America is once again embroiled in a
bitter dispute about Medicare. This is not an issue of one side
"for" good medical care for the country's seniors and the other
side "against" that goal. Nor, more narrowly, is it a dispute over
whether or not a modern Medicare program should cover prescription
drugs. That is not in dispute. At the heart of the debate is
whether improvements in Medicare should go hand-in-hand with
structural reforms of Medicare.
The
argument for linking improvements to reforms flows from two
questions about the state of Medicare:
- How can we add
new benefits when we cannot afford today's benefits for much
longer? A glance at the current projections for the
Medicare program is chilling. Huge future liabilities will require
heavy taxes on future generations--even without any new benefits.
This raises questions about the nature of the Medicare "social
contract." Should we continue a program in a form that allows Bill
Gates, when he retires, to receive essentially the same benefits as
a checkout clerk? Or should limited resources be focused more on
those who need them most?
- Why is Medicare
so out of date that in 2003 we even have to discuss adding a drug
benefit? Many analysts and lawmakers are concerned that
the process of designing and updating Medicare benefits is
dysfunctional and that simply adding, for example, a drug benefit
does nothing to address the underlying problem.
Congress must not add to Medicare's
current benefits without addressing these questions and the
underlying problems in the management and financing of Medicare.
Failure to link benefit improvements with needed reforms will
simply lead to a Medicare program that is inferior and fails to
provide enough help to those who need it while passing a huge
financial burden on to future generations.
To
address these issues, Congress needs to take a number of steps,
including the following:
- Improve the
process for modernizing benefits throughout the Medicare
program. Congress should set up a more independent process
for improving benefits, based on a Benefits Board, to assure
constant modernization of benefits within reasonable budget
constraints.
- Empower the
traditional fee-for-service program to be as competitive as
possible. Congress should take steps to permit Medicare's
managers to be more creative and efficient in satisfying
beneficiary needs. This means making the entire program operate in
a more efficient, competitive, and customer-oriented way, but it
also means ensuring that the traditional fee-for-service (FFS)
program can compete effectively with managed care plans. To do
this, Congress should split the management of the FFS program from
the management of the entire Medicare program and give FFS managers
greater flexibility in operating the program. Congress should also
ensure that the traditional FFS program's budget reflects the costs
of the beneficiaries enrolled in that part of the program.
- Focus more help
on lower-income enrollees. Recognizing that there is not
enough money to give the same benefits to rich and poor alike while
assuring adequate health care to lower-income seniors, Congress
should begin to adjust the structure of benefits according to
income.
If
Congress were to combine these steps with, perhaps, more immediate
actions to address the demand for a prescription drug benefit, it
could set the program on course to become a constantly up-to-date
health care program that the nation could afford.
CONCERNS ABOUT THE STRUCTURE OF
MEDICARE
Fairness and the Funding Crisis
Medicare is an entitlement program with a
hybrid funding system. Workers pay income-related payroll taxes
during their years of employment, and when they retire (or become
disabled), they are entitled to a range of primarily hospital
benefits under Part A of Medicare. In addition, when they retire,
they can enroll in Part B, a government-sponsored insurance program
covering primarily physicians' costs.
In
broad terms, everyone enrolled in Part A and Part B receives the
same benefits. The Part B premium is the same for everyone, but the
premium is heavily subsidized out of general tax revenues, and each
enrollee--regardless of income--pays the same amount, which is
designed to cover 25 percent of Part B costs.
Medicare's premium and payroll tax
revenues are credited to trust fund accounts. In practice, these
revenues immediately flow out of the trust fund to pay for current
Medicare benefits. Since Medicare is a pay-as-you-go social
insurance program, the trust funds really are an accounting tool
used to indicate the program's financial obligations. The Medicare
trustees--government officials and private representatives who
oversee the program's finances--offer long-term projections of the
program's income and liabilities.
