rules will flood the market in the coming years with pricing data that were previously invisible even to large payers, such as employers. The shift, aided by information technology, may begin to help consumers navigate the market in ways that were not possible previously.

However, the steps taken so far are unlikely to solve the whole problem, most especially in the context of Medicare. For price shopping to become a reality in the program, two further changes are necessary.

First, Medicare’s administrators must issue rules standardizing what is being priced. Patients will never be able to shop for services if what one clinician is offering differs in important ways from what a competitor is offering.

Second, consumers must share in the savings when picking low-priced options, even when they have already satisfied their deductibles and have full insurance protection. Without an incentive for consumers to choose lower-priced but comparable options, service providers will never feel compelled to compete vigorously based on what they charge.

Key Reforms

Bringing market discipline to Medicare will require several steps, starting with rationalizing its benefit structure to reduce complexity and allow for more straightforward premium comparisons among coverage options.

Rationalizing Benefits, Coverage Options, and the Enrollment Process. Medicare’s origin and evolution have made the program difficult for beneficiaries to navigate.

At enactment, Medicare was modeled on the prevailing private-sector insurance plans of the day: not-for-profit Blue Cross Blue Shield coverage for hospitalizations and physician services. In Medicare, Part A is for hospitalizations and other facility-based services, and Part B is for physician and ambulatory care. Prescription drug coverage (called Part D) was added in 2006 and is housed within Part B.

The hospital insurance (HI) trust fund is used to track Part A receipts and spending and is constructed like Social Security, with payroll taxes collected from current workers and their employers paying benefits for current retirees (so-called pay-as-you-go financing). Workers “earn” their Part A coverage for themselves and their spouses by paying employment taxes for a specified number of years (usually 10).

When eligible persons enroll in Part A, typically at age 65, they also can voluntarily enroll in Parts B (for physician and ambulatory care) and D (for prescriptions filled at retail pharmacies) by agreeing to monthly premiums covering a portion of their total costs. The balance of Parts B and D expenses, which are tracked in the supplementary medical insurance (SMI) trust fund, is financed by transfers from the general fund of the Treasury—that is, taxpayers. At enactment, premiums collected from enrolled beneficiaries were expected to cover 50 percent of total SMI expenses.4 However, as health inflation escalated in the program’s first decade, Congress limited the rate of growth of beneficiary premiums below that of total expenses, which meant a higher burden on taxpayers. Eventually, Congress settled on a new target, pegging beneficiary premiums at levels sufficient to cover 25 percent of total costs, which was written into permanent Medicare law in 1997.5

Medicare’s benefit design, which may have made sense at enactment, is now out of step with industry standards. Most private coverage involves a single set of cost-sharing rules across all benefit categories. In Medicare, though, beneficiaries must satisfy separate deductibles and coinsurance requirements for all three benefit components.

In Part A, they must pay a deductible for inpatient hospital stays ($1,556 in 2022), a copayment per day ($389 in 2022) for stays that last between 61 and 90 days, and a higher copayment per day ($778 in 2022) beyond 90 days. Further, there is a lifetime limit of 60 days for inpatient stays lasting beyond 90 days; when those have been exhausted, the beneficiary is responsible for the full cost of inpatient care.

In Part B, the beneficiary must pay out of pocket for a deductible before coverage begins ($233 in 2022) and then 20 percent of the cost of each service received.6

Part D has a standard benefit with a $480 deductible in 2022 and a 25 percent beneficiary copayment for all costs above $480 and below $10,690. Above $10,690, the beneficiary pays 5 percent of costs.7 Prescription drug plans participating in Part D are authorized to alter the standard cost sharing so long as the total actuarial value of what they are offering is equivalent to the benefit defined by the law.

Medicare is now a confusing mix of mandatory participation (for Part A) and voluntary enrollment (for Parts B and D), with further options to enroll in privately administered Medicare Advantage (MA) or Medigap plans. In addition, some beneficiaries are placed into accountable care organizations (ACOs)—provider-led entities that get paid for services rendered but that also can get bonuses for controlling costs with managed care practices—without their knowledge. (This general pattern has some exceptions.)

