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  • 1. TheFutureofHealthInsurance forOlderAmericans Editedby KennethS.Apfel and BettySueFlowers CenterforHealthandSocialPolicy LyndonB.JohnsonSchoolofPublicAffairs TheUniversityofTexasatAustin LyndonBainesJohnsonLibrary
  • 2. Big Choices: The Future of Health Insurance for Older Americans Proceedings of a Conference Held on April 22-23, 2004 Edited by Kenneth S. Apfel and Betty Sue Flowers Second in a Series Big Choices in American Social Policy Center for Health and Social Policy Big Choices Series No. 2 Lyndon B. Johnson School of Public Affairs The University of Texas at Austin Published in cooperation with the Lyndon Baines Johnson Library 2006
  • 3. Library of Congress Control No.: 2006925030 ISBN–10: 0-89940-121-X ISBN–13: 978-0-89940-121-8 ©2006 by The University of Texas at Austin All rights reserved. No part of this publication or any corresponding electronic text and/or images may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Printed in the U.S.A. All rights reserved Cover design by Doug Marshall LBJ School Office of Communications Contact information: Office of Communications, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, Box Y, Austin, TX 78713-8925. www.utexas.edu/lbj/pubs/ Supported by The Commonwealth Fund, a New York City-based private, independent foundation. The views presented here are those of the authors and not necessarily those of The Commonwealth Fund, its directors, officers, or staff.
  • 4. Contents Tables v Figures vii Preface ix Acknowledgments xi Part I. Medicare and Future Challenges 1 Chapter 1. Introducing the Issues 3 Presentation by Kenneth Apfel Part II. The Medicare Debate 13 Chapter 2. Medicare Reform 15 Panelists: Marilyn Moon and Stuart Butler Chapter 3. Medicare Prescription Drug Benefit Reform 37 Panelists: David Certner, Jeff Lemieux, and Priscilla Chatman Part III. Approaches to Medicare Reform 63 Chapter 4. Framing Policy Approaches for Medicare Reform 65 Presentation by Pamela Herd Part IV. Civic Dialogue and Deliberation: What the Public Has to Say 75 Chapter 5. Big Choices: The Practice and Potential for Public Deliberation 77 By Taylor L. Willingham and Vanessa L. Davis Chapter 6. Framing the Issues for Public Discussion—Three Options 81 Chapter 7. Medicare: A Deliberative Dialogue 87 Part V. Policy Alternatives: Additional Resources 99 Chapter 8. Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future 101 by Shea McClanahan, Kenneth Apfel, and Parisa Fatehi
  • 5. — iv — Big Choices: The Future of Health Insurance for Older Americans Chapter 9. How Beneficiaries Fare under the New Medicare Drug Bill 133 by Marilyn Moon Chapter 10. Social Values and Medicare Reform 155 by Stuart M. Butler Chapter 11. Medicare Changes That Could Affect You 171 by AARP Chapter 12. Issue Summary: Medicare Modernization Act of 2003 183 by Jeff Lemieux Chapter 13. The New Medicare Law 199 by the National Committee to Preserve Social Security and Medicare Chapter 14. Understanding the Options: Big Choices and Medicare Reform 203 by Pamela Herd Contributors 223
  • 6. Tables Table 1.1 Older Americans: Yesterday, Today, and Tomorrow 10 Table 3.1 Medicare Complexity: The Standard Benefit Design 39 Table 3.2 Low-Income Medicare Beneficiaries Helped: 13.4 Million 43 Table 3.3 Conference Agreement on Drug Proposal 48 Additional tables appear in the reprinted articles in Chapters 9 and 11.
  • 7. Figures Figure 1.1 Past Approaches to Rising Costs of Medicare 5 Figure 1.2 Number of Medicare Beneficiaries 7 Figure 1.3 Medicare Costs in the Future 8 Figure 1.4 Medicare’s Financial Outlook 9 Figure 3.1 Medicare Standard Benefit Design 39 Figure 3.2 Impact of New Medicare Law in 2006 44 Figure 3.3 Four Big Entitlements 46 Figure 4.1 Health Care Costs As a Percent of the Economy 67 Figure 8.1 Number of Medicare Beneficiaries 115 Figure 8.2 Population Pyramids, 1950 to 2030 118 Figure 8.3 Medicare Expenditures As Percentage of Gross Domestic Product 120 Figure 8.4 Medicare Prescription Expenditures (Part D) As Percentage of Gross Domestic Product 121 Figure 8.5 Medicare Monthly Premiums Paid by Beneficiaries 122 Figure 8.6 Medicare Sources of Non-Interest Income and Expenditures As a Percentage of the Gross Domestic Product 124 Additional figures appear in the reprinted articles in Chapters 9 and 11.
  • 8. Preface This book offers proposals for approaching one of the most significant choices now facing Americans—how to meet the challenges to Medicare. Our objective in spon- soring this book and the symposium on which it is based (held at the LBJ School on April 22-23, 2004) is to create a clear picture of the policy choices on all sides of the Medicare debate in order to help Americans create informed opinions about issues that deeply affect their lives. To accomplish this objective, we’ve organized the book in a way that we hope will offer the reader as much—or as little—as he or she might want to know about a particular approach. We also offer practical suggestions on citizen discussions about the issue, including a template for framing the issue for public discussion in the fairest possible way. We begin with an overview (Part I, Medicare and Future Challenges) that offers a broad summary of the key choices that we face in relation to this important social program. This overview is followed by Part II containing brief presentations that analyze the challenges from a number of different vantage points. Part III summarizes the three major policy approaches for Medicare reform. Part IV focuses on civic dialogue and deliberation, first explaining what we mean by those terms; then offering a template that compares the three approaches to the Medicare Challenge in a form that can be used for citizen dialogues; and, finally, reporting on a citizens dialogue using this template. The organization of this book is intended to be helpful to those who want to un- derstand the issue in greater depth than is possible through simply listening to news reports. We also hope that by offering a non-partisan template for discussion, we can encourage classroom and citizen deliberation as an alternative to debate and partisan argument. This hope reflects our conviction that the best public policy is created when grassroots engagement meets informed expertise. For this meeting to be pos- sible, a common language must be available so that an informed public can express its opinion in a nation-wide “conversation.” Such expressions can offer a counterweight to the capture of public policy decisions by private interests. The LBJ School is committed to fostering the professional expertise necessary toprofessional expertise necessary toprofessional create effective public policy. The LBJ Library is committed to fostering the necessary level of public expertise—by sponsoring symposia, lectures, public issues forums, andpublic expertise—by sponsoring symposia, lectures, public issues forums, andpublic books like this one—to help ensure that public policy is not only effective but also in the public interest. We hope that this partnership between a public policy school and a presidential library will illuminate the “Big Choices” that Americans face. Betty Sue Flowers Director LBJ Library and Museum
  • 9. — x — Big Choices: The Future of Health Insurance for Older Americans Kenneth S. Apfel Sid Richardson Chair in Public Affairs Director of the Center for Health and Social Policy LBJ School of Public Affairs
  • 10. Acknowledgments A number of people dedicated a great part of their lives to ensure the success of this endeavor. First and foremost, we want to thank Kristine Niemeyer, Senior Program Coordinator for the Center for Health and Social Policy at the LBJ School of Public Affairs, for her patience, perseverance, and professionalism, which helped to move this project to fruition. We also want to thank two LBJ School graduate students who worked as research assistants for this project. Shea McClanahan and Parisa Fatehi both helped to write, research, and provide logistics for the conference as well as this book. We also want to thank Lauren Jahnke for her editorial support as well as Cath- erine Robb, Chairman of the Future Forum, and Taylor Willingham for organizing the Medicare dialogue that provided citizen feedback. We also want to thank Sharon Tutchings at the LBJ School and Marge Morton, Judy Allen, and Tina Houston at the LBJ Library for coordinating the logistics of the conference and ensuring that all participants and attendees had a worthwhile experience. Lastly, we want to thank the Foundation for Insurance Regulatory Studies in Texas, the Commonwealth Fund, the Sid Richardson Chair at the LBJ School, and the LBJ Library and Museum. Without all of their support, we could not have been successful. Kenneth S. Apfel Sid Richardson Chair in Public Affairs Director of the Center for Health and Social Policy LBJ School of Public Affairs Betty Sue Flowers Director LBJ Library and Museum
  • 11. Part I Medicare and Future Challenges
  • 12. Chapter 1 Introducing the Issues Presentation by Kenneth Apfel Kenneth Apfel: This is the second in our series of conferences on “Big Choices” fac- ing the country. Last year, our conference was on “The Future of Health Insurance for America’s Families.” This year, the topic is “The Future of Health Insurance for Older Americans,” with a specific look at Medicare, a very critical issue for all of us. First, before starting, I want to thank the LBJ Library and the LBJ Foundation for their support. I also want to thank the Foundation for Insurance Regulatory Studies of Texas as well as the Commonwealth Fund. Support for this activity has been criti- cal to Betty Sue Flowers and me, and we hope to continue these symposia into the fu- ture in order to keep a dialogue going about these very big issues facing the country. We’re here to talk about the future of health insurance for older Americans. But to put the future in context, we need to start off not only with a discussion about the present, but also a little discussion about the past. About a half-dozen times in the 20th century, the United States has tried to take a big action on providing health insurance for Americans. But while this issue has been debated many times in the past century, only once have we produced something really big—and that happened through the leadership of a person whose office was just down the corridor from here after he left the presidency. The creation of Medicare and Medicaid in 1965, under President Johnson, was an enormously big step for this country. Let’s start by going back to pre-Medicare times. In 1960, poverty rates for older Americans were about 35 percent. That’s over one in three older Americans in 1960 were living in poverty. At least 44 percent of older Americans were uninsured. A large number of older Americans were working still, and one of the reasons they were working was to keep their health insurance. Over half of older Americans no longer in the work force had no health insurance. And the proportion of our older population back then was relatively low, about 9 percent. When we look back to the Johnson era, the significant benefit increases to Social Security had a major impact on poverty rates in the 1960s. The establishment of Medicare in 1965 provided health insurance for almost all older Americans. These are major accomplishments.
