385 October 4, 1984 HOW TO AVERT. THE. MEDICARE CRISIS INTRODUCTION Medicare faces staggering financial problems. The Hospital Insurance HI portion of the program is proj,ected to run short of. funds by the end of the decade. By the time today's young workers' retire, currently scheduled tax rates will pay for only onejfourth to one-third of promised benefits. If these benefits are to. be,paid, the total HI payroll tax rate may have, to be raised 'from today's 2.6 percent to 11 percent. Expenditures for the Medicare program are projected to soar to $103.3 billion by fiscal year 19

89. The program is also plagued with waste and inefficiency, a pay-as-you-go method of financing that imposes unnecessary cos t burdens on today's young workers, and a benefit structure that discriminates against minorities whi1.e failing to meet the greatest needs and concerns of the elderly.

Fundamental reform of Medicare is needed. Such reform should be based on the concept o f Health Bank IRAs. Workers and their employers under such a program would be allowed dollar-for dollar tax credits for contributions to these new Individual Retirement Accounts IRAs where the funds would accumulate tax free investment returns until retir ement. The funds would then be used to pay for medical insurance and health expenses during retirement years.

IRAs would instead receive vouchers in retirement to meet these expenses. Under the plan, the federal government would provide health insurance fo r retirees to cover catastrophic medical expenses mental benefits for those who were unable to meet their retire ment medical expenses from any of these or other sources. This new system, phased in over several years, eventually would com pletely replace t he current Medicare system Workers who did not opt for the Health Bank The government would also provide means-tested supple2 This reform would eliminate both the short-term and long-term financing problems of the current system, without any benefit cuts f or the elderly or payroll tax increases for workers It would reduce waste and inefficiency by increasing competition and improving incentives their retirement medical insurance coverage with substantially lower payroll contributions, thanks to the investm e nt returns that workers would earn on such contributions over the years control and choice over their retirement coverage, discrimination against minorities would be ended, the poor would be protected and the catastrophic coverage included in me program w o uld address the greatest needs and fears of the elderly In short the Health Bank IRA plan would enable the country to avert the growing threat of Medicare bankruptcy by using the tried and tested private sector IRA system to provide retirees with the mean s for their.hospita1 bills--ending their dependency on the political climate in Congress It would also allow workers to pay for through the Health Bank IRAs. Retirees would have increased THE CURRENT MEDICARE SYSTEM The Structure of the System and Suppleme n tal Medical Insurance (SMI HI primarily covers persons over 65 receiving Social Security benefits, and those under 65 receiving Social Security disability benefits. It pays for up to 90 days of in-patient hospital care for each illness, and a total 60 add i tional days during the retiree's lifetime known as "lifetime reserve days This coverage is current.iy subject to a deductible of $356 for each hospital stay, plus co-insurance fees of $89 per day for 'the 61st to 90th days of hospital stay, and $178 for e a ch lifetime reserve day. These deductible and co-insurance fees are indexed, so that they in crease each year with hospital costs. HI also pays for up to 100 days of skilled nursing facility care per illness (currently with a daily co-insurance fee of $44 .50 after 20 days a total of 100 home health care visits per illness, and hospice care Medicare comprises two components--Hospital Insurance (HI HI is financed by part of the Social Security payroll tax.

This consists of an earmarked portion of the payroll tax amount ing to 1.3 percent each on the employer and employee, which is applied to wages up to the maximum Social Security taxable income 37,800 in 1984 and indexed to increase each year with average wages). In 1986, the HI tax rate is scheduled to ris e to 1.45 percent, for a combined employer-employee total of 2.9 percent and to remain at that level thereafter.

