The federal insurance program is the only player in the health-care game with a pure incentive to control costs. But political resistance keeps it from fulfilling this role. Gradually expanding the program could be the answer.Expanding the number of people who are eligible to participate in Medicare could help contain health-care costs and provide benefits for individuals, employers, private insurers and rural hospitals. That proposal, unfortunately, doesn’t have enough political support to fly. But if we phase in a gradual expansion of Medicare over a good many years, we might negotiate a way for the federal insurance program to solve some of its own problems and help fix what ails the American health-care system.
The problem with escalating health-care costs is actually pretty simple.
The people who make decisions about medical costs (doctors, hospitals, insurance companies, drug companies, device manufacturers) have a vested interest in seeing us spend more money on health care, not less. More money in the system means more chances for them to grab a share.
The one player in the game with the power and interest to control medical costs is Medicare. Medicare has so much market power that it can buy care at reasonable prices. Patients have a powerful advocate, and it’s very popular with beneficiaries. It has its own center for experimenting with better pay incentives to health care systems to get better care for more people at lower cost. (Hospitals don’t get paid when they let things go wrong.) If Congress would permit it, Medicare could bargain for drugs at reasonable prices and pay only for devices that have been proven to work. But Congress will not.
Even though Congress won’t let a plan like this move forward all at once, what if we looked for a way to phase in this solution over time?
First, let’s look at the various players in the current system and the specific problems they face. Then, we’ll come back to the solution.
Medicare problems: Much of Medicare is paid for by a trust fund. People pay into it until they become eligible for Medicare health insurance at age 65. The Medicare trust fund is projected to have more expenses than income starting in 2024. The American population is getting old and not replacing all the working people who now pay into the trust fund that pays for a lot of Medicare. The good news is that Medicare expenses are about the only medical expenses that are NOT growing faster than the rest of the economy.
Insurance company problems: You might think that rising health-care costs would be bad for insurance companies. But they are a lot like credit card companies. The more money they handle, the more they get to keep by raising rates year by year. But as costs continue to rise, they may be priced out of the market, particularly for older workers with higher medical costs. Also, private insurance companies make some money from Medicare. Most people don’t realize that Medicare contracts with private insurance companies to process the Medicare bills for them for a small fee. In this role the private insurance companies are called Medicare’s “fiscal intermediaries.”
Employers’ problems: Under the Affordable Care Act, “Obamacare,” employers may get some federal money to help pay for health insurance, and they will pay a relatively small penalty to the government if they don’t buy health insurance for their workers. But it’s still private insurance. The cost of this insurance is expected to keep growing faster than company profits and Medicare. Most large employers self insure. They just use an insurance company like a credit-card company to pay their employee’s medical bills at rates negotiated with doctors and hospitals by the insurance company. These rates are much higher than Medicare rates. Their older employees are their most expensive.
The ordinary person’s problems: At the moment the health insurance marketplace is a maze of confusing offerings, all of which are too expensive for most people trying to buy their own insurance. This October things should get better as agencies called “exchanges” help decipher the various policies, weed out the junk offerings and arrange for federal money to help buy policies for those who need the help. Uninsured people are subject to shameless price gouging by most hospitals.
Doctor and hospital problems: Medicaid, the state-federal partnership program to pay for care for poor people, usually pays doctors and hospitals quite a bit less than the care actually costs. Medicare, the program for older Americans, on the other hand, pays what it figures a really efficient operation should cost; that is, less than most hospitals and doctors feel they should get. These unpaid costs are shifted to private insurance, which pays much more than the cost of the care that its policy holders get. But though they are paying much more than the care costs, health insurance companies insist that their policy holders get a “discount.” Therefore hospitals charge people without insurance even more. The uninsured pay the most, perhaps twice as much as insured patients and three or even six times the cost of their care. The result of all this cost shifting has to come together in an operation that ends up in the black.
Now, back to the solution: I think individuals or their employers should be able to pay a premium to buy into Medicare before age 65. Instead of making the change all at once, we should lower the age gradually, by, for example, one year of age per calendar year. That is, 64 year olds might buy into Medicare in 2015; 63 and 64 year olds in 2016, and so forth. Until age 65 these early enrollees and their employers, if any, would continue to pay their 2.9% payroll tax into the Medicare trust fund as they do now. That would cover their Medicare after age 65. In addition they would pay an annual “early enrollment premium” to Medicare.That would include the amount actuarially determined to be necessary to pay for the care they would use during that year. It would also include a small “Medicare solvency contribution.”
There is room for that solvency contribution in the difference between Medicare’s internal operating costs (“overhead”) of 2-3%, and private insurance’s internal costs and profit, 15-20% of medical costs paid out. This is in addition to the gap between the rates that private insurance pays doctors and hospitals and what Medicare pays. Some of that difference goes to make up the Medicaid shortfall.
The first few years the revenue coming into Medicare through the “solvency contribution” would be small, but as the early enrollment program gained years and numbers, the magnitude of the solvency contribution would grow.
Why would private insurers accept such an arrangement? Most simply, it would relieve them of their oldest, most expensive and dangerous clients, older folks approaching Medicare age. Some “sweetener” of the deal might have to be negotiated so that the largest insurers in each state would see some increased return through the “fiscal intermediary” role. (The promise of “fiscal intermediary” contracts were said to be the price of getting the Medicare legislation past the insurance companies in 1965.) The Medicare indirect cost rate would need to increase to cover the cost of collecting the new premiums. Finally, the progression would be slow enough for the industry to adjust.
What’s in it for employers? They would see their insurance rates go down as their older employees with more medical bills gain access to lower cost Medicare insurance instead of higher cost private insurance. Even though the employer would still be paying the Medicare early enrollment premium for those under 65, it might cost a quarter to a third less than private insurance.
What would happen to the typical hospital? Each year it would have slightly fewer privately insured patients to whom it can shift the unpaid costs from Medicaid. It must either get better rates from Medicaid and Medicare, or find less costly ways to deliver care. It might have to work with its doctors to do fewer unnecessary scans, lab procedures and consultations and control salaries. Each year the pattern of cost shifting will change as more and more Medicaid and Medicare patients enter the system. This will hurt a bit, but there will be no painless remedies. (The cost shifting from Medicaid to private insurance will probably break down as the Affordable Care Act matures, but that’s a different issue.)
Lowering the age of eligibility for “buy in” to Medicare by one year of age per calendar year seems glacially slow. That is a political and economic decision. Other rates may be proposed at the outset or after some experience with the process.
Why should Congress accept this idea? For people needing federal assistance money to buy health insurance, it will be cheaper to buy it through Medicare than from a private insurer. That is, it saves some federal money while reducing Medicare’s long term financial problem. The most cogent argument against the plan for some will be that it increases the role of the federal government in health care. Others will see in Medicare a buyer of health services with enough market power to begin to control costs, if Congress will let it.
Wayne Myers is a retired pediatrician and rural medical educator. He directed the federal Office of Rural Health Policy from 1998 through 2000 and was President of the National Rural Health Association in 2003. He and his wife, JoAnn, farm in rural Maine.