These long-term projections cause alarm
among many analysts and lawmakers because they indicate that the
program is fundamentally out of balance, with trillions of dollars
in general taxes needed to honor even existing benefits, let alone
any new benefits. The Medicare trustees' 2002 report painted a dire
picture of the program's finances, with expenditures rapidly
outstripping dedicated revenues in future decades.
Chart 1, taken from the trustees' report,
shows the 75-year projections for the combined Part A and Part B
elements of Medicare. The projections are based on
middle-of-the-road assumptions about such factors as, among others,
medical costs and, longevity and assume that no drug benefit is
added to Medicare. As the chart indicates, when a young worker of
today retires in 2053, for example, the program's expenses will
outstrip dedicated payroll tax revenue and enrollee premium
payments by approximately 4 percent of gross domestic product
(GDP).
What
does this mean in dollar terms? One way to appreciate the scale of
the funding gap is to consider that if that were the situation
today, 4 percent of GDP would be approximately $400 billion, or
about $4,000 per household, allocated in the form of taxes to
supplement the premiums and payroll taxes. In 2053, the equivalent
dollar burden of extra taxes per taxpaying household would be on
top of payroll taxes being paid by workers for their own future
Medicare benefits. Furthermore, this extra tax burden just to pay
for the funding gap ignores the large tax burden facing future
workers because of the looming unfunded financing imbalance in
Social Security. Moreover, the funding gap in the trustees' report
does not include the cost of any drug benefit or other improvements
Congress might enact this year or in the future.
In
light of this picture, it is perhaps not surprising that some
lawmakers are reluctant simply to add a drug benefit to Medicare
that could cost hundreds of billions of additional dollars over the
next decade alone (assuming that the cost estimates of a drug
benefit, notoriously underestimated in the past, are accurate).
Faced with this scenario, they suggest two things:
- At the very
least, a new drug benefit should initially be restricted to those
who cannot otherwise afford prescription drugs (many elderly
currently have private drug coverage). A permanent and
standard drug benefit for Medicare should be considered only
alongside major reforms designed to rein in future program
costs.
- Given the
financial outlook, it is time to consider whether everyone should
still receive basically the same Medicare benefits,
especially as many lower-income seniors receive inadequate
assistance while richer seniors do not need all their benefits.
Thus, benefits should at least partially reflect actual need in a
more systematic way.
The Dysfunctional Process of Designing
Benefits and Managing the Program
When
Medicare was created in 1965, its benefit package was based on the
prevailing Blue Cross/Blue Shield package for working Americans in
large firms and was seen as state-of-the-art coverage. Since that
time, however, the benefits for Medicare recipients have gradually
slipped further behind the benefits routinely available to working
Americans. For example, Medicare provides no outpatient
prescription drug benefit. Today, it is virtually unthinkable for a
large corporation to offer its workers a plan without at least some
coverage for outpatient pharmaceuticals or, for that matter,
protection against catastrophic medical costs.
The Politics of
Setting Benefits
The main reason that Medicare's benefits package is
out-of-date--despite the general awareness that it needs to be
updated--is that all major benefit changes require an act of
Congress. Consequently, discussions about changing benefits
(especially about introducing new benefits by reducing coverage for
less important ones) are entangled in the political process.
Providers included in the existing package fight diligently--and
usually effectively--to block serious attempts to scale back
outdated coverage for their specialties. Meanwhile, talk of
upgrading the Medicare benefits package unleashes an intense
lobbying battle among other specialties that seek to be included in
the Medicare benefits package.
Invariably, the result depends as much (if
not more) on shrewd lobbying than on good medical practice. The
understandable reluctance of most lawmakers to subject themselves
to this pressure further slows the process of modernizing
benefits.
Formula
Payments
Medicare today uses complex formulas to determine its payments to
managed care plans serving beneficiaries and to physicians and
hospitals under the traditional FFS program. Through legislation
and regulation, the government tries to create a payment schedule
that will work in all parts of the country and takes into account
local conditions. However, as is typical of government attempts to
set payments by formula, these schedules rarely match the actual
market, which constantly changes.
