"Republicans are eager to win the support
of Senator Edward M. Kennedy, Democrat of Massachusetts. But it is
unclear whether they have made enough concessions to do
so."
--Robert Pear, The New York Times,
November 12, 2003
The
outline agreement reached this week by a House-Senate conference
committee guts any serious long-term reform of the troubled
Medicare program while proposing the single largest entitlement
expansion in the program's history. Instead of enacting real reform
at a date certain and in time to accommodate the retirement of the
massive baby-boom generation, key congressional leaders are instead
proposing that a "demonstration project," confined to only a few
areas of the United States, be created to test serious Medicare
reform.
Such
a demonstration project, however, would not test reform; it would
kill it. Previous experience with federal health care demonstration
projects suggests strongly that political and special-interest
opposition to competition would guarantee the failure of any new
demonstration program.
Indeed, even before the ink on the
Medicare conference agreement was dry, key Senators had already
objected to the establishment of any demonstration project in their
home states. Senators Gordon Smith (R-OR) and Arlen Specter (R-PA)
want to "shelter" their states from any such "demonstration"
program.1
In
the first iteration of the "competitive demonstration" proposal,
the House and Senate
majority leadership reportedly favored scrapping the House-passed
provisions in the Medicare drug bill to move toward national
Medicare reform in 2010, substituting instead a time-limited
demonstration program, beginning in 2008, in four metropolitan
areas of the country and a geographic region, the geographic
boundaries of which were undetermined. In the final conference agreement, this
was changed to demonstration projects in six metropolitan areas,
including an area that crosses state lines. The Secretary of the
Department of Health and Human Services would select the
demonstration sites, and the projects would begin in 2010.
In
other words, current and future taxpayers would be saddled with a
universal drug entitlement of unknown cost as a permanent feature
of the already ailing Medicare program, and a system of
market-based competition would be reduced to a temporary and
uncertain phenomenon, subject to relentless political attack over
the next several years.
Killing Serious Reform: The Tried and True
Method
Members of Congress should be under no
illusion about the record of similar Medicare "demonstration"
projects enacted in previous Congresses. It has been amply
documented that previous attempts to demonstrate some form of
competitive pricing in Medicare were routinely undermined or
destroyed.
Nonetheless, the latest congressional
leadership proposal continues a tiresome pattern of bad federal
health policy that undercuts the effectiveness of serious
market-based health care reforms. Consider what happened in three
cases:
-
The Medical
Savings Account Demonstration Project of 1996 . The
language of the Health Insurance Portability and Accountability Act
of 1996 (the Kennedy-Kassebaum Bill) created a four-year
demonstration project, setting a time limit on the market
opportunities for developing and selling medical savings account
(MSA) products. The bill also imposed a cap of 750,000 policies and
limited the eligible population to firms with from two to 50
employees.
What
Happened. The demonstration project was hobbled by dozens
of statutory and regulatory conditions. Not surprisingly, it was
less than successful. Had the purpose of the project been to create
a robust market for MSAs, it could not have been more poorly
designed.
Since the enactment of the badly designed MSA
program, congressional champions of consumer choice and competition
have had little chance to expand on the demonstration. Indeed,
confronted by intense hostility in Congress, they have been forced
to concentrate on trying to undo the restrictions on the MSA
demonstration. With the current Medicare legislation, the
congressional champions of consumer choice are expected to accept a
massive Medicare drug entitlement as the price of liberalized MSA
rules.
-
The
Medicare+Choice Experiment of 1997. As part of the
Balanced Budget Act of 1997, Congress created the so-called
Medicare+Choice program.
What
Happened. Although it was accompanied by free-market
rhetoric of choice and competition, the Medicare+Choice program
turned out to be a textbook example of political opposition and
over-regulation, discouraging participation in health plans and so
reducing the supply of plans and depriving seniors of promised
choice. Moreover,
the problems associated with the administrative and congressionally
imposed restrictions became a pretext for opponents of consumer
choice and market-based competition to claim that choice and market
competition are unworkable and undesirable.
