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P E R S P E C T I V E
M E A N S - T E S T I N G
W E B  E X C L U S I V E   

8 December 2004  
  

Medicare Means-Testing: 
A Skeptical View

Financing Medicare into the future
is a question of both will and wallet.

By Marilyn Moon

ABSTRACT:

In response to claims that Medicare is unsustainable over time, Mark Pauly has suggested a means-testing approach as a solution to its financing problems. To obtain enough resources in this way, however, it is necessary to ask middle-class beneficiaries to pay much more for their health care, by subjecting them to vouchers. The spending limits Pauly suggests are arbitrary and would likely place an untenable burden on beneficiaries with modest incomes. A better approach to financing would be to examine the ability of both taxpayers and beneficiaries to pay in the future—likely resulting in a different outcome.

Medicare, one of the most successful federal programs, also happens to be one of the most expensive. The number of beneficiaries served by the program has more than doubled since 1967. And Medicare—which serves a population with sizable health problems—has grown more slowly than private insurance when calculated per capita.¹ To many, these accomplishments should represent success. Nonetheless, Mark Pauly claims that the program “cannot be sustained over the next fifty years.”²

Pauly picks up on one of the new catchwords in public policy: that Medicare is not sustainable in its current form. He is in good company with this claim, and that reasoning is often used to argue for a cutback in federal spending on Medicare.³ But people will still need to get care somewhere. From society’s standpoint, holding the line on federal Medicare spending is not much of a solution, unless we believe that there is massive overspending going on now that will be eliminated by large-scale cost shifting to Medicare beneficiaries and their families, or that a large proportion of seniors are very well-to-do.

Pauly creates an elaborate argument for a way to hold the line on Medicare spending over time. He points out that the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 already moves Medicare into the world of means-testing, both by providing additional drug benefits to people with low incomes and by raising premiums for beneficiaries whose incomes exceed $80,000 per year. Why not go just a little further, he asks, and effectively solve most of that pesky problem of greater tax burdens that the baby-boom generation will create for taxpayers in the future? His calculation of what future “wealthy” beneficiaries would receive to meet their health care needs is based on restricting coverage of new technology in health care. Since this is the source of much of the growth in health care spending over time, Pauly proposes to pay only for the technology available today. Presumably those wealthy seniors will be able to fill in the gaps over time.

Once stripped of its artifice, however, the paper essentially argues that the best policy for Medicare is to limit federal spending as a share of gross domestic product (GDP) by subjecting middle-class seniors to stringent vouchers for the purchase of insurance. An examination of the facts behind the arguments suggests key problems with Pauly’s claims.

The Economic Status Of Seniors

Pauly proposes to require the “wealthiest” seniors to pay for more of their own care. Such language conjures up images of ex–corporate executives, clipping coupons and flying off to exclusive clinics to get exotic care, paid for by much poorer taxpayers. However, he quickly shifts to referring to people with incomes of three or four times the official poverty level as able to bear more of the health care burden on their own. Translated into dollars, this means that Pauly treats seniors with incomes of $27,930 for an individual and $37,470 for a couple in 2004 as “wealthy.”⁴ By most real-world definitions, people with those incomes would not be considered wealthy.

Moreover, Pauly neglects to mention that because of the inadequacies in the Medicare benefit, people covered by Medicare already bear a sizable health care cost burden. For example, in 2004, individuals with incomes 300– 400 percent of poverty already spend on average an estimated $1,991 for health insurance premiums (for both Medicare and private supplemental coverage) and $1,412 out of their pockets for acute care services not covered by Medicare or supplemental insurance.⁵ For a person in this income range, this translates into an expenditure of more than 14 percent of income on acute care. And if health care continues to grow faster than income, that percentage will surely rise in the future.

To put this in context, remember that the 2004 presidential debates made a great deal about whether “higher middle income” families with incomes about $200,000 should lose any of the tax cuts bestowed upon them by the Bush administration. Phasing down Medicare benefits sounds much more palatable if we use the $200,000 income level as a starting point. The problem is that there just aren’t enough Medicare beneficiaries with incomes at or above that level to generate the type of savings that Pauly would like to achieve. Even the $80,000 cut-off for higher Part B premiums in MMA is initially estimated to affect only about 3 percent of beneficiaries. The only way to achieve the savings that Pauly seeks is to treat as wealthy those whose incomes put them just into the middle class.