SMI is available on a voluntary basis, primarily to those eligible for HI. SMI pays for physician services, outpatient hospital services, home health care services, and other non hospital services Coverage is subject to a statutorily fixed annual deductible of $75 and a co-insurance fee equal to 20 3 percent of claims. Those who choose coverage are charged a monthly premium, currently 14.60 and i ndexed to increases in medical costs. These premiums cover about one-fourth of ex penses, with general revenues financing the remainder all of the elderly eligible for SMI have opted for coverage, and the program covers over 90 percent of the elderly popu l ation Virtually The Need for Reform Medicare faces a disastrous financial future. The Social Security Administration (SSA) projects that HI will probably run short of funds to pay promised benefits by the end of this decade.l By 1995, HI under current law will likely have run a cumulative deficit of 200 to $400 billion.2 Over the next 75 years, SSA projects that, under its widely used (Alternative IIB) assump tions HI alone faces a deficit twice as large as the long-term financial gap for all the other par ts of Social Security addressed by the legislation passed in 1983 in an effort to save the system from bankruptcy.

By the time those now entering the .workforce reach retirement HI revenues under current law will only cover one-third of expendi- tures, bas ed on Alternative IIB assumptions.4 Under the so-called See 1984 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Funds (Washington, D.C April 5, 1984 hereinafter referred to as 1984 Trustees Report (HI Dosedlv intermediate A lternative IIA and IIB projections, HI runs short Under the report's sup Lf funhs in 1991 realistic Alternative I11 assumptions, HI runs short of funds in 1989.

Under the optimistic, and truly unrealistic, Alternative I assumptions HI still runs short of funds by 1995.

Calculated from 1984 Trustees Report (HI Harry C. Ballantyne, Chief Actuary, Social Security Administration Long-Range Projections of Social Security Trust Fund Operations in Dollars Actuarial Note 120, Social Security Administration May 198 4 The cumulative deficit for HI by 1995 would be about $200 billion under Alternative IIB projections and over $400 billion under Alternative I11 projections..

The 1983 legislation reduced the financing gap over the next 75 years by about 2 percent of taxable payroll under the Alternative IIB assumptions in the 1983 Social Security Trustees reports, which are basically the same as the Alternative IIB assumptions in the 1984 Trustees reports.

Yet the 75-year HI deficit under the 1984 Alternative IIB assumptions is 4 percent of taxable payroll. See 1984 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Tr ust Funds (Washington, D.C April 5, 1984 referred to hereafter as 1984 Trustees Report (OASDI especially Appendix F of the report.

By 2030, HI expenditures under Alternative IIB projections will equal 8.65 percent of taxable payroll, while revenues will e qual only 2.9 per cent. See 1984 Trustees Report (HI Appendix B Under the so-called pessiinistic but probably inore I, 4 a. pessimistic, but more plausible, Alternative I11 assumptions,5 HI revenues would cover only one-fourth of HI expenditures.6 order t o pay all the HI benefits promised to these young workers the total HI payroll tax rate under Alternative IIB assumptions would have to be raised to 8.65 percent, more than three times the current 2.6 percent.7 Under Alternative I11 assumptions, the rate w o uld probably have to be raised to 11 percent--four times today's HI rate, and about the same as that now levied to finance all the other elements of Social Security such as retirement income, spousal benefits,.and disability insurance.8 In The cost of SMI is out of control. The annual general revenue contribution to supplemental insurance is projected by the Office of Management and Budget OMB) to double from $14.2 billion in fiscal 1983 to $28.2 billion in fiscal 19

89. The total annual cost of Medicare for Fiscal Year 1985, including HI and SMI, is estimated by OMB at $69.7 billion (net of SMI premium payments), rising to $103.3 billion net in Fiscal Year 19

89. In that year, Medicare alone'will account for 9 percent of all federal expendi tures Contribu ting to this cost explosion is the substantial waste and inefficiency built into the current system. With the govern ment paying medical bills through Medicare, both doctors and patients cease to pay close attention to costs. Consequently hospital stays t e nd to be extended, repetitive, or unnecessary tests and procedures are conducted with little or no thought given to how treatment could be provided in the least costly manner. Patients have little incentive to seek out the lowest cost providers of quality medical services, and this weakens competitive pressures for efficiency and the development of low-cost medical service alternatives. Doctors and hospitals, in turn, need not worry about whether their patients can afford the charges, and consequently ther e is little pressure on them to keep costs down For a comparative discussion of the Alternative IIB and Alternative I11 sets of assumptions used by SSA, see Peter J. Ferrara Rebuilding Social Security: Part 1, The Crisis Continues Heritage Backgrounder No. 345 April 25, 1984; Peter J. Ferrara, Social Security: The Inherent Contra diction (Washington, D.C Cat0 Institute, 1980 Chapter 5; Peter J.

