Washington is making the real Medicare problem worse

 

The greatest threat to the retirement security of future Americans may well be the projected increase in retiree out of pocket health care costs over the next several decades that will occur under current provisions in Medicare law.

 

Within a decade, without any changes to the program, we are likely to find ourselves facing health care costs that are even less sustainable -- and an even greater threat of class-based health care rationing for all age groups, but particularly the elderly and disabled.

 

Far from constructively addressing this problem, however, politicians in Washington are instead racing to cut Medicare spending in ways that would make the problem worse.

 

Out of pocket costs would rise far higher if Medicare undergoes further privatization through conversion to a defined contribution program based on a premium support strategy as proposed by Republican House Budget Committee Chairman Paul Ryan. But they'd also go up as a result of the kinds of cuts that Democrats appear to be considering as part of an attempted compromise plan. The "Gang of Six" proposal to tie Medicare spending to increases in the GDP plus 1% beginning in 2020 could substantially increase beneficiary out of pocket cost depending on increases in the rest of the health care system, which have an average exceeded GDP by 2.25% for 40 years.

 

And in what should be a source of outrage, despite the breadth and depth of support for the Medicare program, the entire decision-making process appears to be out of reach of the public.

 

Why are the American people being excluded from decisions that could have a dramatically negative impact on a program supported by 75 to 80% of the public? According to what theory of democracy have our policy makers decided to make cuts in an essential pillar of our system of retirement security in the face of overwhelming public opposition? That opposition was most recently expressed in the 2010 elections, when the Democrats were hurt by claims, mostly false, that they had supported Medicare cuts in the Affordable Care Act.

 

Medicare is second only to Social Security in ensuring an adequate standard of living for older Americans. (Read my June article for Nieman Watchdog about Social Security: "Reporting without context on the nation's greatest policy achievement ever.") According to most measures, Medicare is a public policy success story. In 1965, almost 50 percent of persons age 65 and older had no health insurance. Medicare now provides health care coverage for over 95% of the age 65+ population. Medicare has greatly increased access to health care and helped increase longevity.

 

But a growing number of older people will not have adequate access to health care until Medicare co-payments and deductibles are reduced and long-term care, which is now available under Medicaid for only the impoverished, is made an affordable Medicare benefit.

 

The Affordable Care Act contains a modest, voluntary long-term care insurance program called the CLASS Act that would give middle class workers the opportunity to pre-fund coverage of some long-term care expenses after contributing monthly for several years. Private long-term care insurance has not lived up to early expectations and the CLASS Act is probably our best shot at achieving some level of support for families trying to avoid financial ruin caused by long-term care costs that can exceed $70,000 to $80,000 a year. Incredibly, however, the "Gang of Six" proposal includes the repeal of the CLASS Act for no clear reason other than hostility to any public sector involvement in helping families manage long-term care costs which will become a huge burden for many more families over the next several years
as the boomers age.

 

A fair minded effort to reform Medicare would be responsive to the fact that Medicare beneficiaries have been experiencing a steady growth in out of pocket spending for health care for several years. The percentage of beneficiaries' discretionary income spent on Medicare premiums, copayments, and deductibles has increased from 10% in the 1980s to over 15% on average today (Caplan & Brangan, 2004) and is over 30% for many lower income beneficiaries. These increasing costs have put routine medical care beyond the reach of many less affluent older people. The median income of Medicare beneficiaries is only $22,800 a year.

 

Current projections indicate that Medicare beneficiaries’ out of pocket expenditures will rise from 22% in 2020 to between 30% and 40% in 2030 and health care spending, as a share of after-tax income for married couples, will rise from around 20% in 2000 for those in the bottom 40% of the income distribution to almost 50% in 2030. These projected increases represent a profound threat to the economic security and health status of future retirees and their families under current law -- a threat that would be greatly increased by privatizing Medicare, which would not contain the costs of health care but rather shift the cost burden on to those who could least afford to bear them-the elderly and disabled.