Means-Testing

Proposals to means-test Medicare benefits are as old as the program itself.⁶ The American Medical Association (AMA) championed means-testing in the debate on Medicare in 1964 and 1965, recognizing that such an approach would prevent Medicare from becoming a mainstream health program. The appeal is often to argue that it is a better approach for holding down costs than other options because it results in better targeting of benefits to those most in need. And indeed, this is probably the strongest argument for means-testing: If society cannot or does not wish to support all older and disabled people, it may be better to help those most in need. But Pauly’s paper is less about assuring better care for low-income people than about greatly reducing coverage for the middle class and above.

Moreover, contributions to financing Medicare already rise with income. MMA includes a provision to raise Part B premiums for people with incomes of $80,000 or more. Further, part of the taxation of Social Security benefits now goes into Medicare’s Part A Trust Fund. Payroll taxes are paid by people with no upper-bound limit, so that high-income people in their working years pay a great deal into the system. And general revenues—mostly the personal income tax—serve as a source of obtaining greater support from high-income people who are or will become Medicare beneficiaries.

Vouchers

Pauly is right when he indicates that much of the increasing cost of health care is driven by the costs of new technology—particularly for Medicare beneficiaries whose poorer health and frailty mean that advances in improving outcomes and lowering risks to patients will spread to those for whom such care might not have made sense in the past. But what is it about age sixty-five that should cause us as a society to discourage use of new technology by someone whose income is $30,000 per year but to provide a government subsidy (via the tax benefit to employer-sponsored insurance) to a sixty-year-old earning $100,000? That’s the implication of Pauly’s argument.

In practice, however, no company is going to offer—and no person is going to buy—coverage based on 2004 technology in 2010. Rather, the only way to put Pauly’s proposal into practice is through a voucher payment for people above the income cutoff level. Setting the arguments and justification for such an approach aside, this proposal is simply a plan to allow Medicare contributions for people with modest incomes and above to dramatically deteriorate over time. Essentially, the annual increase in voucher payments would be less than the growth in the costs of health care.

The Bottom Line

Pauly’s premise depends on three sets of assumptions: (1) that it is feasible to limit insurance to cover only existing technology, (2) that there are enough wealthy older Americans to make this means-testing exercise worthwhile, and (3) that society is unwilling to help pay for an aging population. As argued above, the first two assumptions are highly questionable, since Pauly would have to ask modest-income seniors to pay very high costs over time based on an arbitrary formula whose meaning would be hard to fathom by those affected. But even more important, one can only hope that willingness to pay is based on something beyond the assertion of no more taxes.

The better question to ask is, Who will be in a better position to help pay for care in the future, beneficiaries or taxpayers? Future taxpayers may be asked to absorb higher taxes, but the increased burdens would only modestly reduce the expected increases in their future command on resources under reasonable assumptions of economic growth.⁷ And within the beneficiary population, how high up the income scale is it necessary to go before people are able to afford a sizable increase in their health care costs? We know, for example, that the factors driving up the projected taxpayer burdens from Medicare also affect beneficiaries who are responsible for a sizable share of the costs of their own care. And incomes of seniors tend to rise more slowly than incomes of younger tax-paying families. Surely these factors need to be taken into account before conclusions about sustainability can be made. A combination of approaches may be needed. The financing issue ultimately is a question of both will and wallet.

The author acknowledges the programming assistance of January Angeles. The opinions expressed here are solely those of the author.

NOTES

1. C. Boccuti and M. Moon, ““Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades,” Health Affairs 22, no. 2 (2003): 230–237.
2. M.V. Pauly, “Means-Testing in Medicare,” Health Affairs, 8 December 2004, content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.546.
3. David Walker, comptroller general, U.S. Government Accountability Office, “Medicare: Financial Challenges and Considerations for Reform,” testimony before the Joint Economic Committee, 10 April 2003.
4. Actually, he sometimes talks about 400 percent of the poverty level—or $37,240 for singles and $49,960 for couples in 2004.
5. Current research by the author using data from the Medicare Current Beneficiary Survey.
6. The most stringent meaning of the term means-testing is to exclude from eligibility those with resources above a certain level. Today, it is more often used to describe financing or benefit differences for people at different income levels.
7. M. Moon and M. Storeygard, “Solvency or Affordability? Ways to Measure Medicare’s Financial Health,” March 2002, www.kff.org/medicare/6034-index.cfm (1 November 2004).

Marilyn Moon (mmoon{at}air.org) is vice president and director of the health program at the American Institutes for Research in Silver Spring, Maryland.

DOI: 10.1377/hlthaff.w4.558
©2004 Project HOPE–The People-to-People Health Foundation, Inc.