Social Security and Medicare are the two great pillars of America’s commitment to seniors’ well-being. Although both are troubled and have promised more than they can ever deliver, Medicare is by far the greater challenge
Social Security is a pretty simple program. People pay in when they are working and the government sends them monthly checks (or electronic transfers) after they have retired. It is just a matter of moving money around, something the federal government is pretty good at.
Medicare is vastly more complicated. Start with the benefit design. It is still based on the old Blue Cross Blue Shield model from 1965, with Part A (hospitalization), Part B (physician and outpatient), and Part D (prescription drugs). Each has a different premium arrangement, different deductibles, coinsurance levels, and limits on benefits. Most people also have some form of supplemental coverage, either from their employer, Medicaid, or a private Medigap plan.
Medicare explains some of these differences for the year 2017:
- No premium for people who paid into the program for 40 quarters (ten years) or more. For people who paid for 30-39 quarters the monthly premium is $227, or for fewer than 30 quarters it is $413.
- Deductible of $1,316 per year.
- Coinsurance: $0 for the first 60 days, $329 per day for the next 30 days, $658 per day for an additional 60 days over the course of your lifetime, full payment per day after that.
- Premium of $109 per month for most people on Social Security, but $134 per month or higher depending on income.
- Deductible of $183 per year.
- Coinsurance of 20 percent without limit.
There is no way to tell what is available until one goes online and enters his ZIP code and current drugs or checks the “Medicare and You” booklet Medicare sends out annually. In my state (Pennsylvania) there are 23 plans offered with monthly premiums ranging from $170.60 to $14.60 and deductibles from $400 to $0 with additional coinsurance and copayment levels.
Plus, of course, there is Part C (Medicare Advantage), which replaces Parts A and B. In my state there is a choice of 147 different plans from 15 different insurance companies. The plans are all HMOs or PPOs with premiums ranging from $293 per month to $0, and are offered in select counties. They don’t usually have deductibles but they do have varying coinsurance and copayments based on whether the service is primary or specialist care, chemotherapy drugs, Part B drugs, home health care, or medical equipment. These plans likely limit the choice of providers, sometimes drastically.
Then, finally, there are the Medigap plans designed to pay the deductibles and copayments of regular Medicare. There are ten different standardized plan designs with premiums ranging from $50 per month to several hundred dollars.
Lots of Money Suckers At Play
As complex and baffling as all this may be, it is just about enrollment and benefit design. Far more problematic is the endless tinkering with how to pay for the promised benefits. Providers who deliver services to Medicare patients have been constantly whipsawed back and forth with different payment methods and cost containment efforts. Just some of the payment reforms have included:
- The whole “participating provider” system, including various ways of non-participation and limits on allowable billing.
- Diagnostic Related Groups (DRGs) for hospital payments, first introduced in the 1980s and constantly revised and expanded since then.
- Resource-Based Relative Value Scale (RBRVS), introduced for physician payment in 1992.
- An entire series of demonstration projects, including Disease Management, Care Coordination, Pay for Performance, and Value Based Purchasing, none of which have actually worked.
- More recently, the HITECH Act, which was part of President Obama’s stimulus legislation in 2009. This mandate to use federally standardized electronic medical records was not confined to Medicare, but had a profound effect on decreasing the efficiency of providers in the program.
- Accountable Care Organizations (ACOs), one of the primary Medicare reforms built into the Affordable Care Act and already failing.
None of these efforts has worked, but they have all added substantially to administrative costs as physicians and hospitals have to run out to hire new attorneys, accountants, software engineers, and compliance officers every time Washington comes up with a nifty new idea to police provider behavior. And none of these new costs add anything to actual patient care.
Consumer-Driven Health Care: A Better Way
Meanwhile, in the under-65 private benefits market an entirely different approach has been taking hold, one that emphasizes direct payment and consumer empowerment through health savings accounts (HSAs), Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs), and defined contributions by employers. These programs are offered by 59 percent of employers with 500 or more workers and 29 percent of those with 10 or more, as of 2015. The Employee Benefits Research Group estimates they covered some 26 million people in that year, while other organizations put the number as high as 45 million.
These programs have been proven to lower costs and encourage more consumer engagement in selecting treatment programs, providers, and healthier lifestyles. And they do it all without disadvantaging low-income or chronically ill populations.