Ferrara, Social Security: Averting the Crisis (Washington, D.C Cat0 Institute, 1982 Chapter 5.

Though Alternative 111 projections for HI are not published past 2005 in that year HI expenditures for Alternative I11 are already running 2.53 percent of taxable payroll higher than under Alternative IIB assume that at least this margin is present in 2030, and it would su rely be greater, then in that year expenditures under Alternative I11 projec tions will equal 2.53 percent of payroll plus the 8.65 percent under Alternative IIB in that year, for a total of 11.18 percent, compared to tax revenues of 2.9 percent.

See discussion in footnote 4.

See discussion in footnote 6 If we See 1984 Trustees Report (HI 5 I c 5 The government has recently attempted to address^ this problem by adopting the 'IDiagnostic Related Group'I (DRG) system of payment for hospital services under Me dicare. Under this new system, the government has established almost 500 categories of illness re quiring hospital treatment, setting the mount it will pay under Medicare in each locality for hospital care to treat each illness.

These figures are based on an average of hospital costs for each illness in the local area. If treatment costs for a particular patient turn out to be less than the set amount for that patient's illness, the treating hospital can keep the difference If the treatment costs more, ho w ever, the hospital cannot collect the extra charges from the patient and must absorb the loss This system may improve incentives for hospitals to keep costs down, and reduce opportunities for overcharging, but it contains many loopholes, such as the hospi tal's discretion in deciding illness categories, which may eventually undermine its effectiveness. At best it will touch only the surface of the problems and disincentivies permeating the Medicare system.

Updating the categories and payments will be subject to bureau cratic politicking, ultimately leading to aw regulatory morass.

In those hospitals whose legitimate costs are above the govern ment-set payments, the system will, in effect, operate like price controls, leading to a reduction in doctors and ho spitals willing to provide service under Medicare--and pos'sibly to shortages and rationing of hospital services to Medicare beneficiaries fact that workers must pay for their retirement HI coverage throughout their careers, yet their payments are not sav e d and invested to finance their future coverage. Rather, the money is paid out immediately to current beneficiaries. Workers conse quently lose the market returns on investment they would receive each year if their payments were saved instead in an IRA-ty p e vehicle to finance retirement health benefits. This loss is not significant for those now retired, who paid low HI taxes for only part of their careers (since the program began in 1966 But those who will have to pay the full HI tax for their entire care e rs could purchase far better coverage and medical services for their money--or the same coverage and service for much less money--if they could receive full capital investment returns on the payments into the system.g Still another major problem with Medi c are stems from the In a steady state, money paid into HI would receive a return equal to the rate of growth in payroll tax revenues, which would be equal to the rate of growth in wages and population. But this is not likely to be nearly as large as the re t urn on capital investment, particularly with the un favorable population trends of today. See Ferrara, Social Security The Inherent Contradiction, Chapters 4 and 9; Ferrara, Social Security Averting the Crisis, Chapters 4 and 9 6 The Medicare benefit stru c ture is also not well designed to meet the chief threat to the financial security of the elderly--the possibility of an illness that is life-threatening and requires enormous medical expenses. Medicare does not insure against such catastrophic" illnesses. Indeed, Medicare co-payment fees increase the longer the patient stays in the hospital or skilled nursing facility, and coverage eventually ceases altogether. In stead, Medicare covers the more routine and less threatening medical costs, which could be me t by most of the elderly out of their own resources. The priorities of the Medicare benefit structure, in other words, are the inverse of thqse required to deal with the principal concern of the elderly.