As a
result, policymakers and health care providers constantly grumble
that the formulas systematically and wastefully overpay some plans
and underpay others and that many payments to physicians and
hospitals are far out of line with the cost and difficulty of
providing specific services.
Bureaucratic
Decision-Making
Just as arcane and problematic is the complex administrative
process used by the Centers for Medicare and Medicaid Services
(CMS) to modify benefits, determine which medical treatments and
procedures are to be covered under Medicare, and define under which
conditions or circumstances services are to be delivered and paid
for. This bewilderingly complex process is marked by intense
pleading by medical specialty societies and a degree of
congressional micromanagement that makes efficient management of
the program impossible.
Any
long-term reform of Medicare must amend this structurally
inefficient and politicized process of changing or modifying
benefits over time. If Congress does not do so, Medicare will
always be hopelessly out-of-date.
Combining Medicare improvements with
reforms
Addressing Medicare's benefit shortcomings without beginning
structural reforms would be little more than a Band-Aid. Failure to
reform the way Medicare benefits are updated means the program
would continue to fall behind as medical practice evolves. And
adding a hugely expensive drug benefit onto a program that faces
staggering unfunded future liabilities would be unconscionable.
A
prudent approach would seek instead to accomplish three goals:
- Improve the
process for modernizing benefits. While incorporating at
least a modest prescription drug benefit into the program, Congress
should set up a benefit improvement structure based on a Benefits
Board to assure constant modernization of benefits within
reasonable budget constraints.
- Empower the
traditional FFS program to be as competitive as possible.
Congress should permit the CMS management of Medicare to be more
creative and efficient in satisfying beneficiary needs. Congress
should also make sure that that the traditional FFS program's
budget reflects the costs of beneficiaries enrolled in that part of
the program.
- Focus more help
on lower-income enrollees. Recognizing that there is not
enough money to give the same benefits to rich and poor alike while
also assuring adequate health care to lower-income seniors,
Congress should begin to adjust the structure of benefits according
to income.
Improving the Process of Modernizing
Benefits
To keep Medicare constantly up-to-date, core benefits must be
adjusted steadily over time, but that has proven impossible given
the current hands-on benefit micromanagement role of Congress. This
includes not only statutory benefit decision-making, but also
periodic, often informal interventions into the complex processes
of the Medicare bureaucracy, which affect both the managed care
plans and the traditional FFS program. The problem is particularly
frustrating in the FFS program, where Congress becomes involved in
the procedures to evaluate, code, and price medical benefits,
services, treatments, and procedures.
As
long as lawmakers make detailed medical benefit design decisions in
this way, they will face enormous political pressure when they try
to adjust benefits--especially if they try to trim back less
valuable benefits to make way for new health services. This
provider-driven pressure typically thwarts the goal of sensible and
economical improvement.
Creating a
Benefits Board
To break out of this impasse, Congress needs to alter its role.
Instead of voting on individual benefit changes and attempting to
function as if they were medical experts, Members of Congress
should instead transfer detailed benefit decisions to an expert
body, limiting themselves to a yes-or-no vote on a proposed package
of modernizations.
Specifically, Congress could create an
independent "Benefits Board" to propose annual changes in the core
benefits for Medicare beneficiaries.
- The Administration and Congress would
select Board members for specific terms, and the membership should
be drawn from medical experts, health analysts, and a fair and
balanced representation of the elderly and disabled.
- Congress would provide the Board with
budget constraints, and the Board would seek to develop the best
combinations of benefits within that budgetary framework.
Typically, each proposed annual revision would contain only small
changes, but over several years the benefits package could undergo
significant revision and improvement.