  • 13. — 4 — Big Choices: The Future of Health Insurance for Older Americans Now I’ll provide a brief picture of Medicare for those of you who need to get a snapshot of how the program works so we can frame the debate for the rest of today and tomorrow. When Medicare was started, it was funded primarily by a payroll tax paid by work- ers to finance the Medicare benefits for those who had already retired. The tax was about a third of a percentage of payroll. So somebody making $300 a week would be paying about a dollar a week for the Medicare part of the payroll tax, and employers matched that payment. In addition, an optional Medicare Part B program, which paid primarily for physician services and which almost all older Americans signed up for, is paid for by premiums as well as by general tax revenues. So there are three big sources of funding—payroll taxes (the direct intergenerational part), premiums paid by older Americans, and general tax revenues paid by all of us. While the Medicare program is incredibly important, we all need to recognize that from the beginning, it had sizable coverage gaps. Long-term care has never been covered under Medicare, for example. Prescription drugs have not been covered by Medicare—although, frankly, in 1960, prescription drugs were not that big a part of our health care budget, and even many private health care plans did not have a pre- scription drug benefit. Also, catastrophic coverage was not part of Medicare, nor was most preventive care. So, the benefit package for Medicare, while important, is really a relatively modest level of acute care coverage, compared to most private-sector in- surance plans. Because of that, about 85 percent of older Americans have some form of supplemental coverage in the form of Medigap policies, or employer-provided health insurance, or sometimes Medicaid to supplement the Medicare package. So in 1965, an important program was created, but it had significant gaps and modest coverage. What’s happened since then? As the health care system has evolved over time, Medicare tried to catch up with its coverage. For example, as more health care expenses took place out of the hospital, such as in ambulatory surgical centers, Medicare would reimburse for those activities as well. Hospice benefits, which didn’t exist back in the 1960s, have been added, as well as expanded home health care and more hospitalization. During that same time, premiums have increased. The pre- mium in 1970 was $4 a month, and in 2000 was $45 a month. Other revenues have increased, but so have the number of beneficiaries and the cost of health care. When you have the number of beneficiaries increasing and you also have health care costs increasing per person, you’re going to end up with some very sizeable cost increases, which we’ve seen in Medicare. Medicare spending has gone up—it is now one of the largest federal budget items. It’s about 2.5 percent of our entire economy, and about 13 percent of the federal budget. It is now the third-largest government program behind Social Security and defense. An important program? Absolutely! Costly? Absolutely, and in my opinion, worth every penny. But to understand Medicare, you have to understand the cost issues as well as the important benefit issues that are out there. And costs have gone up quite substantially.
  • 14. — 5 — Introducing the Issues So how have we tried to deal with these cost increases since 1965? As Figure 1.1 illus- trates, there have really been two ways—increasing revenues and containing costs. A number of steps have been taken to increase revenues so as to provide an ad- equate financing base for the Medicare system. For example, payroll taxes, which used to be one-third of a percent of payroll, is now about 1.5 percent of payroll—so that’s a substantial increase in the share of payroll taxes that workers have to pay for the Medicare program (matched by their employers). Secondly, in 1993, the wage cap was taken off the Medicare program so that pay- roll taxes are paid not only on that first $80,000 or $90,000 of income, but on all of it. So the Bill Gateses and the Michael Dells pay 1.5 percent of payroll for their entire wages—not their stock options, but their entire wages. Third, monthly premiums have increased from about $4 in 1970 to about $67 now. Fourth, Social Security benefits were taxed, first in 1983 for monies to be put into the Social Security system, then again in 1993 for those added revenues to be put into the Medicare program. Lastly, since part of Medicare financing comes from general tax revenues, this has increased very substantially over time as Medicare’s overall costs have increased. On the cost containment side, there has been a two-pronged effort. On the regula- tory side, beginning in 1983, Medicare started paying hospitals a fixed amount based on a particular diagnosis to try to help hospitals control their costs, and as an incen- tive to change their behavior. Similar changes were made for physician reimburse- ments as well as for home health care and skilled nursing facilities. A second approach was an attempt to encourage market-based initiatives. HMOs have been part of Medicare for many years, although just a very small part. But start- ing in 1997, Medicare Plus Choice was enacted to try to create better incentives for individuals to choose private plans. The idea here was for beneficiaries to choose pri- vate plans to get better benefits, like prescription drug coverage or other things, and that competition from these plans would create incentives for cost control. So where has all this taken us from 1960 to the year 2000? First, poverty rates for older Americans are down dramatically from 35 percent to 10 percent. The propor- tion of the uninsured since 1960 is down even more dramatically from 44 percent to 2 percent. I think these two changes form the greatest success story for the elderly in Figure 1.1 Past Approaches to Rising Costs of Medicare Raise Revenues 1. Increase payroll tax 2. Remove wage cap on taxable income 3. Raise premiums 4. Tax Social Security benefits 5. More general revenues Contain Costs 1. Increased regulatory cost controls 2. Encourage market-based initiatives (HMOs, Medicare+Choice)
  • 15. — 6 — Big Choices: The Future of Health Insurance for Older Americans 20th-century American domestic policy because they resulted in a dramatic reduc- tion in poverty and near-universal health coverage. I also want to point out that 10 percent of older Americans are still living in pov- erty, including about 20 percent of elderly widows, African Americans and Hispan- ics. And though virtually all older Americans have health insurance, health care is still a major expense for the elderly. There are still real needs out there, but overall this is a profoundly important success story. Health expenses, which consumed about 20 percent of total income back in 1960, still consumed about 20 percent of income in 2000. Seniors’ incomes grew considerably during that period of time. So what can we conclude about Medicare? I think we can conclude that it’s one of the most successful programs of the 20th century. It’s clearly helped older Americans to gain access to basic health care services. We can also conclude that there are still some continuing gaps in coverage, and they are very real—prescription drugs, in particular. We will focus on prescription drug coverage during this conference. At the end of the Reagan administration, there was an effort to provide prescription drug coverage as part of the Catastrophic Care Act. It was enacted in the last year of the Reagan administration and repealed in the first year of the Bush One administration. While it provided a prescription drug benefit, but it also greatly increased premiums, engen- dering quite a bit of negative response, so it was repealed. So the notion of creating a prescription drug benefit is not a new issue. While about three-quarters of older Americans have some kind of prescription drug coverage, only about half have comprehensive prescription drug coverage. About a third of older Americans have prescription drug costs that are only about $500 or less. But another third have costs that are $2,000 to $5,000. So there are a lot of older Americans with very high prescription drug costs, and this is a large unmet need. It’s one of the reasons there has been such an effort to try to provide a prescription drug coverage benefit to fill one of the important holes in the Medicare program. It is clear that the Medicare program has come a long way since 1965. Where are we headed in the future? More specifically, where are we headed on the number of beneficiaries, on costs, on premiums? And what’s the outlook for the financing pic- ture of the Medicare program in the years to come? As Figure 1.2 shows, the number of Medicare beneficiaries is scheduled to double in the next 30 years. It doubled from 1970 to the year 2000, from about 20 million to about 40 million. And it’s scheduled to double again by about 2030. But because we won’t have the same kind of labor force growth in the next 30 years that we did the last 30 years, we’re going to have a growing problem, with real fiscal pressures as my generation moves toward retirement. The projections for what Medicare will cost in terms of the overall economy are also scheduled to go up quite considerably in the future—from around 2.5 percent of GDP now to up around 7 percent by 2030. That’s 7 percent of our entire economy, with increases due to a combination of more older Americans and higher health care
  • 16. — 7 — Introducing the Issues costs. The prescription drug benefit alone may cost a couple of percentage points of GDP in 30 years. (See Figure 1.3.) So what can we conclude? First, the number of older Americans will increase. The baby boomers are heading toward retirement. Second, health care costs will likely continue to increase. Health care costs were 5 percent of the economy in 1960 and were 15 percent of the economy in 2004. And they are projected by 2012 or so to be up around 18 percent of the economy. So health care costs continue to rise, and the number of older Americans continues to rise. Third, the health costs for older Americans will also likely continue to rise. Back when Medicare was first created, older Americans were paying about 20 percent of their total income for health care. Now it’s back up around 20 percent again, and that trend is not heading down—if anything, it’s going up. Fourth, Medicare premiums are likely to continue going up. It’s a tough proposi- tion older Americans face. Looking at premiums as a percent of our economy, they’ve gone up from about one-tenth of a percent back in 1970 to about half of a percent of our economy, and are projected to go up to about a full percent of our economy Figure 1.2 Number of Medicare Beneficiaries Elderly Disabled & ESRD 3.03.0 3.3 5.4 7.3 8.7 8.6 20.4 20.4 25.5 28.4 31.0 34.3 34.1 39.6 38.6 45.9 52.2 61.0 68.2 76.880 70 60 50 40 30 20 10 0 1970 1980 1990 2000 2010 2020 2030 Calendar YearYearY MedicareEnrollment(millions) Source: Centers for Medicaid and Medicare Services, CMS Chart Series, Medicare Program Information, Profile of Medicare Beneficiaries, 2002. Online. Available: http://www.cms. hhs.gov/charts/series/sec3-b1-9.pdf. Accessed: June 1, 2004. Note: ESRD means End-Stage Renal Disease; numbers may not sum due to rounding.