The Medicare benefit structure also discriminates ag ainst blacks and other minorities. Although everyone has to pay the same HI payroll taxes while working, many minority group members receive less in benefits because, on average, they have lower life expectancies and therefore live fewer years in retireme n t receiving benefits A black male born today, for instance, has a life expectancy of 64.8 years, and so typically will not live long enough to receive Medicare coverage for a single day.1 Hispanic. male at birth has a life expectancy of 66.6 'years compar e d to 71 years for white males. Consequently, other white males can expect to receive up to 5 times the Medicare benefits received by Hispanic males.ll A FUNDAMENTAL REFORM OF MEDICARE: THE HEALTH BANK IRA Solving the problems discussed above requires fund a mental reform of the Medicare system. Such reform could be structured around the'concept of a "Health Bank IRA A similar proposal was first advanced in a paper published by the National Center for Policy Analysis in Dallas, Texas, written by this author U . S. Chamber of Commerce Chief Economist Richard.Rahn, Dallas University Professor John Goodman and University of Michigan Professor Gerald Musgrave.l Under this plan, workers would be allowed to establish a special tax-free savings account, called a Health Bank IRA analogous to today's Individual Retirement Accounts. They would be allowed to contribute each year to their Health Bank IRAs an amount equal to one percent of their Social Security taxable income (currently wage earnings up to $37,800). Workers c o uld also direct their employers to match these contributions lo Peter J. Ferrara, John C. Goodman, Gerald Musgrave, and Richard Rahn Solving the Problem of Medicare (Dallas, Texas National Center for Policy Analysis, 1984 l1 Ibid l2 Ibid. 7 Both employee a nd employer would receive a dollar-for-dollar income tax credit for such contributions In effect, this option I would allow workers to withdraw up to 2 percentage points of the 2.9 percent HI tax, scheduled for 1986, to save instead in a Health Bank IRA. But since workers receive a full credit for these IRA payments against income taxes, rather than payroll taxes, revenues flowing into Social Security would not be reduced.

The tax revenues would continue to be fully and exclusively available to pay the benefits for today's elderly. The Health Bank IRA funds would be invested and accumulate tax free income until retirement.

Under the reform plan, all workers would also be co vered by catastrophic health insurance provided by the federal government paid for by the 0.9 percent payroll tax they would not be allowed in effect, to place in the IRA (that is, 2.9 percent minus the 2 percent they could withdraw pay for medical expens es beyond a high deductible limit--with a modest co-payment fee simply to ensure the integrity of claims.

The deductible and co-payment fees would be set based on the amounts workers could be expected to accumulate in their Health Bank IRAs over their work ing careers, and would be lower for Americans with lower lifetime incomes.13 The catastrophic coverage would Workers in retirement would then use their Health Bank IRA funds to purchase private medical insurance to cover expenses below the catastrophic li m its. They could also I'self-insurel1 by paying their medical expenses directly out of the Health Bank funds. Or they could choose any combination of these options. In order to register to sell insurance purchased by Health Bank funds, companies would have to allow purchases by any workers at uniform premiums within a year after their retirement, or upon reaching the age of 70, and continue to insure those people for the rest of their lives as long as premiums continue to be paid.

Any funds remaining in a Health Bank IRA upon the death of the worker, during his career or in retirement, would pass to the worker's designated heirs.

To the extent a worker did not utilize the Health Bank IRA option during his working years, he would receive upon retirement a vo ucher from the government for the'purchase of private medical insurance or the direct payment of medical expenses--whichever the workers preferred. The amount the worker and his employer paid in HI payroll taxes over the course of his career, minus the 0. 9 percentage points paid each year for the catastrophic cover age, would be added together with imputed interest equal to the 5 l3 The deductible could be a lifetime deductible, say the first $50,000 or $100,000 in post-retirement medical costs, set roughl y equal to the amount a worker could expect to accumulate in his Health Bank IRA or to the maximum amount he could insure for with the annual premiums which could be financed by his expected Health Bank IRA assets. 8 average Treasury bill rate each year. T h e government would calculate the annuity such a lump sum could pay, and the worker's voucher would be set at that amount. Workers who had used the Health Bank IRA option to some extent, but not completely, over their working years would have a combination of Health Bank funds and government vouchers to provide for their medical expenses below the catastrophic limits.

