As Americans celebrate Independence Day, doctors won’t be lighting fireworks. Physicians’ Medicare reimbursements will decline by 10.6% unless Congress takes drastic action by July 1.

If Medicare pays doctors less, seniors will find it even harder to get appointments and their quality of treatment will deteriorate.

Last year, the government’s Center for Medicare & Medicaid Services, following a congressional formula adopted in 1997, ordered that doctors’ Medicare reimbursements be cut by 10%, effective January 1, 2008. Then in December, Congress postponed the effective date to July 1, but with a larger cut, 10.6%. A 20% cut is scheduled for 2010.

Senate Finance Committee Chairman Max Baucus of Montana and the committee’s ranking Republican, Charles Grassley of Iowa, each have drafted bills that would postpone cuts through 2009. Last week Mr. Baucus’s bill, paid for by trimming private Medicare Advantage plans, failed to move to a vote on the Senate floor.

That means reduced income for all doctors who participate in Medicare. Unless the law is changed, on July 1 in Manhattan a 25-minute check-up will earn a Medicare payment of $66.01, compared to the present rate of $73.80.

While physicians grumble that their fees are low, the projected cost of Medicare is staggering. The Congressional Budget Office estimates that over the next 75 years Medicare will cost the government, that is the taxpayers, $34 trillion more than seniors pay in premiums. If trends continue, workers will be paying the equivalent of a 34% payroll tax in 2050 just to cover Medicare and Social Security payments. The rate now is 15.3%.

Of course, a 34% payroll tax is unimaginable and something else must be done to bring Medicare financing under better control.

What would be a better way to curtail Medicare spending?

Economists at Texas A&M University, Andrew Rettenmaier and Thomas Saving, were in Washington, D.C. last week to present their answer to Congress: Health Insurance Retirement Accounts, or HIRAs.

Here’s how HIRAs would function: Workers would deposit 4% of their paychecks into their HIRAs, while current Medicare payroll taxes deducted from their paychecks would be used to pay for current and future Medicare expenditures.

When workers retire, the HIRA would be used to purchase a lifetime annuity. Annual income from that annuity would be available each year to pay medical costs above an initial deductible of $2,500.

If there were money left over in the account at the end of a year, retirees could keep it and spend it on whatever they wanted. If, on the other hand, medical expenses exceeded the annuity amount and the base deductible, the difference would be paid by Medicare.

Since low-income workers would have smaller HIRAs, the federal government might make a supplemental contribution, from tax revenues, and perhaps lower the $2,500 deductible. Workers of all income levels would shop around for medical services, a process that would help stem the increase in medical costs.

Current retirees now on Medicare would continue to pay Medicare premiums under the present arrangement.

HIRAs have major advantages for future generations of Americans:

• They prepay retirement health spending, taking advantage of the miracle of compound interest. That gives workers a nest egg from which to pay medical bills.
• They encourage shopping around for medical care. If people know they get to keep the unspent balance of their annual medical allowances, they would be more cost conscious. Just as prices for Lasik and cosmetic surgery have fallen, so would other medical costs. Doctors would compete against each other by posting lists of services and fees.
• They are fair. Because the size of the annuity is determined by past wages, those with higher incomes pay a larger fraction of their medical care with their larger annuities before dipping into the common Medicare pot.

And yet, why should Americans want a plan with an additional 4% additional HIRA contribution and a $2,500 initial deductible rather than the current Medicare plan? Because the current system is unsustainable. A 4% contribution to purchase an annuity, with some annual proceeds returning to cost-conscious beneficiaries, is better than benefit cuts or forced tax increases of 10% in 2030, 15% in 2040, and 20% in 2050, which would drastically reduce economic growth.

It’s possible that this summer, or in a lame-duck session of Congress after the election, Senators Baucus and Grassley will get together agree on a bill. But this won’t solve the long-run problem of paying for medical care for America’s retirees.

Congress and the next president, either Senator Obama or Senator McCain, will have to face up to Medicare’s problems. In 2011, Medicare will start paying out more than it takes in. The sooner the government comes to grips with this problem, the better for all of us.

Ms. Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.