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Medicare’s New Day

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Medicare’s New Day

The program’s privately managed plans provide quality care while controlling costs—and winning political support. March 8, 2018
Health Care

“Now don’t you let the government get ahold of my Medicare,” an elderly constituent of former senator John Breaux implored him in 1993, reacting to the Clinton administration’s health-care reform proposals. Variations of this tale have proved popular ever since with liberal intellectuals and pundits—most recently, as they looked to defend the Affordable Care Act. The anecdote demonstrates, they contend, how voters enthusiastically embrace government management in practice while opposing it in theory. But as long as politicians are responsible for the management of health insurance, how can they ensure it is really operated in their interests?

Millions of seniors have been abandoning the federally managed Medicare program for privately administered Medicare Advantage (MA) plans. The proportion of Medicare beneficiaries enrolled in MA has soared, from 13 percent in 2003 to 33 percent in 2017, confounding expectations that the ACA’s cuts to private plans would cause those plans to decline. Some analysts expect that the majority of Medicare beneficiaries will be enrolled in MA plans within the next ten years.

Such an arrangement would greatly improve seniors’ quality of medical care and financial protection; it would also do much to secure the Medicare program’s fiscal sustainability. Cost has been a major problem since Medicare’s inception in 1965. President Lyndon Johnson initially believed Medicare and Medicaid together would cost $500 million annually—but by 1970, Medicare alone cost $7.7 billion. This enormous miscalculation led to the establishment of the Congressional Budget Office a few years later. The program’s expense has continued to rise as a result of its largely open-ended commitment to pay for whatever medical procedures are developed and billed. In 2017, Medicare expenditures totaled $679 billion (making it the largest spending item on the federal budget after defense and Social Security), and costs are expected to double over the coming decade.

To get health-care providers to participate, Congress initially reimbursed physicians according to “usual, customary, and prevailing fees,” and paid hospitals based on whatever they claimed that it cost to treat beneficiaries. These arrangements supplanted incentives for cost-conscious medicine, encouraging physicians to inflate fees and rewarding hospitals for making enormous capital investments at a greatly expanded number of facilities. Though Congress gradually enacted caps on permissible fees for various services, slowing the subsequent growth in price, inflated costs were baked into the cake. And the caps may have encouraged physicians to truncate their consultations with patients while increasing the volume of billed services. The growth of physician fees slowed to 4.5 percent between 2000 and 2005, but Medicare spending on physician services per beneficiary increased by 45 percent.

Over 50 years, Medicare has become as much of an entitlement for medical providers—hospitals, medical staff, and drug makers—as for seniors. Rather than establishing dedicated programs to subsidize care for the uninsured or hospital services in rural areas, Congress has found it easier to inflate the Medicare program’s reimbursement rates as a method of supporting such activities.  

Cutting costs means cutting provider incomes, so it is inherently difficult to ensure that Medicare delivers value for the money. The program incurs new costs in covering expensive new drugs, devices, and surgical procedures, but reimbursement rates are rarely trimmed when new technologies reduce the time and expense needed to treat patients, so taxpayers enjoy few savings. Medicare sets tens of thousands of prices for services whose adequacy is hard to discern—with providers lobbying aggressively to scare members of Congress that any cuts would yield devastating shortfalls in access to care.

Because new legislation is often needed to fix payment flaws, problems may pass for years without remedy, as enterprising lobbyists are always able to mobilize one constituent group or another that would lose out from an efficiency-minded reform. For instance, doctors get reimbursed for the average sales price of drugs they use, plus 6 percent, a practice that is well-known to encourage them to administer more expensive but therapeutically equivalent alternatives—notoriously, the $2,000 Avastin, rather than the $50 Lucentis. Medicare lacks most of the controls that private insurers employ to contain costs. The program imposes no gatekeeping of access to costly specialists, benefits from no network of cheaper preferred hospitals, and conducts no scrutiny of claims prior to reimbursement. The federal government estimates that 9.5 percent of Medicare claims were improperly paid in 2017.  

In 1997, Congress enacted the Sustainable Growth Rate mechanism to reduce automatically Medicare fees when aggregate spending on physician services exceeded a target amount. But Congress overrode SGR cuts 17 times before repealing the policy altogether in 2015. Though several years away from implementation, SGR’s replacement is already widely seen as unworkable. Is there a better way to pay for Medicare?

In 1995, then-House Speaker Newt Gingrich laid out his vision for reform to a health-care industry conference, telling attendees that if Medicare beneficiaries were allowed to choose privately managed alternatives, the federally managed option would “wither on the vine because we think people are voluntarily going to leave it.” The statement caused 1996 GOP presidential nominee Bob Dole great anxiety as an AFL-CIO-funded television commercial took Gingrich’s words out of context to suggest that he was trying to eliminate Medicare altogether. Yet despite the demagoguery and Dole’s subsequent defeat, Gingrich’s vision is now largely coming true.