Strictly means-tested medical benefits would be paid by the government to cover expenses below the catastrophic limits that Health Bank funds and/or government vouchers could not meet for some reason. Before relying on such government benefits, workers would be expected to use any of their personal assets not essen tial to daily living and any of their income beyond that needed to maintain a m inimum decent standard of living.

Workers could declare their retirement and be eligible to use their Health Bank funds and receive their government vouchers at any time after age 59

35. But the government-funded catastrophic coverage and means-tested sup plements would not start until the normal Social Security retirement age, as in the case of the existing Medicare system This new system of coverage would replace totally the cur rent Medicare system. The catastrophic insurance and government vouchers wou ld be financed exclusively out of payroll tax reve nues, which would continue at 2.9 percent of taxable payroll.

The means-tested supplemental benefits would be financed out of general revenues, utilizing the general revenue funds now used to subsidize SMI . Under the new system the elderly would not have to pay monthly'premiums to the government for their Medicare coverage, as they do today These funds would be considered available for the purchase of private medical insurance, or for the direct payment of medical bills, and taken into account in setting the catastrophic insurance deductible and co-payment fees Under the new system, the government would provide the benefits that most Americans want--the catastrophic coverage perhaps the most difficult to de liver through the private sector.

Thus workers and the elderly would be freed of their greatest fear--overwhelming medical expenses arising from a life-threaten ing illness or accident. The government would also provide means-tested benefits as a last reso rt for those who lacked the resources to purchase.insurance. But the great bulk of medical expenses between these two extremes would be financed through the private sector, under a system that enabled Americans to accumu late the resources necessary to pu rchase adequate insurance.

GETTING FROM HERE TO THERE The first step in the transition to such a system requires a solution'to the short-term financing problem of Medicare. As 9 noted above, HI is now projected to run out of funds to pay all the promised benefits by 19

90. If this looming crisis is ignored another major payroll tax increase is virtually inevitable. The reason: It is politically impossible to solve an imminent finan cial crisis in any part of Social Security with benefit cuts because they w ould have to be precipitous and would fall harshly on those already retired, leaving them without time to make up for the cuts through other means.

Fortunately, there is another alternative for solving the short-term HI problem. The rest of Social Securit y is now pro jected to start accumulating a significant surplus by the end of the decade. These surplus funds could be used to finance the projected HI shortfall, simply by providing that any surpluses in the rest of Social Security's trust funds could be used to pay for HI benefits. Under the SSA's Alternative IIB assumptions this would allow HI benefits to continue .to be paid in full for the next 35 years.14 Under the more pessimistic Alternative I11 assumptions, HI'will be able to continue paying benef i ts until 1995.15 But even under these assumptions, only modest additional adjustments would be necessary to permit full benefits to.be paid until the new system described above could be phased in.16 Phasing In the Health Bank IRA To begin phasing in the n ew Health Bank IRA system, all workers would be allowed to establish such IRAs and take the accompanying tax credits starting on a specified date, say Jan uary 1, 19

88. Benefits would not be changed in any way for those already retired. But for new retirees, the Medicare deductible would be increased slowly each year. These new retirees, however would also start receiving benefits from accumulated Health Bank IRA ass ets or government vouchers The yearly deductible increase would be geared to the amount of such IRA benefits retiring workers would receive in their remaining years to avoid net benefit reductions.