Adding to this complexity is the lack of a system of enrollment that makes price comparisons straightforward. Under current processes, it is not a simple matter for beneficiaries to compare the all-in financial implications of the various combinations of coverage available to them. Many beneficiaries end up relying on brokers to steer them through the process, even though brokers are under no obligation to treat all options equally.

Reform should begin with modernization and simplification of the benefit structure and enrollment process. Beneficiaries should be presented with the full range of their benefit options through one government-administered enrollment portal that makes it less necessary for beneficiaries to rely on outside parties to help them make their choices. Through it, they should be able to compare competing approaches for delivering covered services on an apples-to-apples basis and across the three main benefit components, as shown in Table 1.

Table 1. Restructured Choices for Medicare Beneficiaries

Source: Author.

Parts A and B should be combined into a single insurance plan, with one deductible and cost-sharing structure designed to encourage cost-effective use of care. There should be no cost sharing required for inpatient hospital stays, and beneficiaries should be protected against high annual out-of-pocket costs through a “catastrophic cap.” The actuarial value of this redesigned benefit should equal what is required for covered benefits in current Medicare law. (This ensures no increase in federal costs.)

This redesign, with one deductible and simplified cost sharing for service use, will necessarily require a larger upfront deductible than applies to Part B today to ensure total federal costs do not increase. For instance, the Congressional Budget Office (CBO) has estimated that applying a $700 upfront deductible for both Parts A and B, along with 20 percent coinsurance on all expenses above that level and an out-of-pocket limit of $7,000 annually, would approximate the insurance value of current law (although changing the benefit design in this way would produce a relatively small amount of budgetary savings).8 The distribution of spending across beneficiaries would shift, however, with the sickest beneficiaries getting relief from elimination of expenses for hospital stays and the new limits on their annual out-of-pocket expenses. Total costs would fall slightly from reduced use of some services due to the larger upfront deductible.

While combining Parts A and B makes sense, Part D should remain a separate benefit initially because of its unique role and reliance on competing private plans. Over time, it could be integrated into the combined Parts A and B insurance plan as premium support (discussed below) is implemented across all of Medicare.

There should be three basic options for getting Medicare coverage that conforms to this redesigned benefit.

FFS, as administered by the federal government, would remain an enrollment option for all beneficiaries in all regions of the country. FFS is the traditional option in Medicare, for which the government has written extensive and complex payment rules for hospitals, physician practices, and other providers of medical services. About 60 percent of Medicare beneficiaries are enrolled in FFS.

ACOs—now a subpart of FFS—should become a coverage option that is distinct from both FFS and MA. ACOs differ from MA plans because they are organized and run by the hospitals and physicians providing care to patients, not insurance companies. Some Medicare beneficiaries may be comforted by this distinction. ACOs also are not traditional FFS because they are expected to implement some managed care techniques to control costs for their assigned beneficiaries.

Medicare’s rules should be modified to require ACOs to offer the full range of Medicare-covered services for a fixed monthly premium and to demonstrate some capacity for managing costs without harming the quality of care provided to patients. The hospitals and physician groups now participating in the various ACO demonstration models should be given time to transition into entities capable of taking on insurance risk and providing organized care to an enrolled patient population. They could contract with other insurance plans to perform functions outside their core competencies. They also could pay their affiliated providers on any basis they determine is effective, but, at their discretion, they would be free to continue using Medicare’s FFS payment rules.

MA plans would be required to offer all enrollees a package of benefits actuarially equivalent to coverage under Parts A and B, without supplemental benefits (which would be offered separately, as discussed below).

The next component of the benefit scheme would be for prescription drugs. Here, the Part D program would operate much as it does today, with private plans competing for enrollment (and no government-administered option). The Part D benefit package should be updated to lessen the incentive for using rebates for price discounts by requiring the plans to cover more of the expenses above the catastrophic threshold. Beneficiaries opting for enrollment into FFS or an ACO would choose from stand-alone Part D plans, while MA enrollees could accept their MA plan’s drug coverage option (which the MA plans would be required to offer) or decline enrollment into Part D.