  • 17. — 8 — Big Choices: The Future of Health Insurance for Older Americans Source: 2004 Trustees Report, Hospital Insurance and Supplementary Medical Insurance Board of Trustees. Figure 1.3 Medicare Costs in the Future 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2001 2006 2010 2015 2020 2025 2030 Calendar YearYearY MedicareExpendituresasPercentageofGDP within the next 30 years. So premiums are rising, and out-of-pocket costs are rising for the elderly. All of these trends will increase pressure over time on Medicare. Each year, the Social Security Board of Trustees issues a report on the long-term outlook for Social Security and Medicare. The projection from the new trustees report indicates that Medicare will probably be the largest government program within 20 years, larger than Social Security. And within 15 years, the trust fund that finances the Medicare Part A program, the hospitalization costs, may be insolvent. (The trustees make pro- jections over the next 75 years.) Under these projections, over the next 75 years revenues grow considerably, but not anywhere near the increase in expenses. So if these projections are accurate, we’ll be spending as much in 2076 on the Medicare program as we do now for our entire health care system for all Americans. Clearly, if this chart is any indication, we’re go- ing to be putting a lot of money into health care in this country in the years ahead (see Figure 1.4). Maybe we should all become health care workers! But remember, these projections for the future are just that—projections. There is a great deal of uncertainty about projections made this long into the future, and unforeseen events as well as future policy changes will certainly change these possible outcomes.
  • 18. — 9 — Introducing the Issues If we take a snapshot of older Americans in 1960 and 2000 and then look ahead to 2030, we see that most projections show the poverty rate for older Americans con- tinuing to decline modestly in the future (see Table 1.1). The percentage of uninsured likely stays very, very low due to Medicare. The percentage of the older population likely grows from 13 percent to 20 percent of our population. And health expenses as a proportion of overall income for the elderly—this is an extrapolation that I’ve made based on earlier work by Marilyn Moon—grows somewhere to around 25 percent of income. It is clear from this chart that the conditions that Lyndon Johnson faced in 1960 were very different from the conditions that we face in the future. The steps that we took during the Johnson presidency were incredibly important steps to enable the poverty rate and the “uninsurance” rate to go down as it has. If Social Security were gone tomorrow, half of all seniors would be back to living in poverty. And if Medi- care disappeared tomorrow, the proportion of uninsured older Americans would be enormous. These critically important programs have filled significant gaps over the last 40 years. But now we face new and tough challenges—a larger and growing aging popula- tion, as my generation ages, and health care costs that are clearly still rapidly rising. Fifteen percent of the economy is spent for health care now in this country, from Source: 2004 Trustees Report, Hospital Insurance and Supplementary Medical Insurance Board of Trustees. Figure 1.4 Medicare’s Financial Outlook 16% 14% 12% 10% 8% 6% 4% 2% 0% 1966 1976 1986 1996 2006 2016 2026 2036 2046 2056 2066 2076 Calendar YearYearY MedicareSourcesofNon-InterestIncomeand ExpendituresasaPercentageoftheGDP Total Expenditures HI Deficit Revenues
  • 19. — 10 — Big Choices: The Future of Health Insurance for Older Americans Table 1.1 Older Americans: Yesterday, Today, and Tomorrow 1960 2000 2030 Poverty Rate 35% 10% 5%? Percent Uninsured 44% 2% 2%? Percent of Population 9% 13% 20%? Health Expenses 20% (in 1965) 20% 25%? (as a percentage of elderly income) Source: Author’s calculations. 5 percent in 1960. Where will we be in 20 and 30 and 40 years? It’s hard to know. But we do know that we face some very big choices, and we also face some very big uncertainties. These are large uncertainties. Are these projections that show health costs going through the roof accurate? It’s hard to know for sure, but past is prologue. Health care costs as a proportion of our economy continue to grow. So it’s likely that significant increases will occur if further steps are not taken. How much will health care infla- tion grow over the next 30, 40, 50 years? Predicting the health insurance system in America in the year 2078 is hard—a lot harder than trying to predict in 1935 what our Social Security system was going to look like in 2000. The projections themselves based on current policies are one area of uncertainty. Another has to do with the uncertainty surrounding what will happen if we do take action—will policy changes made in the future have the expected impact? For ex- ample, in Social Security, if you cut the COLA (cost of living adjustment), you know what the impact will be—Social Security benefits go down. Dollars are saved, but people are made financially worse off. The impact of the policy change is clear. But if you make a change to the Medicare program—to hospital reimbursement rates, for example—will you reduce costs? And will that change positively or negatively affect the elderly? What actually happens? In the health arena, the impact of a policy change is often unclear. There are great uncertainties, but we as a nation must still prepare as best we can for the future. It is our task as a people to come together and determine what we want for the future—for this program and for health care in general. Several major options have been debated to strengthen Medicare in the 21st cen- tury. What we’ll do in this symposium is to focus on three key choices. Two of them are on the cost side. Should the government be a much stronger, broader, and tougher regulator of costs and utilization of health care? Can that reduce costs? That’s option number one. Option number two: should market-based mechanisms in the private sector be used in a much broader, tougher, and stronger way to try to control costs?
  • 20. — 11 — Introducing the Issues Should we encourage the private sector to take over more of Medicare’s responsibili- ties and use competitive forces so that beneficiaries are in a position to make choices about the kind of coverage they want? Will that reduce costs? The third option, to the extent that either of the other two don’t work, is do we want to raise revenues even further than are projected in the illustrations I’ve offered here? We could do that by raising premiums for older Americans, or raising payroll taxes on workers, or raising other taxes and the general revenues of the federal gov- ernment. Or we could increase solvency by changing the eligibility age for the baby boomers so that Medicare doesn’t start at 65—it might start at 66 or 67. These are all potential ways to try to change the system. Every one of them, of course, involves trade-offs. But that’s what we have to talk about. The main issue to me is how are we going to make sure that we have a strong and a vibrant system of health insurance coverage under Medicare for the next 30 years, the next 50 years, and even beyond? The stakes are high. But I want to point out that the stakes were high back in 1965 and we as a people rose to the challenge and created a strong and vital Medicare system for older Americans. As we debate the future of Medicare, we will grapple with budget issues and with the technicalities of health insurance and adequacy is- sues. How we answer these questions goes beyond budget issues and technical issues, and goes beyond adequacy issues. Our answers will say a lot about how we define ourselves as a people in the 21st century. Where do we draw that line between indi- vidual and collective responsibility? Should we rely more upon the market and the private sector or on government and a regulatory approach? Where do we as a people determine where our collective responsibilities start and stop? These are very important issues. And the people who should talk about these is- sues are not only people like former Commissioners of Social Security, or politicians, or health care experts, but the American people. And that’s our desire for the next two days—to hear not only from the experts who can help to frame the questions, but also from the public, who will live with the consequences of the choices that are made. The stakes are high because the choices we make about the future of Medicare will say a lot about how we define ourselves as a people. Let’s choose wisely, for our sake and the nation’s sake.