Benefits for catastrophic illness would also be increased gradually each year for new retirees, while monthly SMI premiums would be reduced each year to compensate for the reduced SMI coverage in effect resulting from the deductible increase. These l4 Calculated from Ballantyne, op. cit l5 Ibid l6 =void any furt h er financial problems in the rest of Social Security exacerbated to some extent by using short-term surplus funds to finance HI, long-term reform will be needed here as well. Indeed such reform is necessary and desirable for many other reasons as well be b ased on allowing workers the option of substituting expanded Super IRAs for their Social Security coverage, as described in Peter J. Ferrara Rebuilding Social Security, Part 2: Toward Lasting Reform Heritage Backgrounder No. 346, April 25, 1984 Such refor m should shifts would continue steadily until today's young workers reached retirement age, at which point the new system would be completely phased in. The means-tested supplemental benefits would be fully available from the beginning of the phase-in peri od, to ensure that no one suffered hardship during the transition, but the demand for these benefits by retirees would grow only slowly over time as the current system was phased out.

Cost of the Reform If'the Health Bank IRA option were in effect in the c urrent fiscal year FY 1985 and workers utilized it at twice the rate they currently utilize IRAs, there would be an income tax revenue loss from the Health Bank tax credit for the year equal to about 12.5 billion.17 Over time, this loss of revenue would b e ..offset by reduced Medicare expenditures as workers began relying more and more on their Health Bank IRA funds. Long before this point however, the tax revenue loss would be significantly offset by new tax revenues paid by businesses resulting from the i n creased investment in the Health Bank IRA During the period of.net tax revenue loss, there,would also be an increase in savings, thanks to the Health Bank IRAs This would be equal to the amount of the tax loss, since the credit would only be allowed for s uch specialized IRA savings.ls Conse quently, even if the government has to increase its borrowing by the full amount of the loss, there would be no net increase in the governmentls borrowing drain on private savings.

BENEFITS OF THE REFORM The benefits of the reform would be considerable. Both the short-term and long-term financing problems of the current HI system would be eliminated. The surplus funds from the other components of Social Security, plus net savings from the increased deductible, over time would bridge the short-term HI problem.

Over the long term, an entirely new system would be phased in to eliminate the HI 'deficit that will occur under current law. This would be accomplished, moreover, without any payroll tax increases for workers or cu ts in.benefits for today's elderly. At the same time, todayls young workers would have their future medical security protected through the establishment of an improved and soundly based system l7 l8 Calculated from 1984 Annual Trustees Report (OASDI 1984 A nnual Trustees Report HI Workers would not be allowed to withdraw Health Bank IRA funds for any purpose except the payment of medical expenses in retirement. This would avoid the danger of any shifting of existing savings into such IRAs, since the savings could not be used for any other purpose, and new savings would in fact be needed by the worker to replace lost Medicare benefits. 11 Lower Cost: Young workers would be able to obtain retire ment medical coverage under the new system for much less than und e r the current system. This is because the contributions of workers and employers to their Health Bank IRAs would earn the market return to capital over the worker's lives, adding to the funds available for their retirement years No such market returns are earned under the current system, since the taxes paid are not saved and invested but immediately paid out to finance the.benefits of current beneficiaries. With a lifetlme of accu mulated capital returns under the new system, workers and their employers c ould pay much less each year than they do under the current system to have sufficient funds in retirement to purchase health care coverage that is superior to Medicare.

Workers and their employers would enjoy further substantial savings because the new sys tem would sharply reduce the waste and inefficiency of the current system. One reason for this is that the Health Bank IRA system would dramatically increase compe tition in the health care industry by allowing private insurers to compete for coverage of r etirees thereby displacing the current Medicare monopoly. Private providers would likely develop new medical institutions with better cost controls, similar to Health Maintenance Organizations HMOs and offer retirees the option of purchasing their insuran ce and medical coverage through such institutions. Private insurers would also have to compete to keep their own costs down by monitoring health.providers closely and rooting out wasteful, unnecessary expenditures.

