What will it take to fix Medicare?

Posted Tuesday, August 21, 2012 in Analysis

What will it take to fix Medicare?

This is the baby boom generation (in red), followed by the much smaller "boomlet" -- the bump in blue toward the right.

by Gina Hamilton

With depressing regularity, someone, usually from the GOP side, comes out and explains why it is necessary to privatize Medicare, the health plan for seniors that was instituted in 1965, which was also extended to younger people with disabilities and those with end-stage renal failure. 

As a social insurance program, Medicare spreads the financial risk associated with illness across society to protect everyone.  This is different from private insurance companies, who try to cut costs for their own financial benefit and in some cases, for the benefit of their shareholders.

Medicare offers all enrollees a defined benefit -- that is, Medicare patients, most of whom have paid into the system during their working life, receive hospital care, outpatient medical care, and now, prescription drugs.  Hospital care is covered under Part A and outpatient medical services are covered under Part B. To cover the Part A and Part B benefits, Medicare offers a choice between an open-network single payer health care plan (traditional Medicare) and a network plan (Medicare Advantage, or Medicare Part C), where the federal government pays for private health coverage.

A majority of Medicare enrollees have traditional Medicare (76 percent) over a Medicare Advantage plan (24 percent). Medicare Part D covers outpatient prescription drugs exclusively through private plans, either standalone prescription drug plans or through Medicare Advantage plans that offer prescription drugs.

In 2010, Medicare provided health insurance to 48 million Americans—40 million people age 65 and older and eight million younger people with disabilities. Medicare serves a large population of old, sick, and low-income people, many of whom would be unable to afford health care otherwise. On average, Medicare covers about half (48 percent) of health care costs for enrollees. Medicare enrollees must cover the rest of the cost. These out-of-pocket costs vary depending on the amount of health care a Medicare enrollee needs. They might include uncovered services—such as long-term, dental, hearing, and vision care—and supplemental insurance.

Medicare versus private insurance and efficiency

However, the Medicare system, even though it doesn't cover everything, is far more efficient than private health care systems.  The traditional Medicare plan's overhead is incredibly low ... only about 1.3 percent of the total cost of the system.  The average overhead cost for a private insurance plan is ten times the Medicare plan, and could be up to 20 times the Medicare plan under the Affordable Care Act.  Some insurance plans have an overhead of 30 percent or more currently, but those will soon have to adhere to the 20 percent prescribed by the ACA.

Medicare Advantage programs, the private insurance programs that are known as Medicare Part C, also have a higher overhead ... about 11 percent in 2010.  That is why the Affordable Care Act wanted to eliminate them, and compromised to bring their costs down by decreasing the amount of money Medicare would spend on Advantage plans. 

This is where the mythology was born that the ACA would cut Medicare.  In fact, the ACA would cut private insurance company overhead costs. 

Private insurance overhead and profit, on average, fluctuates between 12 and 14 percent nationally. This figure is somewhat lower than the 16-20 percent at many of the big insurers because it includes self-insured plans of many large employers that have overhead of about six to seven percent. On the other hand, overhead in the individual market is often substantially higher than 20 percent, and in some cases above 30 percent.

The estimate that total administrative costs consume 31 percent of U.S. health spending is from research by Drs. David Himmelstein and Steffie Woolhandler and published in the New England Journal of Medicine in 2003, according to Physicians for National Health Plan.

So what's the problem with Medicare? Is it really going broke? And how can it be fixed?

Baby Boom

The biggest problem with Medicare (and Social Security) is the baby boom, that large blip of population born between 1946 and 1963, with a heavier concentration born closer to the end of the war.  These folks are beginning to retire now, and they outnumber any other generation.  So the problem is a serious one in some ways, but a temporary one.  A baby boomlet, born to baby boomers, followed in the 70s and 80s, but the number of children born was considerably smaller than the original boom.

Figuring the average life expectancy for baby boomers to be about 80 (from actuarial tables), the largest part of the boom will pass by 2040, and by 2060, the boom will largely be history.  That doesn't mean there isn't a problem, just that temporary measures will solve the problem.

Unlike Social Security, which has a yearly cap (of about $108,500) beyond which one does not pay additional funds into the system in any given year, Medicare is 2.9 percent of income, split between employer and employee, no matter how much one earns in a year.  For the upcoming baby boom generation, these funds will not be enough, so additional funds must be raised at the front end.

If everyone started paying 4.25 percent (again, split between employer and employee) the fund will remain solvent throughout the baby boom generation.  Another option is to move to a two-tier Medicare premium plan.  Anyone earning $150,000 or less would pay 3.5 percent (split between employer and employee) while anyone earning more than that would pay 5 percent, to reach the same end. 