  • 21. Part II The Medicare Debate
  • 22. Chapter 2 Medicare Reform Panelists: Marilyn Moon and Stuart Butler Kenneth S. Apfel: One of the best things about the years that I spent in Washington was working with some remarkable people who have distinguished reputations and who have been part of the public debate for years and years, contributing in so many ways. We have with us today two of these remarkable people. The first is Marilyn Moon, the Vice President and Director of Health Programs for the American Institutes for Research. She’s a long-standing player in Washington and one of the great health care experts in the country. Marilyn spent a number of years with the Urban Institute as well as the Congressional Budget Office, serving as one of the public Trustees of the Social Security and Medicare programs. Her task was to make sure the numbers in those programs weren’t being cooked. One of the most thoughtful people I know on health care issues in this country, she was also a professor of economics at the University of Wisconsin, and received her Ph.D. at Wisconsin Madison. Also joining us is Stuart Butler. He’s a player in Washington who has made his name and his organization’s name prominent in the last 20 years, including the field of health care. Stu is the Vice President for Domestic and Economic Policy Studies for the Heritage Foundation. He put Heritage on the map when it comes to such issues as health care, Social Security, and welfare policies. Stu has also served as a pro- fessor at Georgetown University, and he is a Fellow at the Kennedy School Institute of Politics. Stu was born in Shrewsbury, England, and lived in England for 28 years. He received his Ph.D. in American economic history from St. Andrew’s University in Scotland and became an American citizen a number of years ago. From that day forward, he has been an important voice in the future of health care in this country. Stuart Butler: Thank you very much indeed, Ken. It’s a great honor for me to be here. I am particularly honored to be here at the LBJ Library. As a historian, I have to tell you that despite the fact that I disagree with a lot of Lyndon Johnson’s specific poli- cies, I’ve always had enormous admiration for President Johnson because in spite of
  • 23. — 16 — Big Choices: The Future of Health Insurance for Older Americans his personal weaknesses and failures of resolve in some areas, he focused his attention on these fundamental issues of domestic policy and triumphed as a matter of will, persuasion, and dedication to these objectives. So I’m very pleased to be here in the LBJ Library. Let me begin by restating some of the things Ken said about why we are here talk- ing about reforming Medicare. Ken emphasized two main reasons. The first is a grow- ing concern about the future cost of this program, even without any improvements in it. But the future cost, and therefore the burden on the children, and particularly the grandchildren, of many of you in this room, will be huge. This explosion of costs in the future is happening in large part because the baby boom generation, of which I’m a member, is reaching retirement, and there are a lot of us. And when we hit the program, costs are going to go up enormously. There are going to be a far higher proportion of elderly people relative to the entire population in the future than there are today. About 8.5 percent of our nation’s GDP goes for Medicaid, Medicare, and Social Security. By the time somebody graduating from the University of Texas this year retires, that proportion will probably have grown to about 17.5 to 18 percent. At that time, the unfunded portion of the Medicare/Medicaid budget—that is, the portion of costs not funded by the payroll tax—will consume about 50 percent of our fed- eral income tax. So we’re talking about a situation where expenditures will consume an enormous portion of the income taxes. And that, of course, does not take into account other demands on that revenue of that period. So we’re talking about an enormous burden. In addition to the problem of increasing costs, a second problem is that Medi- care is an imperfect program. Nobody in this room—and certainly nobody who’s on Medicare—would say that this is the perfect program, that it covers everything we need, and that it does so with the best quality care and so on. Because of the way we design and try to manage Medicare, it’s constantly out of date. We’re constantly look- ing at it and saying that it should have these additional specific benefits and so forth. Every so often, members of Congress will pass some legislation on Medicare, as they did just a few months ago, and then celebrate their great success in making Medicare much more up-to-date. When they talk about success in this way, I am always re- minded of Winston Churchill’s definition of success, which is the ability to go from one failure to the next without any loss of enthusiasm. Congress appears to fit this. As we think about how we look at Medicare, we’ve got to start by identifying the obligations that are in play—what responsibilities do we have for the health care of people reaching retirement? I think there are three ways of thinking about this responsibility. One is that there is and should be an intergenerational responsibility. People like myself, and people younger than me, have an obligation to contribute to the costs of our parents and grandparents. I think that is an absolutely fundamental obligation that we have. Secondly, there is an obligation as a community to people who need help, who are
  • 24. — 17 — Medicare Reform frail, or who are poorer than the average, and so on. The rest of us have an obliga- tion to provide assistance to those in need. There is also, of course, an individual responsibility. As we go through our working years and think about retiring, we have responsibilities for making provision, in some regard, for the costs of retirement. I think that is an important obligation. We shouldn’t just pass the tab for whatever we need, assuming that somebody else should somehow find that money. Certain responsibilities are important to bear in mind when we start thinking about our choices for the future. With Medicare, as Ken pointed out, we have cre- ated a kind of hybrid program that encapsulates a number of these kinds of obliga- tions within it. We have a social insurance program that people pay into during their working years and draw on as they retire—the intergenerational aspect. We have a program that has direct support from people from the wider community, in terms of general revenue, although public funding doesn’t cover everything—individuals must pay for part of their health care when they reach retirement (and there are questions about how much that should be). Medicare is also a program whose benefits are designed by Congress. The Medicare program is not like retirement or Social Security, where you can choose how to spend what you receive. Medicare is designed by Congress to offer very specific benefits, which are the results of decisions made by that legislature. This structure leads to some very important problems that help us think about the reforms. First, as Ken mentioned, when we think about the costs of Medicare’s fu- ture, we are creating a projection. We aren’t thinking of a budget, in the sense that we decide specifically how much we want to spend in the future on Medicare. We basically say we will make a commitment and try to guess how much that money will be, and we hope that somehow there is money available to cover it. It is an unlimited obligation based on the fact that we are talking about what we loosely call a “defined benefit,” a specific benefit by Congress. In many respects, Medicare is very inequitable in terms of the future. When Bill Gates retires, he will get an enormous subsidy against his health care costs. He doesn’t really need that. Meanwhile, many Americans will not get enough help when they reach retirement. So there is a lot of concern about the inequities—is it fair to give pretty much the same to everybody rather than focusing the money on those in need? A second, related concern, is that Medicare is a defined benefit program, as I mentioned, where Congress makes specific decisions. That has a lot of implications. It means, for example, that all kinds of organizations, particularly organizations that provide benefits, lobby Congress vigorously to try to make sure that their benefit is included, whether or not it makes the best sense in terms of use of money. Represen- tative Pete Stark, who is a Democratic member on the one of the health committees in Congress, says that as he went around the country talking about health care, he discovered all kinds of organs in his body that he didn’t even know existed. And then he came to Washington and discovered that each one had a lobbyist. In other words, the design of Medicare is based not so much on what a reasonable person
  • 25. — 18 — Big Choices: The Future of Health Insurance for Older Americans would think of as the best package of benefits, but on whoever’s got the most power in Washington. So the defined benefits that people get in Medicare are entangled with all the other political pressures in Washington. This situation leads to the third characteristic of the system’s operation, which is that there is constant micro-management of these benefits in order to get them to fit into the current budget, given all the other things competing with them. So when you look at the way we actually design benefits and the way the program works in Washington and the grubby process that causes par- ticular outcomes to occur, it’s not a big surprise that the benefits that you might have are not the ones that you and your doctor think would be wise in Medicare. The seemingly arbitrary changes that occur in those benefits or in the rules for the benefits are a direct result of the way in which Congress is intimately involved in designing the benefits themselves. So what should we do? Well, we could go into all the numbing details of reform, but let me try to boil them down to a few broad strategies for thinking about the future of Medicare. The first strategy would be to have a debate about the relative contributions of generations toward this program in the future—to have a real debate about what is the appropriate burden on your children and grandchildren and about the relative burden and responsibilities that the elderly generation should bear. We should have an open de- bate rather than continuing the current situation of promising benefits and just hoping somehow in the future somebody will be able to pay for them. There are ways in which that debate can be encouraged and sharpened. One of them would be to require within the budget that Congress looks at every year a statement containing a real measure of what the future liabilities are of the federal government. And we should require that figure to be reported in today’s dollars and to project not just the next five or ten years of actual spending but the future obliga- tions of the program. If we were to do that, we would have a much more realistic debate about what is appropriate, and what is fair and equitable in the system. When you apply for a home mortgage, for example, you get some idea of the total obliga- tion, translated into a monthly payment. Can you afford this obligation? It depends on your income. That kind of projection concentrates the mind wonderfully. If you bought houses with a credit card and just said, ”I hope somehow I can pay for this, but I don’t have to pay anything today,” you’d get a very different set of situations with regard to houses. So it is very important in the budget process that we translate current and proposed new obligations in such a way that we can make some real decisions. Once we have made a decision about the amount we will commit ourselves to over the next decades, the second step should be to translate that figure into specified benefits for seniors and the disabled. This is not to say that the benefits will necessar- ily be less than they are today. It’s just to decide on those benefits in a very clear way so we really do determine what the contribution is going to be. This is sometimes called a “defined contribution” or “premium support” approach.