Finally, Medicare beneficiaries should be allowed to buy supplemental benefits that they self-finance with premium payments. Enrollees in FFS should be allowed to purchase Medigap coverage—but in modified form to make sense in the context of unmanaged care. With FFS insurance, cost sharing at the point of care is an important tool for moderating use of services. Medigap plans sold to FFS enrollees should not fully eliminate cost sharing when patients are using more discretionary services in an ambulatory setting.

ACO enrollees could purchase Medigap coverage, too, but the ACOs would be required to work with private Medigap plans to provide coverage that works with the plan’s managed care practices. In particular, the Medigap plans should provide preferential cost sharing only when enrollees use ACO-affiliated providers and not for out-of-network care.

MA plans attract enrollment today by offering supplemental coverage beyond the benefits required under current Medicare law. With these reforms, they could continue to offer these benefits, but they would be separated from statutorily required Medicare benefits and financed from beneficiary premiums. On a net basis, the effect likely would be an approximation of what occurs today, albeit with more transparency and beneficiary participation. Many MA plans would be able to deliver premium savings relative to FFS, with the savings available for use by the beneficiaries to purchase supplemental benefits.

This reformed benefit structure, along with a streamlined and improved enrollment portal, would allow Medicare beneficiaries to see their options more clearly than they do today. They could compare the premiums charged by FFS, ACOs, and MA plans when deciding how to secure their benefits under Parts A and B. They also could see what their premiums would be when combining options for Parts A and B coverage with those for Part D and supplemental benefits. Structuring the enrollment process in this way would intensify the premium competition and lower overall costs.

Ensuring Fair Premium Competition Among the Coverage Options. The crucial second piece of an effective reform is implementation of strong price competition among the various coverage options. As noted, the Part D benefit was designed to promote such competition, through a premium support construct. Modest premium growth in the program has validated the model.

The next step is to implement premium support in Parts A and B. MA plans already submit competitive bids under current law, but those bids are considered in relation to benchmarks tied to historical cost rates that may not accurately reflect what spending would be with efficient care provision. Further, FFS does not participate in the competitive bidding process, which means its enrollees are held harmless even when FFS is much more expensive than the MA options in a market area. The exemption of FFS from competition has been a major impediment to stricter cost discipline.

Fair competition requires submission of bids from FFS, ACOs, and MA plans for the same set of redesigned and actuarially equivalent benefits. FFS’s bid would be a calculation by the government of the per-beneficiary costs in each market. The government should continue to refine its risk adjustment methodology to ensure the competition is based on efficient care delivery and not differences in the underlying health status of the enrollees joining the various coverage options.

The government’s contribution toward coverage (its “premium support”) should be based on the submitted bids. One option for setting the government’s payment would be to tie it to the second-lowest bid in every market area (as defined in law or regulation). An alternative would be the average bid (weighted by enrollment) in each market.

The CBO has analyzed the budgetary effects of both approaches, as shown in Figure 1. (The government contribution would be net of the beneficiary premium, set at what is required for enrollment into Part B under current law.)

Figure 1. Premium Support Effects on Program and Enrollee Costs

Source: Congressional Budget Office, “A Premium Support System for Medicare: Updated Analysis of Illustrative Options,” October 2017,

With the second-lowest bid, overall costs for the federal government would fall by 15 percent, but net beneficiary expenses would rise by 18 percent, partly because FFS enrollees in high-cost markets would pay higher premiums. Using the average bid to set the government’s contribution would still lower the federal government’s costs (by 8 percent), but it would also reduce out-of-pocket spending by beneficiaries, by an average of 5 percent annually.