In terms of real money, a person earning $50,000 per year would go from a Medicare premium of $15 per week to $22 per week in the first instance, and from $15 per week to $18 in the second.  A person earning $175,000 would go from a premium of $53 to $77 per week in the first case, or from $53 to $91 in the progressive case.

This simple change to the system would render Medicare solvent for the next 75 years, beyond the baby boom years, and well into the 'boomlet' years. 

Social Security, though not part of this discussion, could be saved simply by raising the cap on earned income, and adding a social security premium to unearned income, such as a half-percent on capital gains.

The GOP solution

Although the Medicare trustees suggest strongly a solution like the one above, it is important to note that neither Democrats nor Republicans are endorsing such a maneuver.  Republicans want to issue vouchers to seniors (their plan doesn't even begin until 2027, well beyond the initial baby boom years, and with no plan to deal with those deficits). For people aged 55 or younger, the plan involves a voucher system to allow seniors to purchase their own health care plans, however, there is no guarantee that the cost of the health care plan would match what the government voucher was likely to be. 

When Rep. Ryan first proposed his plan, he envisioned a kind of 401K for health care.  By 2030, seniors would have been responsible for 68 percent of their health insurance, which would have cost too much for many of them  to afford.

His altered plan in 2011 was to tie the amount of the voucher to how much insurance costs.  Each year, companies would submit bids, and the voucher would be set at the second-cheapest rate.  If seniors wanted anything more expensive, they'd have to pay the difference. 

One of the problems with this plan is that the proposal required that the plans be 'actuarially equivalent' -- NOT that they would offer the same coverage benefits. Plans would be permitted to tweak their benefits to attract healthier customers. So if a patient didn't foresee needing much in terms of outpatient coverage, say, he or she might opt for a hospital plan that didn't cover doctor or specialist visits in a given year.  He or she would be responsible for the entire cost of doctor and specialist visits in that year.  If this plan was the "second cheapest" plan, and other seniors knew they'd need more help with doctor visits, other seniors could find themselves paying much more per year than the voucher offered.

Another problem is that the 2011 plan wouldn't actually save any money.  If the plan had been implemented in 2009, it would have saved only nine percent, but that would have been a one-time savings.  Also, seniors would have had to pay $64 per month, which for low-income seniors is a significant hit.

The biggest problem is that it relies on private insurance companies to compete to save money, and as we learned through Medicare Advantage programs, that doesn't work.  Most private plans were unable to come in under traditional Medicare, with very few exceptions, and those that did were limited to certain parts of the country where programs like Kaiser Permanente were already going concerns.

The Democrat solution

Although Democrats in Congress have been largely silent on the issue during the last four years, they do in fact have a plan.

The Democratic plan involves changing Medicare, over the long term, from a fee for procedure system, which encourages unnecessary medical tests, prescription drugs, and other kinds of waste, to a fee per patient system.

A fee per patient system pays a hospital system a set amount of money per year per patient.  Everything the patient receives, except for co-pays, is covered.  However, the hospital system is heavily incented to decrease the amount of unnecessary or duplicate testing done on the patient, to try less invasive techniques, such as physical therapy, before resorting to surgery, and to attempt less expensive generic drugs before trying brand-name drugs.  Hospitals are also strongly encouraged to keep digital records so that duplicate and wasteful tests are not performed. The less expensive care a patient receives, the more of the dollars received the hospital system gets to keep, and those are dollars that can be spent on other patients in greater need. 

Unfortunately, in most of the country, hospital systems that offer fee per patient programs do not yet exist.  Kaiser Permanente in the west has honed this technique to a science, but there aren't yet many networks like Kaiser elsewhere in the country.

In the meantime, the Affordable Care Act managed to save about $716 million from Medicare.  How did that happen?

As mentioned earlier, Medicare Advantage turned out to be a lot more expensive than anyone thought it would be, and some of it will be cut.  Those cuts get a lot of attention, but of the $716 million, Medicare Advantage cuts account for about a third.  Another chunk comes from hospitals -- the ACA changed how Medicare calculates what they will be reimbursed for different services, lowering their rates over time, and encouraging better record-keeping.  Hospitals agreed to the cuts, knowing that they would soon have more paying patients with the ACA's expansion.

Reductions to Medicare’s Disproportionate Share Payments — extra funds doled out the hospitals that see more uninsured patients — account for 5 percent in savings. Lower payments to home health providers make up another 8.8 percent.

But Medicare benefits themselves are untouched.  No patient will lose his or her benefits, and no doctor will be denied payments.

So, yes, there will need to be more money in the short term, and no, it doesn't have to be so painful that it can't be borne.  And Medicare will survive.  Politics just has to get out of the way and let it.

blog comments powered by Disqus