  • 26. — 19 — Medicare Reform With this approach, people could make a lot more decisions than they do today about the specific benefits to be included in their Medicare package. Congress could set very broad guidelines instead of micro-managing all the details that it does today. This is essentially how Congress’s own health care program operates. Members of Congress and about 10 million people in America who are either federal employees, dependants of federal employees, or retired federal employees, are all in a program that is not debated every single year in terms of specific benefits. Congress sets broad guidelines for that federal employee program. It allows people to make choices. They see costs, and they get a contribution toward the cost of their premiums. I think if we move Medicare in that direction, we’ll get out of this constant bickering and argu- ments between interest groups in Washington and allow ordinary Americans to make many more decisions and better decisions about what would actually benefit them. The way we should think about reform is to think about moving away from un- limited obligations to future generations and the Congressional micro-management of specific benefits toward a world where we make clearer decisions about what are the relative obligations in a future budget. In this world, seniors could have far greater choices about what kind of benefits they would receive and from whom. These new choices would then lead to a debate about whether private plans or other kinds of options should be available and encouraged. I think they should. Let me end by telling you about a cartoon that really struck me during the debate over the drug benefit last fall. Although the cartoon was specifically about the drug benefit, I think it really applies to all of Medicare. The cartoon had two pictures, side by side. The first was an elderly person and her grandchild going to a pharmacy to get a prescription filled. The pharmacist said, “How do you want to pay for this?” The second picture in the cartoon was the elderly person holding up her grandchild and handing him over to the pharmacist. I think that is a symbol for the concern that we should have about the whole program. It would be nice to ignore the tough choices that Ken and I have laid out. But as the numbers show, we can’t go on this way. And we’re not the only ones—other countries are also facing this crisis. And some of them are well ahead of us in thinking through how to get a more reasonable balance of obligations between generations. It is up to us to respond to the challenge to do it in this country. We cannot keep going on as we do today by simply adding—by just looking at what is not in the program and getting Congress to add things in and simply pass the tab to our grandchildren. I don’t think that is a wise choice. I don’t think it’s a fair choice. And I don’t think it is just. Thank you. Marilyn Moon: There are a number of things that I agree with Stuart on, but I have some different perspectives. In thinking about what to say today and the history of this issue, I decided to let you know a little bit about myself so you’ll understand where I come from. In 1964 and 1965, when Medicare was being debated, I was living in Augusta, Kansas. I was a debater in high school, and we were debating “Re-
  • 27. — 20 — Big Choices: The Future of Health Insurance for Older Americans solve: that there should be public health insurance for seniors in the United States,” a federal program of health care for older Americans. In Kansas at least, you always wanted to be on the negative because you would always win. Fortunately, from my perspective, the negative position didn’t win the day, and we got the Medicare pro- gram, which I think has been of enormous importance to Americans on a whole range of issues that we could talk about. I also want to say, in terms of where I’m coming from, that while I totally agree with Stuart that there are a lot of problems in the Medicare program, before we condemn it, let’s look at ourselves and our own health care programs. I have been in one of the worst health care programs, I believe, in the United States, CareFirst of Maryland, which was so bad that it eventually didn’t even get merged and become a for-profit organization, partly because of the government. For ex- ample, when I tried to be a good consumer and ask questions, the answer I would get was “That’s none of your business, that’s proprietary information.” In the case of that particular program, when I would go out-of-network to use my very good physician in downtown Washington, D.C., who charges me only $75 for a visit and takes only Medicare and Medicaid coverage and no private insurance any longer, Medicare would pay $58.47 for that visit. But my private insurance plan in its wisdom would pay 80 percent of $32.10 for my visit, meaning that I was paying a cost-share of approximately 65 percent. That is the private market, and that is one of the successful health care plans in the state of Maryland. And it’s not that it was forced upon me. I was under my husband’s coverage at that time, which gave us a choice of 14 plans, and that plan seemed the best one for us at that point. We’re now in a brand-new plan and waiting to see what it will cover for out-of-network services because once again they won’t tell me when I ask, but we will find out pretty soon. So one of the things that I would say is be careful what you wish for in health care. Adding a lot of competition is not going to solve a lot of the problems of the sticky, arbitrary process of getting health care cover- age. Health care is expensive in the United States, and nobody has totally found the solution to that. The other thing that I wanted to do as a theme today is talk a little bit about the Medicare reform bill, not to steal the thunder of the next panel, but to use it as an example of what I was originally going to call the “good enough for now” health care bill and how it causes problems. I’m hoping instead we can put it to rest eventually by calling it the “last unrealistic” Medicare reform bill. One of the ways that I fully agree with Stuart is that we have to have a real debate about the issues facing Americans and the challenges of rising health care costs for an increasing share of the population that will be over 65 or disabled in the future. We can’t get by through simply assuming that something will magically come along and solve the problem, as this legislation does, or that we will eventually come to a day of reckoning later on by putting some poison pills, if you will, in that legislation. There are three points that I want to make about that legislation in terms of how
  • 28. — 21 — Medicare Reform it steers us in the wrong path. It recognizes the inadequacy of Medicare benefits by adding prescription drugs, but it does so by adding a benefit whose design is driven solely by budget constraints and not good policy. This is why you get that doughnut hole where you have benefits for people who spend only a little at the bottom and benefits for people who spend at the top, but you run out of money in the middle at the place where the two sides meet. It’s not because, as you might like to imagine, that policy-makers in Washington are stupid. It’s because they have a lot of goals and not enough money, and as a consequence, this was the compromise they were left with. Secondly, we are still in the world of looking for a magic bullet. It used to be that HMOs were the magic bullet, but we don’t talk about HMOs anymore because at least in Medicare, we learned that they don’t save any money, they have been arbi- trary, and they haven’t been innovative the way that people hoped they would be. I’m not trying to condemn all HMOs with one broad brush because there are good ones. But many of the ones that came into the Medicare market hoped to make quick money by getting big discounts from doctors and hospitals and did not recognize that Medicare is the Big Kahuna of price discounts. You can’t really compete very well with Medicare on prices. So instead they turned in many cases to fairly arbitrary restrictions, causing them problems and backlash not just in Medicare, but also in managed care in general in the United States. We have much less in the way of man- aged care than we did just a few years ago. So the golden age of HMOs came and went very quickly in the late 1990s, and we also found that we had been overpaying those HMOs in Medicare. In 1997, legislation clamped down on these inflated prices, and many HMOS re- sponded by leaving Medicare, cutting benefits, raising premiums, and raising prices. In 2003, we passed legislation that assumed that competition would solve the prob- lem by creating new private plans called preferred provider organizations (PPOs) that would somehow do better than Medicare. As with HMOs, I expect that we’ll overpay PPOs for the first few years and then, when we’re struck by the rising health care costs, we’ll cut back on how much we pay them—we’ll just repeat 1997 all over again. I’m not sure anybody should want to be president in 2006 or 2007 when this little train wreck is going to take place. Moreover, we’re relying on competition as a magic bullet. Again, we’re not setting the system up very well, and it bears the stamp of a lot of interference. Even if you establish private plans, there will be a lot of interference. In some ways, there should be more interference than in other ways. I have enormous confi- dence in the profit-making ability not only of private prescription manufacturers but also of good preferred provider organizations. If you’re a good profit-making orga- nization, you don’t make money by managing care well. That’s too hard, and people grumble too much. So as a consequence, they will seek ways to do just what HMOs have traditionally done—cherry-pick the population to get the healthier folks in. What that means is that a PPO can provide extra benefits, make these well people incredibly happy, and make them lobby on your behalf, while you are sending all
  • 29. — 22 — Big Choices: The Future of Health Insurance for Older Americans the sick people back to traditional Medicare where the costs are rising and you’re not solving the problems. I am skeptical that even well-working programs to enhance competition will be the magic bullet. And I do think we have to be very careful. Unlike Stuart, I don’t want to make available to seniors what others have because the Blue Cross Blue Shields, CareFirsts, and other HMOs are not necessarily doing a terrific job. I’d rather see us find some solutions that don’t rely on making sure that nobody is any better off than the rest of us. That doesn’t seem to me the best way to do health care policy in the United States. Finally, in terms of this legislation, there are worries about the inability of the magic bullet to do its job, so the legislators at the very last minute tucked a little thing in there about financing and a way to presumably bring some rationality to financing. Instead, it will bring a financial crisis artificially to the Medicare program, probably between 2006 and 2008. We can have a humdinger of a presi- dential campaign in 2008 potentially over a massive crisis in the Medicare pro- gram. This legislation argues, essentially, that general revenues are undesirable, and that we don’t want to have them fund this program. Consequently, a new measure seeks to artificially restrict it, which will force changes through reduc- tions in either benefits or coverage, or through increases in either premiums to beneficiaries or payroll taxes. Whenever there has been a crisis in financing in Medicare, as a very good book by Jonathan Oberlander points out, we have a tendency to go in and whack away at the program. We have done the easy whacking away, and now in 2007 and 2008, with the baby boomers knocking on the door just three years later, it will be very hard to be unrealistic about the solutions. The hopeful spin on what that crisis may bring is that society may finally actually realistically talk about what needs to be done. But I’m not sure that things will actually work out that way because I suspect many politi- cians will continue to sloganeer. What we should do is come back and ask three essential questions. First, how should Medicare be organized to save money? Is there a magic bullet out there that says just the way you organize the program somehow saves money? My guess is no. The problem of health care costs and spending and new technology and our desire to live forever is still going to be there. And, I would disagree with Stuart that keep- ing Medicare universal is a problem. I don’t see the problem that Bill Gates has not paid enough into the system and gets big subsidies. First of all, if Bill Gates makes $20 million a year or more, he’s effectively paying about 3 percent of his salary to Medicare, so he has actually been paying a lot of money into the Medicare program. It would be nice if we could just exclude him and his family and everybody else like that, but there aren’t enough of those folks out there really to solve the problem. Plus, these rich people might then do something very bad like getting together to pass the “High-income Older Americans Act” and essentially stick it to all the rest of us in various ways, such as by getting a lot of flexibility in health care and leaving the rest
