Medicare has become one of the most expensive and inefficient federal programs in history, projected to cost over $1.1 trillion in 2025. Its costs are growing faster than inflation and wages, contributing mightily to our $36 trillion national debt. Worse, it delivers this mountain of spending through a bureaucratic system that incentivizes fraud, waste, overtreatment, and poor health.
There’s a simple, bold alternative. Let states opt out of Medicare as it exists today and pay their share of Medicare funds directly to seniors, as a direct cash transfer, alongside Social Security. Instead of government price-setting and provider payments, seniors could purchase health insurance and care in open, competitive markets. The result would be lower costs, healthier people, and vastly less fraud.
A System Built to Overspend
Medicare pays providers through the Medicare Physician Fee Schedule — a price list of over 10,000 services largely determined by the American Medical Association (AMA). A committee of 32 doctors, known as the RUC, meets behind closed doors to decide how much should be reimbursed. This is not a competitive marketplace — it’s a medical cartel. And the consequences of cartel price-setting are exactly what economists would predict: rising prices, distorted incentives, and rampant waste.
Medicare fraud is especially staggering. The Government Accountability Office (GAO) has labeled Medicare a “high-risk” program for over three decades, with “serious vulnerabilities to waste, fraud, abuse, or mismanagement.” In Miami, a Medicare Fraud Strike Force once visited 1,600 businesses that had billed Medicare for equipment — only to find that nearly a third didn’t even exist. Over 10 percent of Medicare’s entire budget — more than $60 billion every year — is lost to fraud, waste, and improper payments.
Imagine if that money were in the hands of seniors, not bureaucrats. Fraud would plummet overnight.
Misaligned Incentives Lead to Disease
Medicare also discourages healthy behavior. Under its rules, seniors’ premiums aren’t affected by whether they exercise daily or smoke two packs a day. Insurance companies can’t offer lower rates for better health. Americans now suffer skyrocketing rates of obesity, type 2 diabetes, and heart disease — behavioral choices contribute significantly to outsized medical costs.
Before Medicare, insurers could price policies based on risk, charging each individual a premium that reflected their expected medical costs. That gave individuals strong financial incentives to stay healthy. Today, people with chronic disease pay no more than those who take care of themselves, removing one of the most powerful motivators for good health.
Medicare’s bureaucracy is slow to adopt new medical knowledge, and often blocks access to innovative treatments. Getting a new treatment covered as “reasonable and necessary” by Medicare can take years — 16 years, in the case of one lifesaving alternative to coronary bypass surgery. But how many lives — and how many billions of dollars — were lost to preventable surgery, unnecessary stents, and symptom-managing drugs in the meantime?
Overpriced and Overprescribed
The current system also encourages overtreatment. Doctors and hospitals are paid based on volume of services, not results. Want to implant a heart stent that’s been proven ineffective for stable coronary artery disease? Medicare will pay. Want to teach a patient how to reverse heart disease with diet and exercise? You’ll be lucky to break even.
Studies have shown that stents don’t prevent heart attacks or prolong life in most patients. But Medicare still incentivizes them because the pricing formula hasn’t been updated to reflect current science — or because doing so would reduce provider income. As a result, millions of unnecessary stents have been implanted in the last two decades.
Even doctors estimate that up to 20 percent of care, including prescribed medication, is unnecessary, and admit physicians are more likely to prescribe unnecessary procedures when they’re reimbursed more. Doctors also tend to steer patients toward specialists and newer, higher-cost treatments, because primary care and long-established treatments are routinely underreimbursed. Both over- and under-utilization of care harm patients and drive up costs.
The Alternative: Pay Seniors, Not Providers
Instead of paying hospitals and providers, we should pay the seniors themselves. Divide the projected $1.1 trillion Medicare budget by the 68.5 million beneficiaries, and each senior could receive over $1,350 per month in cash. That’s more than $32,000 a year for a married couple — enough to buy catastrophic insurance and shop wisely for care.
Seniors could choose their own coverage and care — even abroad. They could save unspent funds for future care or pass them on. Medical providers would compete for their business, driving down prices and improving service. Innovation would flourish.
A pilot state could prove the concept. Let one state adopt the cash option, allow insurers to price based on risk, and let markets work. The outcomes — lower costs, healthier seniors, fewer fraud cases — would sell themselves.
What About the Sick?
Critics argue that markets would leave the sick behind. But the opposite is more likely. A competitive system would reduce waste, freeing up resources to help those who truly need it. Insurance companies would be motivated to find and promote lifestyle programs that prevent or reverse chronic illness. Risk pools or supplemental aid could protect the uninsurable more generously than our current system does.
Health care was never meant to be a federal responsibility. The Constitution delegates no such power to Washington, and the Tenth Amendment reserves unenumerated powers to the states and the people. Letting states test free-market reforms not only honors our federalist system — it empowers local innovation.
As Milton Friedman argued, the best way to help people is to give them money, not services. People spend their own money more wisely than bureaucrats ever will. Medicare should follow the model of Social Security: give the funds to individuals, and let them choose how to spend it.
A Win for Everyone
This is a solution conservatives can embrace, taxpayers can afford, and seniors can love. It puts money in the hands of patients, not middlemen. It restores incentives for health. It slashes fraud and waste. And it opens the door to 50 experiments in delivering better care at lower cost.
America’s seniors deserve more than rationed care and bureaucratic bungling. They deserve freedom — and the power to manage their own health.
It’s time to pay them, not the providers.