Privately managed HMO plans were first made available to Medicare beneficiaries in the mid-1980s, and by 1997, more than 5 million were enrolled. That year’s Balanced Budget Act expanded the choice of Medicare options to include privately managed fee-for-service plans, with or without networks. Yet, while expanding the appeal of what became Medicare Advantage, the BBA inadvertently reduced payment to plans in some areas below the costs of delivering the standard Medicare benefit package—causing MA’s growth to stagnate. The 2003 Medicare Modernization Act adjusted rates to fix this problem, and enrollment has soared steadily since, rising from 5 million in 2003 to 19 million in 2017, even though CBO had projected enrollment would fall following a major cut in payments to MA plans under Obamacare.

One-third of Medicare beneficiaries and a majority of seniors without Medicaid or employer-funded supplemental coverage are now enrolled in MA plans. In some states, enrollment is even higher: 42 percent of Medicare beneficiaries in Florida, 44 percent in Oregon, and 56 percent in Minnesota are enrolled in private plans. This growth has had political consequences. Initially, then-Senator Al Franken of Minnesota attacked Medicare Advantage plans as overpaid; by 2012, he had flipped, denouncing the ACA’s cuts to the program.

Because they get paid a flat fee—adjusted according to enrollees’ expected medical needs—to deliver the whole spectrum of hospital and physician services to which Medicare beneficiaries are entitled, MA plans have the freedom and incentive to spend money in the way that best treats patients at the lowest cost. This flexibility allows plans to reward clinicians for employing cost-effective practice styles, to limit unnecessary utilization of the most expensive procedures, and to exclude fraudulent providers from their covered networks. It also allows them to provide additional preventive services that may avert costly hospitalizations—including case management for chronic conditions, better coordination of medical records, assistance with medication adherence, and support following discharge from the hospital.

As a result, Medicare beneficiaries enrolled in privately managed plans are more likely to get appropriate medical treatment and 20 to 30 percent less likely to visit the emergency room—a key measure of the effectiveness of care. Controlling for the severity of medical conditions, MA patients were 13 to 20 percent less likely to get readmitted within 30 days. MA patients also spent less time in nursing facilities following admission to hospital for equivalent procedures—yielding savings of 16 percent in post-acute care. MA plans therefore deliver the standard Medicare benefit with a higher quality of care but at an average cost of $1,200 less per beneficiary.

During the 1990s, employees receiving health insurance through their jobs resisted managed care because the savings that it generated accrued to their employers. But under MA, plans can use efficiency gains to attract beneficiaries by providing supplemental benefits, such as dental, vision, or hearing coverage excluded from traditional Medicare. Whereas the traditional Medicare Part B benefit requires enrollees to pay 20 percent coinsurance, without limit, on all outpatient services—an exorbitant amount in a world where physician-administered drugs regularly cost over $100,000— cost-sharing under Medicare Advantage plans is limited to $6,700 per year, and the majority of plans reduce the cap on out-of-pocket costs even further. This saves seniors from having to purchase additional coverage, known as Medigap, which requires an average annual premium of about $2,000. MA plans have thus proven disproportionately attractive to beneficiaries on modest incomes who lack supplemental coverage paid by Medicaid or previous employers.

Increasing enrollments in MA plans will help address Medicare’s looming solvency crisis. At the moment, the slightest trimming of Medicare payments to providers unleashes an army of lobbyists to argue, with some plausibility, that proposed cuts will reduce access to care for beneficiaries. Congress’s consistent overturning of cuts under the SGR policy demonstrated the futility of this approach. Yet Medicare Advantage has absorbed with relative ease the major cuts to which the ACA subjected it. While Medicare cannot shed costs without provoking political battles with interest groups, MA plans can cut expensive providers out of networks, amend cost-sharing arrangements, or steer enrollees to more cost-effective methods of treatment. Because costs get eliminated incrementally by a multitude of different plans, with savings from efficiencies returned to beneficiaries, no pitched legislative battle takes place, with providers coalescing to defend their automatically inflating revenue streams.

Moving Medicare beneficiaries into MA plans therefore greatly facilitates the program’s transition into a fiscally sustainable, premium-support arrangement, of the sort proposed by Republican House Speaker Paul Ryan and Democratic Senator Ron Wyden. Yet, rather than becoming a politically suicidal struggle to take benefits away from seniors, a premium support system emerging out of Medicare Advantage would be cherished by the program’s beneficiaries, as they have already enjoyed its fruits.

Photo: s-c-s/iStock

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