  • 30. — 23 — Medicare Reform of us in the cold when they say no, we don’t want to pay the taxes for all the rest of those scummy people who make less than $300,000 a year. We’re going to have to decide whether we want to make these decisions individu- ally or on a communitarian basis. We have to decide whether as a county, we want to make joint decisions or let individuals go at it on their own. That’s when my husband always says you’ve got to remind people that either Mom’s going to live with you or you will have to live with her, and none of us really want to do that. But the point is that we do have to decide whether we’re going to make these individual responsibili- ties or shared responsibilities. That’s a big question that needs to be addressed. Secondly, we have to decide who should pay, and we should do so on the basis of really understanding the ability of different groups to pay. An older woman in her eighties who is widowed is not going to be in a position to pay if there is a sudden jump in the cost of health care, for example, that has occurred long after she has retired, even if she has been very wise and saved all her life. And I don’t think we want to hold her accountable and say, “You’ve run out of money, too bad for you.” We should make those decisions on the basis of who can pay and in terms of who has flexibility to adjust. Health care will be more expensive over time, and as a society, we’re going to have to decide whether or not we want more Humvees or more health care. That is a decision we should be making on a communitarian basis as well. My facetious solution to Medicare’s problem is to say we should raise gasoline taxes. I don’t say that on the East Coast anymore because gasoline is now over $2.00 a gallon. But down here, I noticed it was only about $1.70, so we should raise gasoline taxes by 50 or 60 cents a gallon. We’d take in lots of money and dedicate it to the Medicare trust fund. Don’t put it in treasury bills, buy drug stocks. Drugs are going to do just fine, thank you very much. We’ll own the drug companies, and then when we own the drug companies, we can turn around and make them be more rational pricers. And we’ll use the profits to help fund Medicare. Now, I think that could work, but I think it would take a lot of willingness to do exactly what I’m going to suggest and that is that as a society—either through gasoline taxes or payroll taxes or general revenue income taxes—we’re going to have to step up to the plate and say somebody has to put a crowbar in their wallet, and the question is, who is best able to do that. The good news is that while taxes would have to rise to fund Medicare, over a period of time, such funding is affordable. The situation will not require seniors and their children and grandchildren to go to the poorhouse—rather, society as a whole will be better off. The numbers from a couple of years ago, which aren’t much differ- ent from the new numbers, suggest that even with relatively modest rates of growth, future generations of taxpayers will have a command of resources in excess of 50 percent greater than today, even after controlling for inflation. That’s the good news for all of you young workers out there. The bad news is that Medicare would take some of that away. Because Medicare will grow faster and there will be fewer taxpayers, on a taxpayer or per-worker basis,
  • 31. — 24 — Big Choices: The Future of Health Insurance for Older Americans the cost will indeed go up. For example, this means that instead of average income rising 58 percent, individuals would be just 54 percent better than today. That is certainly doable. It is not a question of a lack of wallet, it’s a question of whether or not as a society we want to ask people who are going to be substantially better off to pay something more. Historically, as our society has become wealthier, we have contributed a greater share of that wealth through Medicare and Social Security to older Americans. Now that older Americans will be a greater share of the population, we will need some change in contributions, particularly because Medicare in many ways has been un- der-funded for a long period of time. Finally, we have to decide how to deal with health care costs. I would suggest to you that this is not a case of giving people money, having them make good decisions and expecting that all will be well. If I give an individual $6,000 to go out and buy insurance, and they go out and buy good insurance, they are still going to have the problem that when they get sick, they are going to want to have care. And the ques- tion is, will the insurance actually pay at that point. They will also have to make good decisions if they decide to buy a private policy—for example, one of the private Medicare plans is a fee-for-service plan with low copayments on physician services. This is appealing for younger folks because that’s about all they use—but if it involves very high copayments for people who use home health care in order to keep physician costs low, it will not be good for sicker people. So let me think, who’s going to sign up for that private plan? It’s going to be the younger, healthier folks who are going to have those low payments on physician ser- vices, and they’re going to hope that they can join another plan when they are 75 and need home health care. They may or may not be able to. But this is a question again that as a society we’re going have to solve. It’s not a problem that begins at age 65. In fact, speaking to all you young immortals, I’ll make you a little bit sober by telling you that it’s a problem that starts at about age 50. If you look at health care spending in the United States, it just kind of trucks along there nicely, pretty low, and then at about age 50, something happens. Those of us who are beyond that know what I’m talking about. The old muscles don’t work so well, and your knees creak and crackle a little, so you’re more likely to take a Celebrex or Vioxx. Your doctor says your choles- terol is way out of whack, and you’d better be taking Lipitor or Pravachol. You have that acid reflux and can’t eat those tacos like you used to, so pretty soon you’re taking the purple pill and overall spending $6,000 a year on prescription drugs alone. It’s going to happen to all of us, and all of us as a society are going to have to find ways to be tough about health care, to ask the tough questions in terms of coverage. I’d much rather do it as a society, spending a little bit of investment from the public sector to decide what works and what doesn’t than let my employer and the insurance plan they pick decide what decisions are going to be made—because they are not going to do it very rationally, at least if past history is an indication. This is not easy stuff to talk about or do for those of you who are younger or may be students. If you
  • 32. — 25 — Medicare Reform want to become a health care policy analyst, it’s full employment for you for the rest of your life. Go right out there and get that education because I guarantee you we’re not going to solve this problem in the next five years or the next ten years. It’s going to be out there indefinitely unless something happens that none of us can predict now. I will close on a perversion of Herb Stein’s old adage. Herb Stein was a crusty economist who was very wise in many ways, and he used to say, if it can’t happen, chances are it won’t over time, and that turns out to be pretty true. Medicare can’t reach the level of GDP that people are worried about it being in 2070. Actually, what that translates into if you do simple projections, is that at that point we would be spending a third or more of our national income on health care. Probably we don’t want spend a third of our income on that, so something will happen, and we won’t do it. But I would also introduce the old adage that if something has to hap- pen—that is, if we have to find a way to deal with an aging population in a wealthy society—chances are it will, and we will find the way. I am very much of a short-term pessimist because I look at bad policy. But I’m a long-term optimist. We need something to trigger more rational debate so that we really look at these issues realistically and come to some solutions. Thank you. Ken Apfel: Thank you both. What I’d like to do first is to ask each of you to comment on each other’s remarks, and then I’m going to ask one question, and then we’ll open it up to the floor. Stuart Butler: I want to comment on Marilyn’s presentation, because you probably detected there’s agreement and disagreement woven in together, which is not unusual with this particular issue. I do feel very strongly, as I think she does, that looking at the future of what the burdens are going to be of different choices we make now is ab- solutely critical. We should look at these issues now in order to make decision about taxes, about benefits, and so on in the future, rather than leaving them until we get an absolute crisis and have to make draconian decisions one way or the other. I think that is something we actually both agree on. But I think, as she said and I tried to emphasize, if you look at the numbers, and you look at the way in which the propor- tion of projected taxes today would have to go to this program and other retirement programs, it’s a staggering number. Therefore to say, well, let’s just find more money, let’s just raise taxes—how far? Is this likely to happen in the future politically? The second thing I’d say is that there is a sharp distinction between us in terms of how we think about how Medicare should be organized. Marilyn talked about doing it as a community. In one sense, I don’t disagree with that, but if we’re talking about designing the specific programs at the community level, what we really mean is doing it within the United States Congress. That’s actually what it means. And for the rea- son I mentioned, I believe that is not a wise way to think about the design of benefits in the future. I think the weakness is with expecting members of Congress to basically play doctor in areas they have no real knowledge about. That is not a wise way to go
  • 33. — 26 — Big Choices: The Future of Health Insurance for Older Americans forward. More and more, we ought to be letting individual Americans make more choices about the kinds of benefits they have and where they get them. I’d be curious to know if anybody in this room would think that given the way Congress has operated in the time that you have known it, whether you have more confidence in Congress making sensible decisions about your benefits rather than yourself. I think that is something for you to think about in terms of your confidence level in members of Congress. That’s why I think individuals making choices is so critically important. There are various kinds of plans and competition and so on that exist. I am not in favor of overpaying anybody to provide shoddy benefits. But on the other hand, I don’t believe in monopolies where you are told this is what you have, and take it or leave it, and you have no choices. So I think that’s an issue. And the final area which I think I would strongly agree with Marilyn is that we do have to think about who should pay and how much. It is wrong that lower-income Americans today and in the future will have to pay an impossible amount from their meager earnings to pay for their health. I think we ought to be helping lower-income people more in the future. But I think that Bill Gates and even people earning a little less than Bill Gates will need to shoulder more of those costs because it is the only way in which we can be fair to those who need help most. Bill Gates certainly does pay into the system today, but he’s really paying through payroll taxes only for the hospital costs of Medicare. He can choose whether or not he wants to go into Part B, and Part B is subsidized out of general revenue. So he’s getting a subsidy anyway. I don’t think he should get anything. I think people who earn less, but are still well off, ought to be getting much less of a subsidy. I don’t see any other way unless we’re going to bankrupt our children and grandchildren in the future. Marilyn Moon: I’m only going to talk about one area because we will undoubtedly get back to the finances in a little bit. I’m going to talk about the issue of government and the benefits because I think it’s been a little bit overstated here. My congressman doesn’t really have very much to do with the way in which benefits are provided in the Medicare program. People misuse the term “choice” in some ways. First of all, the law essentially establishes that Medicare covers hospital benefits and outpatient benefits. Essentially over time, for example, as the delivery of care in the United States has changed, there has been a very smooth transition of people moving out of the hospital where they used to get benefits to getting them in an outpatient setting. As long as the general benefit is covered, there really has not been a problem. Stuart is right in terms of adding the additional benefit, but that is not necessar- ily easy or hard in anything except in the size of the dollars that are being discussed. That’s really what has kept the prescription drug benefit from being made available. Employers got smart and added prescription drugs when they were very cheap, but now they are going back and cutting back on them. Where coverage decisions are affected is when a new procedure is being considered for inclusion in Medicare. For
