Republicans’ Medicare Fix – Defined Benefit Becomes Defined Contribution

The Republicans’ proposals for Medicare are quite different than the Democrats’ in that they begin with fundamental structural changes that will convert Medicare from a defined benefit to a defined contribution plan. The Democrat’s plan, see my last post, approaches the fix mainly with price controls.  

Politicians realize that Medicare will not be able to continue on its current track. Something has to change since the country will simply not be able to afford the inexorable growth and expenditures. But politicians do not like to take away entitlements so proposals generally are couched in vague terms and often with positions that are unrealistic.  

Congressman Paul Ryan, chair of the House Budget Committee and the Republication Vice-Presidential nominee in 2012, presented a proposal about two years ago embedded in the House budget proposal. It was passed in 2011 in the House with all no votes from Democrats and died in the Senate. But then, after negotiations with Senator Ron Wyden, a Democrat, they offered a joint bipartisan plan, one that few other Democrats have endorsed. The essence is to allow individuals to stay with original Medicare or select a plan from a private insurer that offers the same benefits as Medicare. It has no effect until 2023, i.e. only affecting those less than age 55 today. At that time, the age of Medicare eligibility would gradually rise over ten years from age 65 to age 67. Second, each beneficiary could choose to remain with traditional Medicare or chose a plan from a private insurer. The government would pay a set amount (“premium support”) towards either original Medicare or the private plan; the individual would have to pay any overage. The amount of premium support, according to the proposal, would be equal to the second lowest plan among the competing insurers, including Medicare, during the first year. Individuals of limited means would be able to purchase at discounted rates. The annual rate of rise of premium support would be limited to the rate of rise of the GDP plus 0.5%. This means that if expenses and hence premiums rose at a greater clip, the individual would have to shoulder the excess. In short, the Republican (or the  Wyden-Ryan) plan counts on competition in the marketplace to drive down costs. In practice, this is very similar to the way the Part D drug benefit works today. Thus Republicans point to the success of Part D to bolster their claim. The Democrats fault this plan in that if costs are not controlled, the onus falls on the enrollee, the one most vulnerable, especially in older ages, and not the insurer nor the government. 

Since the Republicans also state that they would repeal or largely repeal the ACA, then the added benefits to Medicare enrollees found in the ACA such as the annual health and wellness review and the preventive care/screening at no cost would presumably be repealed along with the IPAB and the enhanced reimbursement to PCPs. Presumably although silent on the issue, the Republican plan would also be to cut physician reimbursement by the formula driven 27% (or whatever amount is calculated in the future) of the SGR although, again, it is is very unlikely that either Republicans or Democrats will ever allow this to  happen. 

The end result of the Republican’s plan (or Ryan-Wyden bipartisan plan) would be to cut the rate of growth of Medicare to about 3.5%, the same as the Democrats’ plan but using a much different methodology. 

Two approaches, two very different methodologies, each attempting to achieve some slowing of the rate of rise of Medicare cost escalation. Both have pros and cons. Some thought that after the 2012 election, the parties would come together and develop a widely bipartisan plan endorsed by many on each side of the aisle but that has not happened nor has there even been reasoned attempts at bipartisan compromise – too bad because it is surely needed. Our elected representatives should come together to find a path forward rather than bicker and look for “points” to score against each other. That is not governing nor is it what they were elected to do.  

The next post will describe how Medicare could improve primary care quality and reduce costs beginning immediately.

 

 

Democrats Fix For Medicare –Price Controls

The two party’s approaches are quite different. The Democrats’ plans are contained generally in the Affordable Care Act (ACA) and for the most part are based on rate or price controls. This is Part 4 of my series on Medicare.  Politicians realize that Medicare will not be able to continue on its current track. Something has to change since the country will simply not be able to afford the inexorable growth and expenditures. But politicians do not like to take away entitlements so proposals generally are couched in vague terms and often with positions that are unrealistic. 

The most commented upon action today from the ACA/Obamacare is that the payments to Medicare providers will be reduced over ten years by $716 billion. These include reductions in hospital reimbursements and reductions in payments for Part C plans (Medicare Advantage.) 

These cuts were instituted to free up dollars for other aspects of the ACA. Some would call this “robbing Peter to pay Paul.” But others would argue that it is simple prioritization of the funds available; kudos to those who accepted the responsibility for making the difficult decision. Basically these are “price control” mechanisms but price controls rarely work; Medicare has used them for decades with obvious inadequate results. And as demonstrated over the years, providers will make up the difference with more visits, procedures, hospitalizations, etc. The proponents note that the plan only reduces payments to the providers; it does not cut benefits. How reducing provider payments will not ultimately result in less for the beneficiaries is a legitimate question. 

