James Capretta explores for the American Enterprise Institute prospects for a major rethinking of Medicare.

Medicare was enacted a half-century ago and has been at the forefront of prominent political debates since the program first began paying hospital and physician bills for enrollees. Its rapid spending growth and its position as the dominant regulator of the nation’s vast network of hospitals, clinics, and private physician practices have made it the focal point of both fiscal- and health-policy debates.

Proposals to reform Medicare have tended to focus on improving the program’s operational efficiency and cost-effectiveness. The goal of these reforms has not been to change how Medicare works in any fundamental way but to make adjustments within the program’s existing structure to facilitate the provision of higher-quality and lower-cost medical services.

That’s an understandable strategy, but it is not the only way to think about reforming Medicare. It is also possible to take a step back and consider whether Medicare’s basic structure ought to remain as it is indefinitely, and what an alternative design should entail. Both the fiscal prospects of the program and its effects on our broader health-care economy now call for such fundamental rethinking.

To do this, we would have to begin by considering just what the Medicare program actually consists of at the most basic level. At that level, Medicare is two things. First, it is a publicly run, community-rated insurance plan for persons age 65 and older and the disabled. Federal taxes and spending are not necessary to run this community-rated insurance plan. In theory, the full premium for this insurance could be collected from the enrollees during their time of eligibility for benefits. But Medicare isn’t just a traditional health-insurance plan. It is also, secondly, a social-insurance program.