  • 34. — 27 — Medicare Reform the most part, Congress does not get into that. It’s actually quite a transparent process where expert panels are pulled together to make those decisions. Ironically, a lot of private insurance plans piggyback on what Medicare decides in terms of what’s covered and not covered. There have really only been a few areas, but they’ve been some pretty bad ones, that the members of Congress have gotten deeply involved in. For example, they set the price of oxygen. Senator Phil Gramm came in one day complaining about how high the price of oxygen was in Medicare, only to have one of his colleagues tug on his shirtsleeve and say, “Excuse me, Senator, we did that.” Medicare is one of those programs where the benefits are broadly defined, and you have the choice of almost all doctors and hospitals in the United States. To say that we’re going to have choice and let people have different options means there are going to be different plans, and you go out there and you’ll get different things. Now, that sounds pretty good until you hear what a lot of Americans say. And then you’ll hear in the case of younger people, a gentlemen in his thirties say, “I don’t want to be in a plan that is paying for maternity benefits because I’m not married and don’t intend to have any children.” And younger senior citizens might say, “I don’t want to pay for home health benefits because I don’t intend to use them.” And another person may say, “Well, I’m pretty healthy, I don’t see why I should pay for that other person who has genetic defects.” We want to be really careful how far down the line we go in terms of that kind of choice. That’s where I think you need to have regulations or else you end up with a very fragmented, very unhealthy private market. I have not seen any state or the federal government willing to regulate the private insurance industry to achieve the kind of well-working market that you need to have, for example, for individuals when they go out and buy in the private sector. Yes, you’ll be able to get insurance, but it may be very expensive or in the case of examples that I’ve seen, if you’re a 26-year-old woman and you take Claritin for two months out of the year, the insurance company will be happy to insure you except they will es- sentially say they will never cover any problem with your respiratory system for the rest of your life. That kind of overkill is what you get in an unregulated market that is not working well. The good guys get penalized because if they try to be good guys, all the sick people will flock to them. So we have to be very careful about getting what we wish for in terms of talking about getting Congress and the government out of this program. Ken Apfel: Before we open the discussion up to the audience, I want to ask one ques- tion to both of our participants here. It has to do with ways to control costs, either through the market or through a tough regulatory approach, a defined benefit ap- proach. On the one hand, does the government have the stomach to be able to really get savings through a regulatory approach? And, on the other side, do the markets have the ability to truly get savings from a market-based approach? In other words, will we really see lower costs through either a tougher defined benefit approach or
  • 35. — 28 — Big Choices: The Future of Health Insurance for Older Americans through a market-based defined contribution approach? If the answer is yes to some extent, what are the implications? Let’s go out a step or two. What happens? Stuart Butler: Well, first of all, I am not somebody who argues that there shouldn’t be regulation at all. Marilyn raises legitimate issues and legitimate concerns about realis- tic fair competition. It’s very important for any kind of competition in the Medicare system to be negotiated with the government looking at the rules, looking at the ben- efits that are offered, and so on. So I think regulation has a significant role in ensuring that people get good value for the money, given the choices that they are allowed to make. On the other hand, or at least in addition to this, it’s important to recognize that if you try to clamp down on total costs, which you have to do if you’re going to provide health care through a purely government-sponsored approach, you end up with what we might call “hollowing out” benefits for people. You say, in theory, you can get this health care service, but in practice, that isn’t going to happen. As you mentioned, I was brought up in England, and my parents both lived in Britain all their lives. And I saw that process happen. In theory, benefits were available to everybody, but in practice, because of governments ratcheting down budgets, ben- efits were largely unavailable to people. On the other hand, if you say to the elderly, “We will provide you with a degree of financial assistance as far as we can so you can make some decisions in terms of how that’s going to be used,” people are more likely to be able to have the kinds of choices that fit their needs and their desires than if the government does provide health services in a direct way as they do in Britain. This is a fundamental difference of opinion and of vision about how we think about the fu- ture. So I feel that putting some notion of limits on budgets is essential if we’re going to be able to afford Medicare in the future. But I would give much more control over how that money is going to be used to individuals rather than the government. Marilyn Moon: Whatever system you use, there is no magic bullet. There are really three things that drive health care costs in the United States on a per-person basis. One is the price of the health care. Another is the use of health care services. And the third, related to use, is simply the adoption and addition of new and different kinds of services. There is no easy way for anybody to deal with that. Both the private sector insurance companies and the government deal with prices in a fairly non-negotiated way. You don’t see insurance companies ask, “What will it take?” Sometimes, what they do is simply to say to the beneficiary, “I’ll give you $75. Hopefully, your doc- tor will take that as payment in full. If not, it’s your responsibility. Good luck!” The government uses a little more heavy-handed way than that in Medicare. Over time, that probably causes some doctors to opt out of the system. Both the private sector and government have problems. In terms of use, the question is how do you control the use of services and whom do you trust to do that? That’s a really hard area. The one area in which the govern- ment has a big advantage is in studying the effectiveness of treatments. It makes no
  • 36. — 29 — Medicare Reform sense for Aetna Insurance Company to spend billions of dollars studying which are effective or ineffective treatments because they are serving a limited share of the pop- ulation. And even if they did do it, they wouldn’t want to tell anybody else because they’d want to keep their extra advantage. That’s something that makes enormous sense for the government to pay for someone to do, hopefully a quasi-independent group of folks. And I would love to see both better information and dissemination of that information that could be used in a private sector or government approach to making those decisions. We’re going to have to make tough decisions over time, and I’d like to see them being made on the basis of what’s effective. For example, about three weeks ago, there was a very nice article in the New York Times suggesting something that’s pretty scary to a lot of cardiac surgeons and theirTimes suggesting something that’s pretty scary to a lot of cardiac surgeons and theirTimes patients. The article said that heart bypass surgery does not appear to extend life by very much, if at all. What it does is alleviate current discomfort and pain, and it makes people think that they have solved the problem of having a heart attack in the future. But very few heart attacks actually begin in a spot where your blood has clotted and created a problem in the arteries around your heart. That is stunning information. And that is not what your cardiologist is going to tell you. Well, your cardiologist may tell you, but not your cardiac surgeon. This finding opens up a realm of possibilities for a lot more patient choice and decision-making. I hope that both the public sector and the private sector can find a way of taking more responsibility for consumers so that we’re not talking just about economic incentives but also about better information. But “consumer-empowered health care” usually does mean just economic incentives. When you hear that term, run for the exits because it means high copays usually—but it ought to mean also better information. I’m dancing around this issue because I don’t have the magic bullet. I don’t think either of these approaches does. I think Stuart is right when he says that if you allow a lot of plans out there with a lot of discretion, you will get offerings of different things that may be better or worse in meeting your needs. And I’m going to add that in this trade-off, the people who are very sick will fall through the cracks. So, I’m willing to give up a little choice for coverage for everyone. These are important trade-offs. What I would like to see, however, is a more realistic discussion, rather than pretending that one plan is ideal and the other is not—because both of these approaches have difficulties. Ken Apfel: Questions? Audience Member: I was disappointed that the discussion seemed to be based in a vacuum. What is happening right now in the public sector is that the population is getting older—but there are younger ones, too. We’ll probably have a tremendous variety of ideas of what is acceptable by the time any new plan goes into effect.
  • 37. — 30 — Big Choices: The Future of Health Insurance for Older Americans Marilyn Moon: Yes, dealing with health care costs is an issue we have to face across all of society. Certainly one of the ways in which health care plans and employers have responded, after first embracing and then getting smacked around pretty hard with putting people into managed care organizations, has been to pass off the cost to individuals, hoping that would solve the problem, which it largely has not. Another issue is if we have a large number of uninsured who eventually become eligible for the Medicare program, that also raises the cost of Medicare for people who have deferred getting coverage and care, for example, before they become eligible. Stuart Butler: I think that’s correct. Certainly, it’s interesting that members of Con- gress and federal employees have a separate system for themselves even when they re- tire, keeping at least a part of their coverage when they retire. And there is a different system for the rest of us. I guess my general rule of thumb is that Congress, generally speaking, will produce the best available for itself. If it’s that good, why can’t the rest of us join it? Despite all of the things Marilyn said in terms of the vagaries of com- petition and choices, this system seems to be very attractive to those who make laws for us. Many of us would like to see a change in the Medicare program that would be much more like the federal employees benefit program. Marilyn Moon: There are two big differences between Medicare and the federal em- ployees’ health benefits program. One is structure, with the choice of a number of different plans that people have. That is what people are talking about giving you. The second is the number of dollars per person that go into those plans—if it were adjusted by age, Medicare would have to be enormously increased in size. I don’t think people are as focused on structure as they are on the quality of the benefit. Just to give you an example: a prescription drug benefit of the size of that available to peo- ple under FEHBP (Federal Employees’ Health Benefits Plan) that Congress is under, would have cost around $950 billion to a trillion dollars rather than the $400 billion that people were talking about. So the question is, are we talking about the structure or are we talking about the dollars? And many people are talking about giving the structure, but not following up with the dollars. If they don’t follow up with the dol- lars, you’ve got a lot of other problems that still remain. That’s a real difficulty. Audience Member: Dr. Stuart, I read with interest and enthusiasm the op-ed piece that you and Henry Aaron from the Brookings Institute wrote in which both the lib- eral and the conservative side supported universal health care as a process and talked about a communitarian approach to it. You actually advocated the idea that part of the process would be to transfer decisions about costs and who should pay and how from the federal government to state governments. Considering the idea that the bigger the pool in insurance, the more equitable and the lower the cost is, why is no solution being discussed as part of a universal health care approach instead of just a Medicare for seniors approach?