 

A more effective, as well as just approach to containing costs would be to adopt features of health care systems that have achieved universal coverage at affordable prices in several European and Asian countries. A 2003 report by Gerard F. Anderson, Uwe E. Reinhardt, Peter S. Hussey and Varduhi Petrosyan called It’s The Prices, Stupid: Why the United States Is So Different From Other Countries, found that several other national health care systems were able to provide universal access, pay for more per capita medical services, achieve better health outcomes and consumer satisfaction at substantially lower costs than the U.S., by systematically restricting price increases.

 

Every country has its own approach to providing universal coverage, cost containment and quality assurance. Three strategies that could work in the U.S. without turning health care into even more of a Rube Goldberg system than it already is are; a public option insurance program to compete with private plans that currently have near monopoly control in most markets, the gradual extension of Medicare, (single payer coverage) to younger age groups, or an all payer rate regulation system similar to the current Maryland program which has operated with reasonable success for several years.

 

The health care industry has vigorously resisted these strategies, most recently in the debate over the Affordable Care Act, and will continue to do so in the future. Nevertheless, these strategies are far more likely to contain unsustainable cost increases while preventing Medicare from being eviscerated through privatization or funding reductions that would threaten physician and other providers participation rates and undermine access and quality of care.

 

The fear that major cuts in the Medicare program could reduce access and undermine the quality of care is supported by recent research reported by the National Bureau of Economic Research (NBER). Researchers Vivian Wu and Yu-Chu Shen found that Medicare payment reductions in the 1997 Balanced Budget Act led to increased mortality rates during 2001-2005 in hospitals that absorbed large Medicare payment cuts relative to the hospitals that experienced small cuts. Reductions in staffing levels and operating costs following big Medicare payment cuts are the most likely cause of increased mortality rates.

 

All of Medicare's contributions to the improved health status and economic security of older people have not come cheaply. The program now costs over $500 billion a year and is set to grow rapidly over the next 30 years as the number of beneficiaries grows from 46 million to over 80 million, including several million disabled persons younger than 65. The cost of Medicare is a major part of the rationale for expanding the role of private insurance in the program as proposed by Ryan and passed by the House earlier this spring. The Ryan Medicare plan would substitute a voucher for the current system of either direct reimbursement for services received (fee-for-services) or payment to an HMO for those in Medicare Advantage. The voucher would be designed to pay for some portion of a premium for the purchase of a private insurance plan and would be capped annually at the level of increase in the consumer price index plus 1%. This limitation on the cost of the voucher is the main reason the Congressional Budget Office projected a huge increase in out of pocket costs for beneficiaries under the Ryan Plan if it were to take effect in 2021. Medicare beneficiaries in 2022 would have to pay an additional $6,000 out of pocket under the new voucher or premium support program, and by 2032 the cost of purchasing insurance in the private market would consume most of the average recipients Social Security and Medicare voucher checks.

 

Proponents of the Ryan plan argue that putting control of Medicare resources under private plans will increase the program’s efficiency and cost-effectiveness. Privatization advocates, however, ignore the fact that even as Medicare has played a critical role in increasing the longevity, quality of life, and retirement security of those ages 65 and older, it is also a comparatively efficient program. When comparing rates of growth for comparable benefits, Medicare’s cumulative cost rate from 1970 to now is 19% below that of private insurance. A December 2010 report from the American Health Insurance Plans showed that from 2000-2009, prices in California increased 18% in the Medicaid program, 76% in the Medicare program and 159% for private insurers. One of the major factors accounting for Medicare’s efficiency edge is its lower administrative costs, which constitute just 5% of total expenditures, compared to 15-25% in private plans and much higher in many managed care plans.

 

Rising Medicare costs are not a result of inefficiencies unique to the Medicare program. These increases are caused by the same factors that have driven costs in the entire U.S. health care system at the rate of 2.2% above the CPI for almost 40 years. These factors include advances in medical technology and a health care system that is unique among developed nations in the extent to which it is driven by shareholder value and high executive compensation and professional salaries, especially for doctors and administrators.

 

Provisions in the Affordable Care Act, if successfully implemented, have the potential to contain costs in the Medicare program without significantly harming beneficiaries. At this point, however, there is little reason to think that these provisions will have more than a marginal effect on costs.

 

Medicare is not perfect, but privatization or further cuts would undermine its value for beneficiaries by making the program increasingly unaffordable.