Consumer Incentives: Complementing this i ncreased competi tion would be improved incentives for consumers under the new system. They would be purchasing coverage with their own Health Bmk IRA funds, and consequently they would seek out the lowest cost insurers and service providers that met thei r quality and service requirements. Workers who chose to self-insure by paying medical costs directly out of their Health Bank IRA assets would have the most powerful incentives to question charges, and the greatest potential for obtaining substantial cost savings. This desire to economize would lead to general reductions in medical prices and costs by reducing unnecessary demand.

Rather than HI payroll tax rates of 9 to 11 percent that would eventually be required under the current system, the cost saving resulting from this new approach would require no increase in the scheduled Ifpermanentlf tax rate of 2.9 percent. Indeed even lower tax rates eventually could be required. Since workers could accumulate substantial sums in their Health Bank IRAs, the nee d for federal catastrophic insurance could be quite limited.

And if virtually all workers opted for the Health Bank IRAs, as seems likely, the tax revenue needed to finance government vouchers would also be modest.

The new system would expand the role of the private sector by enabling most workers to place funds in Health Bank IRAs which would, in turn, be invested in private industry. This I 12 enhanced role would sharply reduce projected government spending.

Not only would HI costs financed by payroll t axes be reduced dramatically, but the new general revenue financed and means tested supplemental program likely would cost far less than the existing SMI program. This is because even minimum wage workers should be able to develop'enough'resources in thei r Health Bank IRAs to avoid the need for such means-tested supplements Catastrophic Coverage: Many of the inadequacies of the benefit structure under the current system would be corrected under the new system. Unlike Medicare, the government would protect r etirees against the potentially devastating expenses of catastrophic illness, which is precisely the protection the elderly most need and want A Better Deal for Minorities and the Poor: All workers would earn approximately the same market returns on their Health Bank IRA contributions If a minority worker died earlier than most workers, as is statistically likely, the worker would be able to leave more of his Health Bank IRA funds to his heirs.

Medicare's discrimination against minorities, in other words w ould be eliminated under the IRA plan. In addition, the poor would be thoroughly protected under the new system through the means-tested supplements. But those workers who wished to con tinue to rely completely on the government for retirement health care financing would be free to do so by opting for the govern ment vouchers rather than the Health Bank IRAs.

Control and Choice: Under the new system, workers would have much greater control and choice over their retirement medi cal coverage. The new system would be diverse and flexible allowing workers to choose from the myriad of options in the pri vate marketplace the coverage best suited to their needs. They would be free to choose their retirement age with no benefit penalties for late retirement.

Boost to Savinqs: The new system potentially could increase national savings by tens of billions of dollars each year, through the new funds saved in Health Bank IRAs each year savings would result in increased capital investment, jobs, and economic growt h Such increased CONCLUSION Everyone recognizes that Medicare is in deep trouble. Con gress should act now to address the system's problems before the crisis becomes acute. Experience with the latest Social Security crisis in 1982-1983 shows that, if Congr e ss waits until the last c minute to act, the options available to solve the problem become limited to benefit cuts and 'tax increases. Public hysteria makes rational consideration of meaningful long-term reform impossible by that stage of a crisis 13 The proposed Health Bank IRA system gives Congress a plan to enact now, which will solve Medicare's enormous structural problems without benefit cuts for the elderly or tax increases for workers.

Instead, the proposed reform would replace Medicare with a new p rivate sector system which would serve both the elderly and workers far better than Medicare. The new system would enable workers to develop their own resources to meet their retirement medical service needs, but it would retain the option of govern ment- f inanced medical service vouchers for retirement if the worker so desired. Government would also retain its crucial role in providing catastrophic medical insurance for all elderly Americans and supplemental medical benefits for those retirees who were oth erwise unable to develop adequate private resources for their retirement medical expenses.

The proposed new system would meet the major concerns of Americans regarding their retirement health care. Instead of waiting until the Medicare problem becomes a ma jor crisis, Con gress should move quickly to consider the Health Bank IRA Prepared for The Heritage Foundation by Peter J. Ferrara a Washington attorney I Formerly a senior staff member in the White House Office of Policy Devel opment.