Thursday, January 31, 2013

An Agenda for Medicare Reforms

What's to be done about Medicare? The Kaiser Family Foundation has usefully pulled together a list of possible "Policy Options to Sustain Medicare for the Future." I especially liked that the report is fairly exhaustive in listing about 130 options (depending on how one counts options, suboptions, and sub-suboptions), and fairly honest in admitting that no realistic cost estimates for many of those options. Here, I'll start with a quick reminder of where Medicare is currently headed, and then list just 12 of the choices--those that in the KFF tally would reduce Medicare costs or raise Medicare taxes by at least $4 billion per year over the next  few years.

Medicare spending is taking off for two reasons: as the baby boomer retire, a rising proportion of Americans will become eligible, and continually rising health care costs will push up costs still further. The first figure shows projections for the rising number of Medicare enrollees and Medicare spending as a share of GDP. The second figure shows Medicare spending projected as a rising share of the overall federal budget.

Discussions of how to fix Medicare often head for happy talk about how, if we all just provide patients and doctors with the right information and incentives, and link them together with the right network of health information technology and thoughtful counselors, we can save billions while improving everyone's health. For a recent example, see this report from the United Health UnitedHealth Center for Health Reform & Modernization, which suggests that steps along these lines could save up to $542 billion in Medicare and Medicaid spending over the next decade. It's a cheerful story, and I'm certainly fine with pursuing these kinds of win-win possibilities. But the U.S. health care system has been facing ever-rising costs and talking about win-win solutions for several decades. While we're waiting for the cost savings from these kinds of more enlightened and efficient practices to arrive, we need to start thinking about some less pleasant options.

 Here's the list of 12 possibilities from the KFF report that would involve Medicare cost savings or revenue increases of at least $4 billion per year. In that report, all the proposals for better information sharing and quality control and improved decision making by patients and providers have the effect on costs and revenues listed as "Not available," which seems fair to me, given historical experience with attempts along these lines as overall health care costs have continues to rise. What's left are choices that sting (with the effect on costs or revenues in parentheses). The KFF Report gives a couple of pages of more detailed explanation for each of these, along with the other 100+ choices.

1) Raise the age of Medicare eligibility from 65 to 67 ($113 billion over 10 years)

2) 10% coinsurance payment on all home health episodes ($40 billion over 10 years)

3) Restrict first-dollar Medigap coverage ($53 billion over 10 years)

4) Increasing premiums for Part B and Part D: for example, raise Part B premiums by 2% per year until they cover 35% of total Part B expenses ($231 billion over 10 years)

5)  Increase Medicare payroll tax by 1 percentage point for all workers ($651 billion over 10 years)

6) Require manufacturers to pay a minimum rebate on drugs covered under Medicare Part D for
beneficiaries receiving low-income subsidies ($137 billion over 10 years).

7) Repeal provisions in the Affordable Care Act that would close the Part D coverage gap by
2020 ($51 billion over 10 years)

8) Reduce and restructure graduate medical education payments to hospitals ($69 billion over 10 years)

9) Rebase SNF and home health payment rates: for example, reducing payment updates for post-acute care by 1.1 percentage points ($45 billion over 10 years)

10) Adopt traditional tort reforms at the Federal level ($40 billion to $57 billion over 10 years)

11) Establish a combined deductible, uniform coinsurance rate, and a limit on out-of-pocket
spending, along with Medigap reforms ($93 billion over 10 years)

12) Set Federal contributions per beneficiary at the average plan bid in a given area, including
traditional Medicare as a plan, weighted by enrollment ($161 billion over 10 years)

A few thoughts:

1) One of the policy changes would dramatically increase costs. Congress has been playing a game for years now in which it lowballs the future costs of Medicare by proposing very large cuts  in payments to health care providiers that will take place a few years in the future. Then Congress perpetually pushes back those cuts. To their credit, the official Medicare actuaries have been quite blunt in pointing out "Why Official Medicare Costs are Understated." But if, for example, the currently legislated future cuts in payments to health care providers were replaced with a 10-year freeze on fees and a "only" a 5.9% cut in fees for non-primary care services each year for the first three years, Medicare costs would be $200 billion higher over 10 years than the current legislative estimates. If fees for health care providers rise at the rate of GDP growth, or a percentage point or two faster, then Medicare costs will be $300 billion or more higher over the next 10 years. Thus, take your first few hundred billion in cost savings or revenue increases above, and assume that it's going to go to sidestepping the huge future cuts to health care providers in current legislation.

2) I did leave out a few proposals on the KFF list for increasing taxes on other items and earmarking the funds for Medicare. For example, one could raise taxes on alcohol, tobacco, soft drinks, or employer-provided health insurance and earmark the funds for Medicare. But one could also raise those taxes and spend the money on deficit reduction or some other program, so at least to me, these are not specifically "Medicare" reforms.

3) Just for the record, you can't just add up the cost estimates several of these proposals with, because they interact in various ways. For example, option #3 on restricting first-dollar Medigap coverage overlaps heavily with option #11  on Medigap reforms. If the Medicare age was raised to 67, it would alter the cost changes from all of the other proposals.

My bottom line is that too many of the arguments over Medicare spending are magically nonspecific. Sometimes they describe innovations in health care delivery that would improve health and save money and leave everyone with a big rosy smile. I'm all for such changes, and I'll believe in their effectiveness as soon as they are actually effective in reducing costs--but not before. Other time, politicians talk tough about how they will just put a cap on Medicare spending, or just not let it rise at faster than some certain rate. Again, I'll believe in the workability of such caps when I've seen them operate for a few years.

In contrast, the list above is not a pleasant one. Some of these proposals reduce coverage for the elderly or require them to pay more. Some reduce payments to health care providers. One raises taxes on current workers. I am fully aware that none of these are popular options! Which options are more palatable is an argument for another day. But these are real choices, and the inexorable arithmetic of Medicare's rising costs is likely to force choices among these sorts of options.