The CBO’s assessment of premium support confirms that competition would lower costs by encouraging migration toward more efficient coverage options. It also suggests that the competition likely would slow program spending growth in future years by encouraging development and adoption of cost-reducing technologies that improve the efficiency of care delivery.9

MA plans have an advantage over FFS because they can build selective networks without paying substantially higher rates for inpatient services. The law prohibits balance billing by facilities even when treating non-FFS Medicare patients, which means hospitals have little incentive to resist the contract terms of MA plans.

To improve the functioning of the marketplace, this requirement should be revisited, especially as premium support would increase the pressure on MA plans to achieve cost reductions through more efficient arrangements.

The savings from more intensive premium competition among the coverage options can be shared with Medicare enrollees to make the reform more attractive politically. One approach would be to expand Medicare- covered benefits and increase the government’s contribution toward the coverage. For instance, expanding Medicare benefits to include an annual out-of-pocket cost limit (so-called catastrophic protection) might be done as an add-on (rather than in an actuarially neutral manner). Medicare might also cover some benefits that fall outside what is provided in current law today (such as some dental services). These added benefits would lessen the savings from reform but might diminish the political opposition that has made advancing the premium support concept so difficult in the past.10

Competition and Price Shopping in FFS. Premium support is not the only means by which stronger market discipline can be introduced into Medicare. Enrollees in FFS can be encouraged to select lower-priced service providers too.

Medicare should become a leader in using standardized pricing to foster strong competition. Hospitals and physicians today have weak incentives to post clear pricing for their services, and the complexity of medical care makes price comparisons difficult for patients when multiple line items are billed for a full episode of care.

The Centers for Medicare & Medicaid Services could promote strong price competition by requiring participating providers to disclose pricing for standardized services covering common procedures. The key is to ensure a coordinated, all-in price from all the practitioners and facilities involved in delivering care to a patient. For instance, the government could require all providers involved in common surgeries to provide a combined all-in price for these services.

An essential next step is to incentivize the Medicare enrollees to shop for lower-priced options. Medicare could do this by calculating benchmarks in every market (based on prevailing FFS rates) for a list of standardized interventions. Beneficiaries opting for providers that post prices below the benchmarks should keep some of the savings (perhaps 50 percent). In some cases, for expensive care, the payment to the Medicare beneficiaries could be thousands of dollars, which would create strong incentives for the providers to price their services more aggressively and for the beneficiaries to migrate to the lowest-priced options. For beneficiaries in rural areas, the savings from lower-priced options in more urban settings might be sufficient to make the cost of travel worthwhile. And there is strong evidence that the overall effect would be to deliver substantial savings, for both Medicare as a program and the program’s enrollees.11

Modernizing the Trust Fund Structure. Medicare’s trust funds attract considerable political attention, for understandable reasons. HI relies entirely on tax collections, not subsidies, to meet its obligations, which means it could run short of funds and thus force Congress to take up corrective legislation. In 2022, the CBO projected that the HI trust fund would be depleted of reserves in 2030, after which it could not cover 100 percent of benefit claims.12

While the impending insolvency of HI can be a powerful motivator and, under the right circumstances, propel sensible reforms forward, it has not always worked that way. Congress’s interest is in ensuring Medicare beneficiaries receive coverage of their medical expenses. The path of least political resistance might be to replenish the HI trust fund with changes that cause minimal controversy, even if that means ignoring the fundamental sources of the program’s financial challenges.

Figure 2 exposes why papering over HI’s shortfall would leave the real financial problem unresolved. Because the SMI trust fund is financed mainly with transfers from the Treasury, it is perceived as perpetually solvent even though its burden on taxpayers is already immense and will become overwhelming in the coming decades. The 2022 Medicare Trustees report on the program’s financial outlook estimated that general fund transfers to SMI will total $6.0 trillion over the next decade alone. By 2050, the annual transfer will equal 2.8 percent of gross domestic product (GDP), up from 0.7 percent in 2000.13

Figure 2. Total Medicare Spending and Sources of Financing

Source: Medicare Trustees, The 2022 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Centers for Medicare & Medicaid Services, June 2022,