-
The Medicare
Competitive Pricing Demonstrations of the 1990s . In the
1990s, four "competitive pricing" demonstration projects were
established in the Medicare program to test a new form of private
health care plan. The demonstrations were in Baltimore, Maryland;
Denver, Colorado; Phoenix, Arizona; and Kansas City,
Missouri.
The most significant of these were the
demonstration projects created in the Balanced Budget Act (BBA) of
1997 in Phoenix and Kansas City. Under the BBA arrangements,
Congress set up a Competitive Pricing Advisory Committee, composed
of private-sector experts, to oversee the creation of a system of
competitive payments for the Medicare+Choice plans.
What
Happened. The aim of reformers was to create rational
incentives and price competition in Medicare. But the plan payment
system implemented in the Medicare+Choice program involved
administrative pricing, under which prices were set by government
rather than by the market.
This turned out to be both inefficient and
inequitable. As Urban Institute analysts Len M. Nichols and Robert
Reischauer observed in 2000, "In the case of M+C plans,
administrative pricing has both led to excessive Medicare spending
and created significant inequities for beneficiaries."
All four of these projects were successfully
undermined by political opposition and economic self-interest. The
policy experience was well summarized in 2000 by the editors of
Health Affairs in a special section on the demonstrations:
Recent demonstrations of the concept were
fraught with operational obstacles, fierce industry opposition at
the national and local levels, and congressional hostility. The
upshot: The demonstrations never fully materialized, which suggests
that such tests may not be feasible or even desirable.
Moreover, this successful opposition was
neither as ideological nor as intense as that being directed
against current efforts at Medicare reform.
Key Lessons from the Competitive Pricing
Demonstrations
Based on the previous competitive pricing
experiments alone, health policy analysts can point to a variety of
painful lessons:
Lesson 1: There
will be intense opposition from narrow special
interests.
These interests include doctors, hospital
officials, health plans, and other providers who have often
resisted having to compete with each other on the basis of price. According to Nichols
and Reischauer:
While it is common to talk about the
Medicare program as health benefits for the elderly, it is also an
important source of income for providers and plans. Competition and
the efficiency it produces will inevitably hurt some local
providers and plans.
Lesson 2:
Congressional delegations will ob-struct the
demonstrations.
Reflecting the strong self-interest of
local providers, state and local congressional delegations
frequently have lined up in opposition to Medicare competitive
pricing demonstrations that threatened the status quo. Often, these
delegations have been instrumental in enacting measures to block or
impede the implementation of such demonstrations.
This
was particularly the case with Medicare+Choice demonstration
projects authorized under the Balanced Budget Act of 1997. As
Nichols and Reischauer have explained:
Congress as a whole did not kill the
demonstrations it approved in the BBA. Rather, the leadership on
both sides of the aisle and the White House allowed a few members
to kill them, for reasons that had precious little to do with long
run Medicare reform policy.
Lesson 3: There
will be destructive congressional micromanagement .
Even
if Congress decides, as it did in 1997, to establish a
semi-independent body to make key decisions governing the Medicare
demonstration, it is unlikely that the demonstration will escape
congressional micromanagement, an intervention invariably designed
to make the process fail. "Over the history of the Medicare
program," as prominent health policy analyst Bryan Dowd and his
colleagues have noted, "Congress repeatedly has prevented HCFA [the
Health Care Financing Administration, which was then running
Medicare] from implementing efficient purchasing practices."
Lesson 4:
Demonstrations are not necessarily the easier road to
reform.
Demonstrations are often portrayed as
easier to enact and put into place than national reforms; but the
curious feature of a limited Medicare demonstration project, such
as that currently being proposed by the House and Senate
leadership, is that the reverse often turns out to be true. Perhaps
the best example of a sweeping national change is the comprehensive
physician payment reform of 1989, which resulted in a complete
overhaul of the method for paying all physicians, in every
specialty, who treat Medicare patients. Phased in nationally over five years,
it changed the entire payment practice in Medicare in one step.