Physician payments were scheduled to be cut by about 27 percent December 31, 2012. This was based on a formula established in 1997 called the Sustainable Growth Rate. It goes into effect unless Congress explicitly exempts it. Over the years, Congress has repeatedly given such an exemption but only for a short time, allowing themselves to claim that eventually they would enact the cuts and use them to offset budgets. And true to form, Congress (Republicans and Democrats alike) – after the election –created another short term exemption. Hardly a satisfactory way to govern.   

The ACA recognizes that there is a shortage of primary care physicians (PCP) and that PCPs are under reimbursed. To this end, PCP reimbursements will be increased by about 10% over a few years’ time. Just how this increase corresponds with the 27% reduction or whatever number in the future is unclear. 

The ACA also creates some new benefits for enrollees. Chief among them relates to prevention and wellness. Each enrollee is allowed an annual extensive preventive medicine evaluation with no deductibles and no co-pays. Medicare also pays the full cost of screening such as mammography and colonoscopy, cholesterol tests, etc. along with appropriate vaccinations. An interesting sidelight – if a colonoscopy detects a polyp which is removed during the procedure, that converts it to a therapeutic procedure with deductibles and co-pays.  

The ACA created the Independent Payment Advisory Board (IPAB) whose job it will be to recommend steps to save dollars within Medicare without reducing benefits or without expecting beneficiaries to pay more - a tall order. They will be nominated by the President, ratified by the Senate, have prolonged terms and their recommendations become effective unless Congress votes them down en bloc, i.e., no cherry picking. Republicans have criticized this plan as allotting too much power in a small group of individuals not accountable to anyone. Democrats counter that the structure allows them to be honest brokers unaffected by competing constituencies.  

Recently, there has been controversy within Democratic circles. Howard Dean, a physician, former presidential primary candidate and Democratic Party chair, recently wrote an op-ed in the Wall Street Journal that the IPAB should be repealed because it will not control costs, will become essentially a rationing organization and will lead to much added bureaucracy in medical care delivery. He added that rate setting has never worked in the past forty years. Within two days, Peter Orszag, former director of the Office of Management and Budget for President Obama retorted to the contrary on Bloomberg View. Clearly it is controversial.  

Altogether, the Democrat’s plan is projected to reduce annual Medicare cost escalation from the currently expected about 4% to about 3.5% per year over the coming decade. This may not seem like much but compounded each year it really adds up. 

In my next post, the Republicans’ plan – quite different from that of the Democrats.

 

 

Medicare Is Not Free, As Many Would Believe.

A retired couple can expect to spend about $6000 per year (or more) for Medicare. And since Medicare does not “cover” all costs, there will be added expenses as well. 

Part A, generally for hospitalization, is paid fully by the Medicare Trust Fund supported by the Medicare tax described in my last post, which you paid into all of your working life.  Part B, generally physician fees, is paid 50-50 by the individual and the federal government from general tax revenues, not the Trust Fund. In 2013 the enrollee fee is $105 per month, progressively higher for those of greater income.  

Since Medicare Part A and B pay for about 75% of covered services, most individuals purchase a Medigap policy sold by private insurers. There are multiple “levels” of Medigap coverage as specified by the government, each level costing more. Medigap policies only pay toward the part of covered services that Medicare does not pay for. Hence Medigap polices do not assist with services that are not covered by Medicare. [Those with a defined benefit federal, state or local government, company or union pension often have built in health care coverage which means that they have Medicare Part A plus pension-paid Part B and a pension-sponsored supplement that may also pay for non-Medicare covered services such as drugs, vision and hearing plus some or all of the various Medicare deductibles and co-pays.]  

Non-covered services would include extended stays in the hospital, many complementary medicine practitioners, certain at home care such as IV antibiotics, etc. In addition, Medicare (as with almost all commercial insurance) does not cover indirect healthcare expenses such as travel to a specialty center, overnight accommodations, parking, mileage, etc. Not to suggest that Medicare should pay for these expenses but of course these are costs nevertheless that may eat into a retired person’s savings rapidly. 

