America's Economy Headed for Crisis, Part 3: Medicare reform

In the August issue of Prairie Fire, former Colorado Governor Richard Lamm presented his unique view of the fiscal problems associated with the federal budget. The following month, the comptroller general of the United States, David Walker, presented an overview of the public meetings throughout the United States that he and his associates have been conducting. In October, we began a three-part series explaining how one group, The Concord Coalition, proposes to solve three distinct problem areas. October’s essay examined the area of the federal deficit. In November, Coalition members suggested solutions focusing on the Social Security system. December’s essay brings suggestions on solving the Medicare dilemma. By Robert Bixby, J. Robert Kerrey, Peter G. Peterson, Warren B. Rudman Medicare is a much bigger problem than Social Security, not just fiscally but also politically and ethically. Its costs are projected to grow faster than the economy and faster than can be reasonably supported by the federal budget. Health-care prices have outpaced overall economic growth since 1960. This phe­­nom­­enon greatly compounds the growing fiscal problems associated with the rising number of aged Americans. Unless health costs slow, by 2050, the share of the Gross Domestic Product consumed by Medicare and Medicaid will be nearly five times what it is today. Most of that increase would come from the rising cost of health care rather than the larger number of elderly Americans. Before thinking about specific ways to address the Medicare problem, here are criteria for evaluating presidential candidates’ Medicare reform proposals: *Scope of benefits: Medicare should cover a level of care commensurate with the care available to working-age people. This does not mean that taxpayers must be expected to finance a “high option” insurance plan for all seniors. *Fiscally responsible: A fiscally responsible program is one that can reasonably be expected to operate within the resources available to finance it. A program that assumes a perpetually open spigot from the Treasury is not fiscally responsible. *Income-related cost sharing: As a group, seniors enjoy a better income and less poverty than other age groups, particularly children. Therefore, Medicare’s premiums, which help fund Parts B (physician care) and D (prescription drugs), should be geared to income levels. Currently, premiums cover only 25 percent of program costs. General tax revenues cover the rest. Given this large subsidy and the need for long-term savings, beneficiaries who can afford to pay more of their fair share should do so. *Efficient provision of medical care: Whatever new system of medical insurance for the elderly is devised, it should contain incentives for both providers and patients to use resources cost-effectively. Treatments that have little or no promise of achieving any appreciable improvement in a patient’s well-being should not be financed with taxpayer dollars. Political leaders like to pretend that there are simple fixes to Medicare that won’t require anyone to give up anything. Just clamp down on “fraud and abuse,” or cut back on excessive paperwork, and the problem will be solved. Health-policy experts see it differently. Pure “waste” is no easier to pinpoint in the health system than it is in the federal budget. And, even if we could identify and eliminate all of it, the underlying cost drivers - from technology to expectations of good health to aging - would soon cause spending to grow again as fast or faster than before. The hard truth is that there are only two direct ways to reduce the growth in Medicare costs: pay health-care providers less or reduce the amount of health care that patients consume. Although both political parties agree that the goal is to deliver better quality of care while controlling costs, that goal is much easier enunciated than achieved. The United States has the only open-ended, cost-plus health-care financing system in the world. As a result, we spend more than twice as much per capita as do other developed countries. Yet there is very little evidence that our overall health outcomes are any better—and on some key measures, they are worse. Following are described some of the more significant contributing factors. Resource intensity. America’s resource-intensive style of medicine is the single most important reason we spend so much more on health care than do other nations. Some of the resource intensity comes from our new technology and some from simply doing more - more tests, visits, procedures, administrative costs and so on. Society’s definition of health itself has also expanded. In recent decades, we have steadily broadened the definition of insurable health care to include whole new realms of social life. Lack of cost-containment incentives. “Good health” is a subjective standard and one that naturally arises as society becomes more affluent. As these trends interact with technological progress, they are transforming the practice of health care. While once health care meant an occasional visit to the doctor or hospital it is fast becoming a lifelong process of diagnostics and fine-tuning in which any extra dollar spent is expected to confer some perceived benefit. And with consumers’ out-of-pocket share of their personal health-care costs having fallen from more than 30 percent in 1975 to 15 percent in 2005, they have little incentive to demand the most cost-effective treatments. Moreover, fee-for-service reimbursement and fear of malpractice claims give providers every incentive to prescribe any additional treatment regardless of its relative cost-effectiveness. Aging society. Then again, there is the aging of America’s population. Nearly every measure of illness, disability and health-care utilization rises with age. On average, each older American consumes about four times as much in medical services as a younger adult and about seven times as much as a child. Although the elderly now are just 12 percent of the