Medicare Stethoscope Healthcare Premium Getty
Image source: Getty Images.

America has spoken, and with president-elect Donald Trump less than two months away from taking office, healthcare is the issue many voters would like to see him tackle first.

During his campaign, Trump took a pretty aggressive approach to healthcare reform. His seven-point plan was highlighted by completely repealing and replacing the Affordable Care Act, which is better known as Obamacare. Though you can read about his seven-point plan in more detail, other intriguing aspects include block-granting Medicaid to the states, allowing consumers to purchase prescription drugs overseas, and giving consumers the ability to buy health insurance policies across state lines.

Ready or not, Medicare reforms could be on the docket

However, one thing notably missing from Trump's campaign promises is entitlement reform. Throughout the president-elect's campaign, he stated that America should honor its pledge to America's seniors in relation to both Social Security and Medicare. But with Republicans in control of both houses of Congress, and Paul Ryan (R-WI) unanimously chosen to remain House Speaker, the winds of entitlement change may be headed Trump's way whether he's ready for them or not.

In particular, Paul Ryan looks set to champion Medicare reform. In a recent interview with Fox News, Ryan had this to say:

"When Obamacare became Obamacare, Obamacare rewrote Medicare, rewrote Medicaid, so if you're going to repeal and replace Obamacare, you have to address those issues as well. What people don't realize is Medicare is going broke, that Medicare is going to have price controls."

Paul Ryan Medicare Reform
Paul Ryan (R-WI). Image source: Paul Ryan House webpage. 

Medicare reform has been something Ryan has considered for years. In June, Ryan and Republicans presented the 37-page "Better Way" policy package that offered a broad array of Medicare reforms. Some of these reforms are relatively simple, such as the repeal of the Independent Payment Advisory Board, a regulatory body created by Obamacare that has the authority to suggest reductions in government payments to healthcare providers participating in Medicare. Yet one broad-stroke reform known as the "premium support" model would attempt to completely dismantle and rebuild Medicare as we know it.

The premium support model would replace the current system, whereby the federal government covers a large chunk of healthcare costs for seniors, and instead supply those seniors with vouchers that they would use to shop for private health insurance. In other words, it would privatize the program.

What's wrong with Medicare?

Medicare certainly has its fair share of issues, and cash flow appears to be one of its biggest. Although the program is incapable of going bankrupt due to the fact that payroll tax revenue is constantly being generated by workers, the program is on track to exhaust its spare cash by the year 2028, according to the 2016 Medicare Board of Trustees report. If this cash is exhausted, reimbursements to physicians and hospitals could drop by 13%, and some healthcare professionals may stop accepting Medicare. That would be very bad news for seniors. 

One of the prime issues affecting Medicare is the fact that it's legally forbidden from negotiating on its own behalf. The result is that Medicare is getting nowhere near the same discounts from drug list prices as its sister program Medicaid, which is allowed to negotiate with drugmakers.

Doctors Talking Obamacare Getty
Image source: Getty Images.

Another issue for Medicare that often flies under the radar is that you're getting way more than you're paying for. According to the Urban Institute, the average lifetime Medicare benefits for a single male with average earnings turning age 65 in 2015 is estimated to be $195,000 (in 2012 dollars). Yet this same individual has only paid $70,000 in lifetime Medicare taxes. There's simply not enough payroll tax revenue being collected to factor in the rising costs of healthcare and the growing number of people who are becoming eligible for Medicare.

These are the underlying reasons why Ryan and other Republican leaders have been pushing for Medicare reform.

Would privatizing Medicare be good or bad for America?

The important question, though, is whether privatizing Medicare would be a good or bad thing for America's seniors.

According to Ryan and other Republican lawmakers, the premium support system would help reduce costs over the long term by encouraging competition, much in the same way Obamacare was designed to help control premium inflation. By allocating vouchers to seniors that they would then use to select plans among a myriad of private insurance options, the idea is that insurers will aim to get cost-competitive to draw in business, as well as improve their health plans to provide differentiation to gain new members.

Remember, there are around 56 million eligible Medicare beneficiaries, which is well over double the number of enrollees projected to be gained through Obamacare's rollout over the first five years, per the Congressional Budget Office back in 2014. It's possible that insurers will fight tooth and nail for seniors' business, thus pressuring premium prices and saving seniors money.

But there's a possible downside, too.

Doctor With Worried Senior Patient Getty
Image source: Getty Images.

To begin with, some pundits have argued that Medicare stands the best chance of negotiating with drugmakers as a larger entity. If Medicare were to come to the table with tens of millions of members, and were allowed to negotiate drug prices on its own behalf, then it could presumably have the upper hand. However, putting private insurers in the driver's seat could result in weaker negotiating power. It's much easier to remove a network or an insurer from the equation than it is to cut off a program the size of Medicare. In this respect, drug prices and out-of-pocket costs for seniors could rise.

Another dilemma is that the Medicare program, as it's set up now, is highly efficient. The Kaiser Family Foundation has previously pointed out that Medicare's administrative costs only total about 2% of its operating expenditures. Comparatively, administrative costs can easily eat up a double-digit percentage of revenue at private insurance companies. 

There could also be confusion for seniors if Medicare were privatized. Though Medicare may not be the most convenient program, with multiple parts to enroll in, requiring seniors to choose a plan among dozens of private insurance options could be overwhelming.

Which side is right? We may know more if we get a detailed analysis of the costs and savings of the premium support plan from Congress, but ultimately it's up to you to decide.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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