- The Board would present the annual package
of recommendations to Congress, and the entire package would be
subject to an up-or-down vote without amendment. If the package
were rejected, the existing benefits would remain in force, and the
Board would present a modified package for a vote later in the
session. This process would retain Congress's critical role of
reviewing and agreeing to Medicare benefit changes, but it would
sharply reduce political pressures on benefit decisions by
lawmakers.
A Temporary Drug
Benefit
If a Benefits Board had been in place during the past 20 years, it
would likely have found an imaginative and economical way to
introduce a prescription drug benefit, or catastrophic protection,
into Medicare. If such a Board were established and Congress
provided it with broad budgetary targets, it is easy to imagine
that the Board would design an acceptable permanent drug benefit
far more rapidly than Congress could ever manage.
If
Congress determines that it must take the initiative on a drug
benefit, however, it should focus on a temporary and narrow
benefit, aimed at those who need help the most, and leave the
development of a permanent benefit to the more deliberate and
politically independent procedures of a Benefit Board.
In
creating a temporary benefit in both the traditional FFS program
and managed care plans, lawmakers should remember that many senior
citizens already have drug coverage through former employers,
supplemental insurance, or another government program. The Medicare
drug access problem is concentrated among low-income seniors who
cannot afford such coverage and are ineligible for assistance
through Medicaid or other public programs.
An
interim solution is to target subsidies to this population to help
them get prescription drugs. While pursuing a modernization of the
current Medicare program, there are two ways to do this:
First, Congress could revitalize President
Bush's original proposal to transfer funds to the states to
supplement or encourage state efforts to secure prescription drugs
for low-income seniors. Unveiled in 2001, Bush's "immediate helping
hand" initiative would have channeled $48 billion to the states
over a four-year period to assist this population.
Second, Congress could directly target
subsidies to modest-income seniors through a prescription drug
account. For example, federal officials could make an initial
deposit of between $600 and $800 per year to help seniors with
their routine drug expenditures, coupled with a federally
subsidized catastrophic insurance for high drug costs. Seniors
could use a debit card in purchasing drugs, allowing the pharmacist
to swipe the card against the person's prescription drug account.
Seniors also could keep unspent funds and roll them over from year
to year in the account, and state officials could supplement these
funds through the state-based drug assistance programs. Health
policy analysts from the American Enterprise Institute and the
Galen Institute have developed the details of this approach.
Empower the Traditional FFS Program to Be
as Competitive as Possible
The
second key step in reforming Medicare while improving its benefits
is to give CMS the power to operate the traditional FFS program as
efficiently and effectively as possible in competition with managed
care plans. The managers of the traditional program should be
empowered to run that part of Medicare as an aggressive competitor
to the managed care plans. The FFS program should become an analog
to charter schools--public schools in which managers are given the
freedom and incentive to compete with private schools.
Turning the FFS program into the health
care equivalent of charter schools would require several steps.
Among them:
- Create a
Medicare Board. Currently, CMS is responsible both for
operating the traditional FFS program and for establishing the
arrangements under which the FFS program must compete with managed
care plans. But that dual role is inherently problematic.
For one thing, refereeing a competition is
very different from being an aggressive competitor. Over the years,
CMS (like its predecessor agency, the Health Care Financing
Administration) has developed a culture and expertise that focuses
on regulating prices and services and identifying fraud and abuse.
The training and skills of the staff reflect these general
functions. Staff members lack the experience and skills needed to
establish ground rules for a competitive market, develop
businesslike relationships with competing private health plans, and
provide consumers with the information they need to get the best
value in such a market.
Even if the agency's staff actually
possessed the skills to turn the FFS program into an effective
competitor, it is extremely unwise to permit an organization to set
the rules of a competitive market when it also has a direct
interest in the success of one of the competitors. So long as CMS
runs the FFS program, it cannot be expected to fairly referee a
market in which other plans compete directly with its FFS
program.
Thus, to make the FFS program as efficient
as possible, Congress should clearly separate the function of
running FFS from the function of overseeing the market in which FFS
must compete. One way to do this would be to establish a new
Medicare Board to run the overall Medicare program while giving CMS
greater powers to run the FFS program in a more competitive way.