The sad irony is that the law creating health savings accounts, the Medicare Modernization Act of the 108th Congress, extended HSAs to everyone in America, except those on Medicare. The law did reauthorize the Medicare Medical Savings Account (MSA) that was part of the 1997 Balanced Budget Act, but the original was a half-hearted demonstration program that was doomed from the start, and never attracted any insurance companies to offer products. The revision was a little better, and a couple of companies did offer MSA products under Medicare Advantage in a few states for a few years, but the Medicare Advantage cuts under the Affordable Care Act (ACA) put an end to that.
These ACA cuts portend a very bleak future for Medicare generally. As John Goodman has written, the Affordable Health Care act gets about half of its spending ($716 billion) from cutting Medicare spending—forever. This means Medicare will be paying less than Medicaid for services at an ever-reducing rate. By 2030 Medicaid will pay about 58 percent of what private insurance pays but Medicare will pay about 40 percent. That means the elderly will be the orphans of the health care system, getting services only from public clinics and safety net hospitals.
Medicare needs to be fundamentally redesigned and quickly. We need to learn from the experience of the private sector and turn Medicare into a consumer-driven program that is less confusing for the elderly and produces better results by altering consumer behavior.
So What Does That Look Like?
First, we would need a unified design that blends Parts A, B, and D into a single program like every health insurance product in the private market for the past 30 years. Then, we need to combine all the existing deductibles, coinsurances, and copayments into a single across-the-board deductible, with a carve-out for proven preventative services. This might be between $3,000 and $4,000. Medicare would pay 100 percent of charges beyond the deductible.
Any savings in program costs could be used to seed a beneficiary’s HSA. The Medicare MSA program began with a $3,000 deductible and a $1,500 federal contribution to the HSA, then raised the deductible and lowered the contribution to $3,600 and $1,020 respectively. If a patient did not use the full contribution in the course of a year, it would roll over into the next year, and collect interest. Whether those numbers would work for a larger population would have to be determined by an actuary.
Importantly, unlike the old Medicare MSA program, the new HSAs could also be funded with contributions from beneficiaries. Increasing numbers of newly enrolled people are coming into Medicare with HSA balances built up while they were working. They should be able to roll these balances into the new Medicare HSAs. Plus, with such a program there would be no need for supplemental insurance, so money currently being spent on Medigap or prescription drug premiums could be invested instead in the HSA.
This would not be a privatized program, at least not at first. Instead it would be run by CMS, just like traditional Medicare. The savings account administration would be done by the banks that currently service HSAs, not insurance companies, but the high-deductible insurance program would be a public program just like traditional Medicare is today.
How This Would Help Americans
This approach would have many benefits. It would bring an end to most Medicare fraud, estimates of which range from $60 billion to $180 billion a year. People who are paying their own bills scrutinize them very carefully to make sure they are being billed only for services actually rendered and not overcharged. There is no such scrutiny in Medicare today.
To do that effectively, there would be a huge consumer demand for price transparency. People would want to know ahead of time what a service is going to cost. There is today a very wide range of prices for identical services so some (not all) consumers would shop around for the best deal.
They would also carefully consider treatment options. There may be better, more affordable ways of treating their condition than the one first suggested by their doctor. This would lead to very useful conversations between patients and doctors that would raise awareness for both sides.
It would also lead to better lifestyle decisions as patients look for ways to avoid preventable conditions. Many would discover that changes in diet or increasing exercise would not only improve their health but save them money, too.
It would raise efficiency as both patients and doctors discover that many issues can be resolved through phone calls or e-mail exchanges without the need for an office visit. Medicare currently does not reimburse for such services, but an HSA payment could.
Importantly, this approach would need to be voluntary for beneficiaries. Many of the elderly currently on the program are accustomed to it and not interested in changing to a new design. While they should be allowed to change if they want to, they should not be forced to do so. It is likely that enrollment in this design would come mostly from new or recent enrollees who are already comfortable with consumer-driven health programs. But over a number of years this segment could grow into a majority of people on Medicare, saving the program from financial ruin.
It is long past time for Medicare to enter the twenty-first century instead of relying on a model from the 1960s (traditional Medicare based on a 1965 Blue Cross Blue Shield design) or 1990s (managed care under Medicare Advantage). The new century features decentralization and consumer choice in all aspects of our lives. This is the approach that is taking over the private benefits market, but the greatest beneficiary could be the crusty old Medicare program and those who rely on it for their health-care needs.