U.S. population, they account for nearly 40 percent of U.S. medical bills. No cost-effectiveness standards. Businesses run on “best practices.” Medicare does not. Many studies have shown that comparable patients receive very different care - at very different costs - depending on where they get care, because of different styles of practice from one region to another, or even from one hospital to another. For example, comparable patients are six times as likely to have back surgery if they live in some areas of Oregon than if they live in Indiana. One reason for this is that insufficient data exist to guide caregivers and patients on which treatments work best. Any package of reforms should include greater attention to research on the comparative effectiveness of treatments, as well as incentives for patients and providers to use the results of such research in making decisions on the best care. Better targeting of resources could lead to substantial savings. It is well documented, for example, that cost variations are dramatic for care near the end of life. A recent study of large California hospitals found that Medicare spending per patient in the last two years of life ranged from $24,722 to $106,254 - with no demonstrable difference in health status, quality of health care or longevity. Over the five-year study period, Medicare could have saved $1.7 billion in the Los Angeles area alone, if the resource-intense hospital care there matched the pattern of care in lower-cost areas of the state.(See Endnote 1) With more than a quarter of Medicare spending annually going for beneficiaries in the last year of life, policy-makers must begin asking some tough questions about the causes and potential cures for such anomalies in cost patterns. The most striking find from these comparisons of costs among regions is that higher spending and more resource-intensive care does not produce better patient outcomes. For policy-makers, the key point is that there are choices in the way care is delivered and that the most expensive choice is not necessarily the best - not for patients, and not for society. Americans have yet to confront these choices, but in other countries they have been dealing with them for years. Go through the intensive-care unit of New York Hospital and count the number of octogenarians who are there with heroic intervention techniques and a dismal quality of life. Then go to a hospital in London and observe the difference in the age composition. What is it they do in Great Britain? They have capped their medical costs. A neurologist caring for stroke patients with a dismal prognosis turns them over to their general practitioner who sends them home to die quietly of pneumonia, “the old man’s friend.” Would Americans accept the level of health-care “rationing” this implies? Maybe not. But we will soon need to face the question. Spending on health care for the elderly will continue to grow far faster than the economy so long as we pretend that costs can be controlled without any sacrifice. Costs aren’t rising because of the proliferation of completely useless medical services. They’re rising because medical science can do more for people - and because what it can do is often very expensive, even if the benefit is incremental. Ultimately our nation must decide what level of health care we wish to provide as an entitlement and how much we are willing to pay for it. Setting limits in Medicare will mean moving toward a whole new paradigm - one in which prospective budgets at the program level and capitation at the beneficiary level finally compel us to make trade-offs between health care and other national priorities. In short, Medicare should be put on a budget. If program costs exceed targeted levels, Congress and the president should be required to take corrective action. If they decide that program costs should be permitted to increase (for example, by filling the prescription drug “donut hole” or adding long-term care coverage), then fiscal responsibility demands that they identify a commensurate stream of revenue to pay for the expanded coverage. No matter what vision of health-care reform we adopt, it would make sense to end the current open-ended tax exclusion for employer-paid health benefits. According to the Government Accountability Office, this exclusion costs the federal government an estimated $125 billion in forgone revenues in fiscal year 2006 alone. Subsidized health insurance is also one of the main reasons Americans spend so much on health care. It encourages employees to choose more generous coverage than they otherwise would, channeling resources toward health-care consumption and away from other priorities. It also gives the same preferential tax treatment to the last dollar spent on health care as to the first, and thus subsidizes not just basic coverage but “gold-plated” health-benefit plans. The tax exclusion thus adds to the deficit and drives up health-care costs. It would be counterproductive in a single-payer national health system. It even would be counterproductive in a system that mandated employer-based coverage. If desired, to maximize coverage, it would be possible to reform this tax exclusion so much, or even all, of the benefits went to lower earners. This could be done by using a flat refundable tax credit or a sliding-scale credit. Ultimately the growth in Medicare costs must be addressed through fundamental health-care reform. That is no reason, however, to avoid incremental steps that make sense on their own and that can achieve substantial savings. Medicare is quite influential, accounting for 20 percent of the nation’s total spending on health care. If the next president, with the help of Congress, can agree on meaningful Medicare reforms, it may well lead the way for necessary reforms of the broader health-care system.


1. See Dartmouth Atlas Project, Supply-Sensitive Care, January 2007, Related: America's Economy: Headed for Crisis, Part 1 America's Economy: Headed for Crisis, Part 2

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