The Board might report directly to the Secretary of Health and
Human Services (HHS). An alternative would be to confine CMS's role
to the oversight and operation of the overall program and create a
new body within HHS--separate from CMS--to run the FFS program. In
either case, the body running the overall program and the body
running FFS would--although separate--be answerable to the
Secretary of HHS and Congress.
- Give the FFS
managers the flexibility to compete with the managed care
plans. Congress should refrain from its increasingly
onerous and ineffective micromanagement of the FFS program.
Instead, Congress should give CMS greater flexibility to run the
traditional FFS program in ways that would make it an aggressive
competitor to managed care plans and other emerging private-sector
health care options in the next century.
Whenever a competitive market is
introduced, a government-provided service must be given every
opportunity to redesign itself to compete effectively. Public
enterprises can be surprisingly competitive and entrepreneurial
when they have the freedom and incentive to do so. This is true in
education; it should be the case in Medicare as well. Thus, CMS
should be permitted to introduce innovations into the management of
traditional FFS Medicare, and Congress should give FFS managers
greater discretion.
- Replace formula
payments with a system of negotiation and "jawboning."
Rigid formula payments to health plans deny CMS managers the
opportunity to negotiate levels of payments to managed care plans
that balance budget control with securing adequate service levels.
Congress would be wise to extend to Medicare the same flexible
payment-setting and service-setting process used in its own health
program, the Federal Employees Health Benefits Program (FEHBP).
In the FEHBP, a "call letter" is sent each
spring to health plans by the Office of Personnel Management (OPM),
which administers the FEHBP, requesting them to submit proposals
for providing a broadly defined set of benefits to federal workers,
their dependents, and federal retirees. The plans must state the
services they propose to cover as well as the premium they intend
to charge. After these proposals are received, OPM engages in
rounds of negotiations with plans until final proposals are made
and accepted.
The negotiations between OPM and the plans
involve the design and scope of benefits, the premiums, the
geographic area in which the plans will operate, and other
conditions under which services will be delivered. Through this
negotiation system, a set of benefits and prices is determined that
is very close to market conditions. After the negotiations are
complete, OPM sends out standardized information on all plans to
federal workers and retirees in the late fall of each year, and
FEHBP beneficiaries choose the plan in which they wish to enroll
for the following year.
In this system, plans feel pressure to
compete with one another; they also feel pressure from the
government and federal workers to provide the best services for the
price. Unlike a system of pricing based on formulas, plans cannot
easily profit by exploiting a regulation or a poorly designed
pricing formula; nor is the government required to overpay or
underpay simply because of a legislated rule. If Medicare were run
on similar principles, the government could negotiate payment
levels for plans that reflected local market conditions and avoid
the mismatch between payment levels and market conditions in many
areas.
- Risk-adjust the
FFS budget. If the managers of FFS were given the power to
improve the operation of that part of Medicare and market it more
effectively, they would face the classic dilemma of insurers--"no
good deed goes unpunished." Specifically, improving FFS would
likely make it even more attractive to higher-risk, higher-cost
enrollees.
This fear that strong competition between
managed care plans and FFS could result in "adverse selection" and
a heavy cost burden on the traditional program constantly haunts
those who are skeptical of wide plan choice in Medicare. Giving CMS
greater power to negotiate payments with managed care plans would
reduce this concern within the managed care sector, because the
agency could negotiate payments that reward plans taking on
higher-cost enrollees while offering lower payments to plans that
generally attract lower-cost seniors.
The way to protect the FFS sector is to
adjust the general annual budget allocation for FFS and the managed
care plans, based on a sampling of the average enrollee costs in
each sector. This sectoral "risk-adjustment" budgeting would alter
the portion of the projected Medicare budget going to each Medicare
sector according to the choices made by enrollees and help insulate
each sector from a disproportionate volume of higher-cost
enrollees.
