Established in 1965, the Medicare program is the primary health insurance program for adults ages 65 and over and non-elderly people with permanent disabilities. Although Medicare has made a significant contribution to the lives of beneficiaries by improving their economic and health security, some of the problems that currently plague Medicare, e.g., rising costs and overwhelming complexity, were already present in the first year of the Medicare program. A Saturday Evening Post article from 1967 included a review of the first year of the Medicare program:
- First year cost significantly exceeded President Johnson’s forecast
- Medicare was more complex and confusing to operate than its sponsors predicted
- Medicare’s intricate billing procedures added millions to hospital overhead expenses
Continued efforts by Congress (i.e., the Board of Directors of Medicare) to address both the growing needs and numbers of beneficiaries, and reign in costs have resulted in two types of Medicare:
- Traditional, fee-for-service (FFS) Medicare: includes Part A (inpatient hospital, some skilled nursing, home health, and hospice); B (physician and outpatient services); and D (prescription drug coverage). FFS Medicare provides coverage to the majority (about 2/3s) of all Medicare beneficiaries. Unlike most private insurance plans, FFS Medicare has no annual out-of-pocket limit on cost-sharing requirements. Perhaps not surprisingly, 4 out of 5 FFS Medicare beneficiaries have some type of supplemental insurance coverage.
- Medicare Advantage Plans (MAPs) or Medicare part C: capitated, private insurance plans that typically combine parts A, B, and D into a single insurance product, often in exchange for a restricted delivery network. MAPs also have an annual out-of-pocket spending limit for services covered under Medicare Parts A and B. About one-third of all Medicare beneficiaries are currently enrolled in a MAP.
So our first observation is that the current Medicare structure has a lot of moving parts – not exactly what most people think of when they utter the words “single payer.” And since over half of all Medicare beneficiaries have supplemental coverage, it really isn’t “single” payer. Moreover, the operational oversight by Congress and the financial incentives under both programs are different. Perhaps not surprisingly, the programs show different results for similar populations of patients:
- FFS Medicare is characterized by wide variation in utilization, costs, and patient outcomes. In turn, innovations in healthcare delivery to address this variability require an act of Congress and are often subject to lobbying by various industry “stakeholders”, significantly hampering the development and dissemination of new models of care.
- In contrast, given their capitated status (and thus lower operational oversight by Congress) and desire to maintain star quality ratings, MAPs are incentivized and have the freedom to focus on keeping patients well. Not surprisingly, MAPs are where we find new models of care and innovative approaches to healthcare delivery (e.g., hospital care in the home, telemedicine, telemonitoring), that aim to curb unnecessary utilization (e.g., avoidable ER visits and hospital admissions).
So, why not MAPs-for-all? There are three legacy issues that must be addressed to make MAPs-for-all a viable option:
- Congress being heavily involved as the Board of Directors for all things Medicare
- Medicare financing
- Medicare payment rates
We have already alluded to #1 above and although this is a bigger challenge for FFS Medicare, Medicare Advantage plans are also subject to many of the same regulatory provisions (and lobbying efforts) as the traditional program.
What about Medicare financing? Medicare Part A (the Hospital Insurance Trust Fund) financing presents us with the biggest problem given its de facto pay-as-you-go structure. As stated by John Goodman in Politico:
“Workers have been repeatedly told that their payroll taxes are being securely held in trust funds. But they are actually spent the very minute they arrive in the Treasury’s bank account. …Today’s payroll tax payments are being spent to pay medical bills for today’s retirees. …if any surplus materializes, it is spent on other government programs. As a result, when today’s workers reach the eligibility age of 65, they will be able to receive benefits only if future taxpayers pay (even higher) taxes to support them.”
Moreover, a 2013 study by the Urban Institute has shown that Medicare benefits received greatly exceed taxes paid in. For a model family of 2 where both individuals worked and both individuals did not retire until age 65 in the year 2030, the couple would have paid $181,000 in Medicare taxes, but will receive over $600,000 in benefits. Thus, keeping the Medicare Trust Fund solvent beyond 2029 (the latest estimate from the Medicare Board of Trustees) would require either a reduction in Medicare benefits or further increases in Medicare payroll taxes.
And finally, the issue of Medicare payment rates. For physicians, cumulative Medicare payment rate increases (2.9%) between 2001 and 2014 have not kept up with general inflation (33.4%), not to mention the rise in physician practice expenses (60.6%). And while the passage of MACRA is a step in the right direction, it is far from being a panacea. The sitation isn’t much better on the acute care side – the average margin on Medicare business in hospitals fell from 6.3% in 1999 to -4.5% in 2010, declined further to -7.1% in 2015 and was estimated to drop to -10% in 2017. As a further testament to Medicare’s tendency to pay providers below cost, let’s take a look at the state of Maryland – the only state with “all payer rate setting” for hospitals through a Medicare waiver. A commission in the state is tasked with establishing “appropriate” payment rates for hospitals across all payers (Medicare, Medicaid, private insurance, etc). So how do these commission set payments compare to Medicare rates? A 2016 study by CMS showed that in 2015 regular Medicare paid 25.7% below what the commission determined to be appropriate payment for Maryland hospitals. As the above Medicare Trustees report indicates,
“…the prices paid by Medicare for most health services will fall increasingly short of the cost of providing such services. If this issue is not addressed by subsequent legislation, it is likely that access to, and quality of, Medicare benefits would deteriorate over time for beneficiaries.”
We often hear that Medicare is more efficient than private payers, yet this alleged efficiency likely comes from a mix of continuously underpaying providers, counting enrollees as Medicare beneficiaries even when Medicare serves as the secondary insurer, and benefit gaps that are solved by beneficiaries through supplemental insurance coverage. Moreover, the program faces significant funding challenges given rising healthcare cost and the demographic reality of an aging population whose healthcare is financed by a dwindling workforce – not exactly a recipe for success.