This
lesson applies with special force to changing the system of
payments to private plans through Medicare reform. As Dowd and his
colleagues also note:
Paradoxically, it may be politically
easier, but riskier, to implement competitive pricing in Medicare
as part of national reform with no demonstration. Demonstrations
single out groups of beneficiaries and treat them differently from
their peers. When the changes that are being tested have a
significant and direct effect on all of the major stakeholders in a
site, demonstrations may be impossible. At least, based on the
record to date, Congress will defer to the complaints of sites that
have been singled out.
Reversing the Retreat from Serious
Medicare Reform
Serious Medicare reform means one thing:
creating a premium support financing system modeled on the superior
Federal Employees Health Benefits Program (FEHBP) as recommended by
the majority of the National Bipartisan Commission on the Future of
Medicare and cited as a model for choice and competition by
President George W. Bush. To this end, Section 241 of the House
bill would set up an FEHBP-style competitive system starting in
2010 and then phase in the program over a period of five years. The
Senate bill had no such provision.
However, although Section 241 of the House
bill was a major improvement over the competitive features of the
Senate bill, it would not have taken effect until 2010; and the
first wave of the massive baby-boom generation becomes eligible for
Medicare coverage in 2011. This would be a close call. Already, the
House bill's reform timetable would pose a serious political risk
to reform.
It
would have been far wiser to give new retirees a chance to carry
their private health plans into retirement as their primary
coverage at an earlier date while creating an infrastructure of
choice and competition early enough to absorb the coming
demographic shock of the baby-boom population. This would have
given Congress and the Administration time to make the necessary
adjustments well before the onset of the first wave of that huge
generation's retirees.
Moreover, by setting the date so far in
the future, the House provision, while laudable in itself, would
still have been vulnerable over the next several years to attempts
by relentless congressional opponents of any serious change in
Medicare--particularly those who champion a single-payer health
care system for the United States--to undermine any such
reform.
A Better
Option
A better option would be to strengthen the competitive
provisions of Section 241 of the House bill. This could be done by
starting the process of serious reform earlier, in 2007 or 2008. At
the same time, Congress could create the infrastructure of choice
and competition administered by a market-friendly agency and could
deem any private or public health plan covering new retirees, under
existing rules, eligible for premium support for the primary
coverage of retirees. FEHBP plans and state employee retiree plans,
for example, would be deemed automatically eligible.
Moreover, a new competitive system should
not be burdened by having to operate within rigid geographical
service areas or by being forced to comply with comprehensive
benefit standardization, both of which would inhibit plan
participation, flexibility, and innovation.
Conclusion
A
successful demonstration program of premium support has already
been conducted. It is the Federal Employees Health Benefits
Program, and it has been in operation for over 43 years. Predating
Medicare itself, the FEHBP has covered millions of workers and
retirees over that long period, including retirees who were never
covered by Medicare. Indeed, from 1960 to 1983, federal retirees
relied on the FEHBP's premium support system as their primary
coverage; its use as supplementary coverage for federal retirees
was not generally available until the enactment of amendments to
the Social Security Act in 1983.
The
FEHBP is superior to the Medicare program in every way: in the
richness and variety of its health plans and benefits; in its
administrative flexibility; in its rapid accession of new medical
procedures, treatments, and technologies; and in the relatively low
level of bureaucracy and regulation that governs the program. In
addition--contrary to the inaccurate claims routinely made by its
opponents--the FEHBP, particularly when controlling for the value
of benefits, is superior to Medicare in controlling health care
costs.
Members of Congress know these facts about
the FEHBP. That is why they have no excuse for retreating from a
long-term reform of Medicare by enacting a demonstration program
that is doomed to failure.
Robert E. Moffit,
Ph.D., is Director of the Center for Health Policy Studies
at The Heritage Foundation.