Focusing More Help on Lower-Income
Enrollees
Given the daunting task of financing
Medicare's future benefits under current law, let alone adding new
benefits such as prescription drug coverage, Congress should expand
its so-far modest steps to focus available funds on those who most
need assistance.
The
federal government and the states currently provide some assistance
to lower-income seniors to cover part of their out-of-pocket
Medicare costs. For instance, states can use Medicaid funds to
enroll eligible seniors in Part B of Medicare. The Qualified
Medicare Beneficiary program and the Specified Low-Income Medicare
Beneficiary program provide financial assistance to eligible
low-income seniors to help them afford out-of-pocket Medicare
costs. In addition, the insurance value of some Medicare benefits
is taxable for upper-income elderly Americans.
These steps have already begun to
transform Medicare from a classic social insurance program with
equal benefits for all into a hybrid program with a social
insurance foundation but slightly different benefits for the rich
and the poor.
This
transformation of Medicare into a hybrid program needs to continue
if Medicare's limited designated future funds are to be used to
help those who need assistance the most. As noted earlier,
Americans reaching retirement can enroll in a heavily subsidized
insurance program (Part B of Medicare) without regard to their
income. This part of Medicare is not a true social insurance
program because beneficiaries do not contribute to Part B during
their working lives.
It
is an injustice for millionaires to receive the same 75 percent
subsidy for this part of Medicare that modest-income seniors--who
in many cases find the out-of-pocket premium and other costs of
Part B onerous--also receive. Congress should start to address this
unfairness by reducing the Part B premium subsidy for upper-income
seniors while increasing it for additional lower-income
seniors.
Congress should take similar steps to
reduce the financial value of hospital benefits for upper-income
beneficiaries, such as increasing the deductible and other costs.
And if a drug benefit is added to Medicare, the subsidy should be
restricted to those who need it. Most middle-income and
upper-income seniors already purchase supplementary private
insurance to reimburse many Medicare out-of-pocket costs. Tapering
down the value of benefits for these Americans would likely lead to
an increase of such supplementary coverage.
Opponents of such income testing for
Medicare make three broad arguments. First, they say that an
income-related benefit violates the social insurance design of
Medicare. As already noted, however, special assistance already is
given to some lower-income beneficiaries, and Part B was never even
designed on social insurance principles.
Second, some argue that altering the
benefits in this way would break up the broad coalition supporting
Medicare, leading to an erosion of upper-income support and a
decline--rather than an increase--in help to lower-income
beneficiaries over the long term. While this argument is plausible
in theory, there is little indication that it will materialize in
practice, any more than taxing Social Security benefits for
higher-income retirees has undermined support for that program.
Medicare has rock-solid support, as every politician knows, which
will not be eroded by expecting upper-income Americans to pay for
more of their benefits.
The
third argument is that income adjusting is either too draconian,
and thus politically impossible--if it is to lead to significant
program savings in the near future--or an insignificant offset, and
thus unnecessary if it is introduced in modest ways. In truth,
however, small changes introduced now, such as a sliding scale Part
B premium, may have a small immediate impact but can lead to large
savings over the decades to come. Thus, even small adjustments
should be set in motion as soon as possible.
CONCLUSION
Medicare, with Social Security, is the
nation's most popular federal program. But although it is popular,
Americans grumble that it does not contain many of the most basic
benefits one would expect in a modern health plan. Despite these
gaps, Medicare faces a financing gap in the decades to come that
will impose huge tax burdens on future workers in addition to their
own Medicare contributions.
It
would be unconscionable of Congress simply to add new benefits to
Medicare without addressing the dysfunctional process of upgrading
Medicare benefits, the inefficient management of the program, and
the unfair distribution of benefits among seniors of different
incomes and needs.
Stuart M. Butler,
Ph.D., is Vice President for Domestic and Economic Policy Studies
at The Heritage Foundation.