The core problem is rapid growth of total Medicare spending, driven by an aging population and escalating costs for services. In 1990, total program spending equaled 1.9 percent of GDP; three decades later, it had reached 4.0 percent of GDP. Medicare’s trustees expect costs will reach 5.0 percent of GDP in 2030 and 6.2 percent in 2050.14

Medicare’s trust funds need updating to mirror the changes recommended for the program’s insurance design. With Parts A and B benefits combined into a single insurance plan, their receipts and expenses should be tracked through a single trust fund too. For this reform to work as intended, general fund payments to the new account must be limited in some fashion, which would then force Congress to consider reforms to keep program spending within available receipts.

One option would be to tie the government’s general fund contribution to Medicare to the amount paid for Parts B and D in a reference year and then to index that amount in subsequent years to the rate of growth in the national economy. This approach would ensure that current and future taxpayers contributed the same percentage of their combined incomes toward sustaining Medicare.

Changing the basis of general fund support for Medicare will not by itself ensure an appropriate political response, as Congress could avoid serious reforms with budget gimmicks that inject funds into Medicare without raising taxes or cutting expenditures.

Nonetheless, it remains important to change how the Medicare trust funds operate because the status quo creates an unhealthy and misguided focus on HI solvency, even as SMI spending becomes an ever-larger burden on taxpayers. A reformed trust fund mechanism could change the tenor of the political conversation around Medicare solvency and is thus worth pursuing.

Cost Estimates and Further Reforms

The reforms suggested here, if approved, would be among the most consequential entitlement changes ever enacted by Congress, although estimating the full extent of the savings will be difficult because the suggested adjustments interact with each other. The two changes with the most notable effects are implementing premium support and limiting the growth rate of general fund payments to the Medicare trust fund.

As noted previously, the CBO has estimated that premium support, with the government contribution tied to the average premium bid in each market, would reduce federal program spending by 8 percent. In the agency’s most recent long-term forecast, Medicare spending (net of premiums) is projected to rise from 2.9 percent of GDP in 2022 to 5.9 percent in 2052.15 Cutting the program’s cost in 2052 by 8 percent would lower the burden to 5.4 percent of GDP.

While certainly substantial (and likely a conservative estimate of the potential savings), allowing Medicare spending to rise to 5.4 percent of GDP in 2052 would still entail too much pressure for further tax hikes and non-Medicare spending cuts. More savings in Medicare will be necessary. For instance, one goal might be to limit the amount of overall Medicare spending in 2050 to about 5 percent of GDP, which implies that reforms would need to deliver another 14 percent reduction in program expenses.

Combining HI and SMI into a single Medicare trust fund will not, by itself, deliver such savings, but it might help. The intention is to force Congress to take up additional program adjustments to prevent trust fund insolvency.

Among the ideas that should be considered is further means testing the program. One option would be to keep in place a level of subsidization for all Medicare participants but to ask those with above-average lifetime earnings to pay for more of the total costs of their coverage. Medicare would remain a highly valued program for these beneficiaries because it is a community-rated insurance plan; enrollees with higher risks do not pay higher premiums. But some enrollees would be expected to pay higher premiums out of their retirement savings. Low- and moderate-income elderly enrollees would lose none of their current support.

Changing Medicare in this way would be controversial, of course, and could only be implemented gradually, as workers approaching retirement would need time to plan for the additional expenses. Even so, the immensity of the government’s financial challenges requires that this and other ideas (such as raising the age of eligibility) remain firmly on the table for consideration.

Still, the first step should be to modernize the program and bring more discipline to it by allowing its participants to steer resources toward more efficient ways of receiving services. These changes are controversial, too, but not because they would impose higher costs on beneficiaries. Medicare’s participants would see substantial savings, as would the government. Opposition will come from those who distrust using market incentives in health care. Their concern with these ideas is that they would work as planned and thus undermine the argument that Medicare as it exists today, with its heavy reliance on government-administered payment rules, should be the insurance plan for all Americans.