Opinion: Columnists

Manhattan Moment: Two quick and (relatively) easy improvements for Medicare

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As the "fiscal cliff" negotiations drag on, it's important that we recognize the elephant in the room. According to the Congressional Budget Office, growth in federal spending as a share of the economy is entirely driven by health care entitlements and interest on the debt. And the biggest component of federal health care spending is Medicare.

If reports are to be believed, gradually raising Medicare's eligibility age from 65 to 67 is "on the table" in the negotiations between President Obama and House Speaker John Boehner. That's good news, if it's true. The CBO projects that such a change could reduce the deficit by $148 billion over the next 10 years.

Indeed, now that Obamacare is here to stay, raising Medicare's eligibility age is the single best thing we can do to put Medicare on stable footing. Obamacare's subsidized insurance exchanges cover Americans with income below 400 percent of the federal poverty level: about $60,000 for a two-person household. Hence, raising the Medicare eligibility age is the best way to means-test federal health care benefits for younger retirees. After all, why should lower-income taxpayers be forced to subsidize the cost of health insurance for wealthy seniors?

Another important benefit to raising Medicare's eligibility age is that it will gradually introduce Paul Ryan-like reforms to the younger retiree population. The dirty secret of Obamacare's insurance exchanges is that they use a "premium support" mechanism that is nearly identical to the one that Ryan proposed for Medicare in 2010. The difference is that while Democrats lambasted Ryan's proposal, nearly all of them voted for Obamacare.

If we do raise Medicare's eligibility age to 67, however, we'll still end up with 70 million baby boomers in the program. And so we still need to do more to make sure that traditional, 1965-vintage Medicare becomes more efficient than it currently is. One approach would be for Medicare to learn from the way that large American companies -- those with tens of thousands of employees -- provide health coverage to their workers.

Most of these large companies -- companies such as Coca-Cola, GM and United Airlines -- don't buy coverage for their workers from insurance companies. Instead, they engage in a practice called self-insurance. The company pays directly for the health care costs that the employees incur. It's cheaper to do this than buy a third-party insurance policy, because self-insurance cuts out the middleman. About 50 million employees -- one-third of the insured workforce -- get health coverage in this way.

It's a big headache, however, for employers to manage these health care policies on their own. So, many companies hire an administrative-services-only company, or ASO, to manage their health care spending. The ASO negotiates rates for hospital services, for example, and keeps an eye on things to ensure that providers don't bilk the system.

Most importantly, ASOs have come up with a range of innovative services that traditional, government-run Medicare does not. ASOs can steer patients to high-quality, cost-efficient hospitals and doctors in a way that Medicare is legally barred from doing. ASOs get much more active in managing patients with chronic conditions and ensure that when patients leave the hospital, their transitions go smoothly. ASOs can use internally developed algorithms, based on their experiences with similar patients, to make sure that patients engage in preventive care.

All of these tools -- common in the private sector -- are inaccessible to the typical senior on Medicare today.

Bringing ASOs into traditional, "fee-for-service" Medicare wouldn't provide fundamental reform of the Medicare program in the way that raising the retirement age would. But it could save hundreds of billions in taxpayer dollars.

Most importantly, ASOs would improve the quality of care that seniors receive today. It's something, at least, to consider.

Avik Roy is a senior fellow at the Manhattan Institute and author of the Apothecary, the Forbes blog on health care and entitlement reform.

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