Part D, the drug coverage program, is paid jointly by the federal government out of general tax revenues and by the individual. Basically, the government gives private insurers a set amount per enrollee (“premium support”) which is equal to about 75% of the expenses of running the program and the insurer then collects whatever is needed to make up the difference from the enrollee. By offering different levels of coverage, an individual can spend more or less that the remaining 25%.  Part D premiums per person have a wide range among participating insurers with an average in 2013 of about $40 per month. However, the costs can still be high for the average person who needs multiple prescription drugs. Generics may be fully covered or have only a low co-pay. But brand name or newer medications may require very high co-pays or are not covered at all. And once a threshold of $2970 in total drug costs has been reached, Part D offers only partial coverage (the coverage gap) until an individual has reached a total out of pocket cost of $4700 after which “catastrophic coverage” kicks in and Medicare then pays 95%. This has been called the “donut hole” and is being largely eliminated over time by the ACA/Obamacare legislation.  

Thus Medicare is not free. A retired couple can expect to spend about $6000 per year (or more) for Part B ($1200/year X2), Part D ($500/year X2) and a Medigap policy (about $1200/year X2). Add to this the cost of non-covered services, deductibles and co-pays and uncovered drug costs and the total costs of care can be quite high. Indeed over 10% find they are spending over $8000 per year related to Medicare-covered services, perhaps substantially more for other services.  

There is another Medicare option known as Medicare Advantage or Part C. Basically private insurers provide the same coverage as traditional Medicare in a managed care approach with a limited physician and hospital network. Urgent and emergent care must be covered no matter where provided. The insurer receives an amount of money per enrollee from Medicare that approximates what Medicare calculates the average beneficiary would consume under Part A in a given year for that geographic area plus a bonus amount. This extra amount is set to decrease over time as a result of the ACA legislation. Private insurers then charge for Part B and have found that they can offer the Medicare-mandated coverage and have enough money left over that they can also offer added coverage such as dental, vision, hearing, etc. Usually these programs offer drug coverage at much lower rates than Part D or even no added cost to the individual. So a person can often save on what they would have paid for Medigap and Part D insurance and still have broader coverage.  

About 25% of Medicare enrollees have opted for Medicare Advantage, finding that they get more coverage yet spend the same amount or actually save money. Removing those with pension-related assistance with Medicare (see above), the percentage who opt for Medicare Advantage is very high. As fewer and fewer Americans will retire with defined benefit pensions in the future, it is likely that the numbers using Part C will increase much further. 

So, at $6000 or often substantially more, a retired couple may end up contributing a substantial amount of their annual income toward their health care insurance coverage. With rising annual health care expenditures per capita, and with seniors having many expensive-to-treat chronic illnesses, it can only be expected that the premium costs for Medicare Part B and Part D will continue to rise. There is nothing in the ACA or any other pending legislation that would significantly reduce these annual expenditures. The critical issue is to find ways to reduce health care costs so that insurance costs can be reduced or at least be maintained level. Some recommendations to do this will be offered in later posts.  

The next two posts will describe the opposing approaches of the two political parties.''

 

 

“Why Are Medicare Costs Rising So Fast? – It’s Actually Not Complicated”

My last post was the beginning of a primer on Medicare. Medicare covers about 50 million older Americans for general health care and covers about 75% of covered services or 50% of total health care costs of these seniors. Medicare, as the largest single insurer, sets the standard for reimbursement rates across all insurers. It tends to pay slightly less than costs, leading hospitals and doctors to cost shift or charge others a higher rate. Medicare costs are increasing at about 4% per year and will reach $1 trillion by 2022, an unsustainable cost to the government (tax payer). 

There are multiple “parts” to Medicare. Part A is principally for hospital care; Part B is for largely for physician costs and Part D is the prescription drug benefit. Part C or Medicare Advantage is a private insurer managed care alternative to Part A which incorporates Part B and often Part D into one plan. 

Each of us and our employer pays 1.45% (total of 2.9% combined or for a self-employed worker) of earned income into the Medicare Trust Fund each year for Part A. Beginning in 2013, the tax is 3.8% on earned and unearned (i.e., salary or wages plus interest, dividends and capital gains excluding interest on municipal bonds) income above $200,000 for a single person and $250,000 for a married couple. The money paid in is not invested and set aside for use when the individual reaches 65. Mostly it goes to pay for the hospitalization costs of today’s beneficiaries – it is a generation transfer tax. As the population continues to age and continues to live longer, there will a relatively smaller working population to pay the annual bills. It is estimated that the current 50 million enrollees will expand to 80 million by 2030 and the ratio of workers to enrollees will drop from 3.7/1 to 2.4 /1. So the combination of rising healthcare costs, more beneficiaries living for longer times and a relative shrinking of the taxable base means that the Trust Fund will ultimately become insolvent.  

Medicare enrollees tend to have chronic illnesses; 85% have at least one and 50% have three or more. Aging brings on chronic impairments (“old parts wear out”) such as impaired vision, hearing, mobility, dentition, bone strength and cognition. Additionally, enrollees also suffer from the chronic illnesses largely but not entirely the result of life styles. These include obesity, hypertension, heart disease, diabetes, chronic lung disease, cancer and many others.  Chronic diseases are inherently difficult to manage, will last a lifetime (some cancers excepted) and are expensive to treat. Chronic illness results in over 70-85% of claims paid. 

But these chronic illnesses consume more than they need to for a few very clear reasons.  First has been a lack of quality preventive care and attention to wellness. Second has been the lack of careful care coordination. These patients need a full multi-disciplinary team of providers to assure complete care (e.g., the diabetic patient will need an endocrinologist, nutritionist, exercise physiologist, podiatrist, ophthalmologist and others over time). But any good team needs a quarterback and the logical choice, the primary care physician, has been marginalized by Medicare for years. The result is that PCPs only allot about 15 to 20 minutes per patient visit (which translates into about 10-12 minutes of actual face time) – not nearly enough time to deal with multiple chronic issues, multiple prescriptions let alone take the time to call a specialist to explain the rationale for a referral and seek a prompt appointment for the patient. 

These are the basics of Medicare and the major reasons for continuing cost escalations. The increasing costs mean that it makes little sense to promise “Medicare as we know it” to persist in its current state into the future. Change is mandatory. The question is not whether there will be change but how to make changes in a manner that protects the medical and the financial health of the beneficiaries both today and into the future while keeping the benefits affordable. The Democrats and the Republicans both agree that change is mandatory but they offer widely divergent approaches to cost containment.  

The next post will evaluate the actual costs of Medicare for the average retired couple.

 

 

Will “Medicare As We Know It” Persist Or Will It Change?

With the nomination of Congressman Paul Ryan last summer as the vice presidential candidate of the Republican Party, Medicare became front and center in the political discussions and, although there is less attention just now, it will return with a vengeance once again to dominate. To understand the dialogue requires an understanding of Medicare, how it works, where the money comes from, how it is spent and why there is such concern for its future costs. Here is an overview in a few bite sized pieces spread over 8 parts.  

Medicare was designed in 1965 to serve as “major medical” insurance to cover the unexpected large expenses of, say, surgery or hospitalization. Individuals paid out of pocket for routine care. Medicare has morphed over the years; it now covers preventive care, screening, annual exams and most routine care. This broadening of coverage, the relentless rise of healthcare costs and huge enrollee additions by baby boomers will continue to increase Medicare expenditures.  

Medicare covers about 50 million older Americans for general health care insurance and another approximately 8 million with coverage for disabilities and end stage renal disease.   

Medicare pays about 75% of covered services and about half of the total costs of health care for older Americans, i.e., it pays for only certain specified medical services or “covered” costs. The remaining 25% of covered services as defined by Centers for Medicare and Medicaid Services (CMS) is paid for either via a private Medigap policy and/or out of pocket by the beneficiary. Since 2004, prescription drugs have also been covered.  

Interestingly, Medicare is not true catastrophic insurance. For example, it pays in full for the first 60 days of hospitalization but then there is a co-pay of just under $300 for each of the next 30 days. There is no coverage after 90 days although each person is allotted a lifetime reserve of 60 days, each with a co-pay currently of just under $600 per day. 

Medicare is such a large part of the health care insurance market that it establishes two critical parameters for all of health care reimbursement. First, it sets the standard level for reimbursement which all other insurers ultimately follow.  

Second, Medicare does not pay it full share of the costs it does cover. Basically it pays some percentage below actual costs leading the providers – hospitals, doctors, or other  - to cost shift, i.e., charge their other patients who have commercial insurance a higher amount than costs to make up for what they did not receive from Medicare. What this means for the young person who has either a company sponsored health insurance plan or buys it directly in the individual market, is that he or she paying a “Medicare tax” over what the insurance would have otherwise cost. This is on top of the Medicare Trust Fund tax of 2.9%. 

Government estimates are that Medicare will increase its expenditures over the coming decade at a rate of about 4% per annum. This is greater than both inflation and the GDP rate of growth. Medicare which now accounts for about 15% of the federal budget will rise from almost $600 billion per year now to about $1 trillion per year by 2022 – levels that will severely strain the capability of the system. Indeed, it a growth rate that is just not sustainable; it will eventually bankrupt the federal treasury.

Next – Where the money comes from and why it costs so much.