  • 38. — 31 — Medicare Reform Stuart Butler: I guess I wouldn’t agree with that premise. Certainly Marilyn and I are both searching for an approach that would provide universal coverage in a way that has similarities to the way in which you are now covered. Senator Breaux from Louisiana often comments about all the different boxes that people are in. If you are a veteran, you get one kind of health care. If you are very poor, you get Medicaid. If you are a working person, there are all kinds of different rules and forms. I do agree that moving toward some kind of similar system so people are not in different pro- grams is part of the solution. What that should look like is of course is open to a lot of debate. When Henry Aaron and I did this piece, we were talking about a process for en- couraging innovation and experimentation at the state level to find out what is the best kind of approach toward universal coverage. And I think that is what we’ve got to do. Anybody on this or any other panel would be really hard pressed to say, “Well, I’ve figured it all out, and I know exactly what the answer here is.” I think we know at least the directions to go in, but I think having a process of continuous examina- tion and experimentation is very important. And this is, quite frankly, why I feel that consumer choice—individuals making decisions—and competition, are so critical because, notwithstanding the legitimate concerns around race, that’s how you filter out things that are showing promise from those that are not. That’s true in all the rest of American society and economy, and I’d like to see that much more strongly in Medicare and health care generally. Audience Member: I think when you talk about medical health care that this idea of the Adam Smith consumer kind of thing doesn’t really work, even if you are an educated consumer who wants to make a decision. For example, I was going to have a cauterization of blood vessels in my nose, so I told my doctor, why can’t we just do it in your office because I hoped that my bill would be a lot cheaper even though my insurance wouldn’t pay for it. He said no, you have to go in the hospital, full anesthesia, the whole thing. So a consumer does not tell a doctor what he wants, a doctor tells a consumer. You can’t tell a doctor, “Well, I think I’ll skip the heart by- pass because I don’t believe in it.” Stuart Butler: You can. Audience Member: So when you’re talking about “I won’t take this drug that you recommend” or whatever, this whole idea that the individual is the one who is mak- ing choices is false. It is not Congress being doctor, it is some insurance company playing doctor who is in it for profit. In the state of Texas, these insurance companies buy themselves a legislature and throw tens of thousands of kids off the Medicaid program. So the whole idea that the magic bullet is going to be free enterprise and competition in the medical area does not work.
  • 39. — 32 — Big Choices: The Future of Health Insurance for Older Americans Stuart Butler: Well, you underscore part of the point that I was trying to make. If the Texas Legislature is owned and operated, some might argue, by the health care industry, then the decisions it makes are not necessarily any more in your interest than what you would get through your ability to choose. If you have to make choices in areas you don’t have a lot of knowledge about, at least you can go to some person or organization that you trust to help you make that decision. If you can act on that decision that an expert—it may be your doctor or may be an organization—advises you on, that to me is what the critical empowerment of individuals is. Not that ev- erybody should be all-knowledgeable about all these things—but you should be able to turn to somebody for advice and then act on that decision. You can’t do that if Congress says this is what you’re going to have, this is how we’re going to provide it. It’s either take it or leave it. Ken Apfel: We’re going to have four more questions, and then we’ll have to wrap it up. Audience Member: Yes, this is really very generalized. We’re talking about problems that affect everyone. But no one has talked about what has happened to the economy in the United States. Ten percent of the people have access to 70 percent of the wealth. And the bottom 50 percent of us have 2.8 percent of the wealth. This is as bad as it was before the Great Depression. And we keep moving walnut shells around. It’s hard to see when the wealth is so maldistributed in this country. And the people from United for a Fair Economy—Bill Gates, Sr., is one of them—are saying that what’s happening now is very bad for everybody in this country. So I just feel like this colors the revenues that we’re talking about. Stuart Butler: Well, we could have a whole seminar and discussion about what’s actu- ally going on in the economy. But just to answer your question specifically, I tried to argue that we need to have an approach to Medicare that says who can shoulder the burden and who cannot. And for people who can easily afford medical care in the future, they should not be getting the subsidies that are insufficient for those at the bottom end. So we can argue about what the numbers are, but I disagree with the no- tion that we should have a system which provides equal benefits to everybody—Bill Gates gets subsidized, a janitor gets subsidized. We ought to be looking much more at focusing the assistance where it is needed, and that means big changes in terms of what people can expect, if they are middle-class, upper-income people, and working people today. Marilyn Moon: I think the problem is that you can never equalize the unequal distri- bution of income in the United States by taking a few people off the Medicare rolls. This is an issue that affects taxes and a whole range of other things. I agree it is really important and doesn’t get discussed enough in the United States because it sounds
  • 40. — 33 — Medicare Reform very anti-American if we say we are opposed to people making it on their own. But I’m glad to see you raise it, and I think it ought to be raised in these kinds of conversa- tions. But, unfortunately, I don’t think we can solve the problem that way unless we charge Bill Gates a pretty high premium over time. Audience Member: I hope that as we go farther into the program, we will open this issue up further. We are considering a very narrow set of options, it seems to me. Un- less we do talk about health care for everyone in this country, then it seems to me it is futile to talk about it for one little patch on a blanket—a very tattered blanket at that. Also, I must say that I am extremely cynical when I hear the word “choice” these days. How about a 90-year-old woman who was turned down for insurance—what do you expect her to do, surf the Net? What I really wanted to say is the federal em- ployees’ program—it ain’t utopia. I have been in the foreign service and what I have, the choices that I have, are probably better than a lot of people’s. But they are private insurers, and they are very similar in what they offer. There are not as many choices as you might think. And our premiums will have gone up, by the end of this year, 50 percent in the past four years. Now, I assume they’ve also gone up for Congress, but Congress may not be feeling it because they have allowed themselves to have pay raises of $3,000 or $4,000 a year. So, please don’t be too ecstatic about the federal program. It’s not bad, but it’s not great. Stuart Butler: I didn’t suggest that it was utopia. I think over time, incidentally, while not many 80-year olds are surfing the Net today, all the signs are that a bigger and bigger proportion of the elderly actually will be doing that, as people get older who have been brought up on this. It’s also important to understand about choice that no- body requires anybody who’s got choices available to change their decisions or change their choices. If you want to stay with what you have, nobody is forcing anybody to change. If you don’t think you can make choices, or that it’s good for you, don’t do so. That’s not to say that people who really feel that they should be able to make other choices should be denied that right. I think that’s the critical issue. Marilyn Moon: I wasn’t going to say anything because I thought the lady did a good job of defending herself. But one of the real difficulties about not making choices is that if you look at people who don’t make choices in that kind of system, they can end up being chumps. For example, some of the research on the system for Califor- nia University employees suggests that retirees who were reluctant to make changes and who didn’t want to change plans every year ended up stuck in plans that simply became more and more expensive every year. They were very poorly treated that way because the healthier people deserted the plans they were in, so when they stuck to those plans, they didn’t benefit at all from choice. To a certain extent, when you go into that kind of system, you can really be hurt if you don’t participate in it.
  • 41. — 34 — Big Choices: The Future of Health Insurance for Older Americans Audience Member: I just wanted to reflect a little bit on what is influencing those of us who are members of the public, the consumers of Medicare—because I didn’t see a lot of that reflected in what was said. Nobody makes decisions in a vacuum. When I see the statistics that 10 percent of the people who are consumers of Medicare are living in poverty, I view that with a great deal of skepticism. And I also say that you have to look beyond that very simple statistic because Medicare and Social Security are tied to one another in terms of the ability of the older individual to meet their expenses, including health care expenses. All the inequities of society get reflected and inherited by those systems, Social Security and Medicare. I’m speaking as a woman who raised two children as a single parent. We all know that women make less in their working lives than men, and that is reflected in how much Social Security income they receive. We also know that women suffer disproportionately from the increasing rate of divorce and the fact that they are more likely to end up, as I did, as a single parent raising children. When it got to the point where my children needed to go to college, my ex-hus- band wouldn’t help contribute to their college expenses. When I applied for financial aid, I was expected to dip into what meager income I had been able to set aside for my future retirement to help pay for their college expenses. Mr. Butler, you talk about how we all need to be responsible for planning for our own future and caring for ourselves in our old age. Well, when I started out as a young person, I did what I could. I got two master’s degrees and felt that I was going to be well prepared to support myself. But it didn’t turn out to be that way because of being a single parent and having to make choices. I was a teacher. We all know that teachers don’t get Social Security for the most part. And they are lucky if they get anything in the way of sufficient retirement benefits. Everything I’m saying could be said also for the inequities that apply to racial and ethnic minorities. These are all reflected in that supposedly lovely statistic of 10 percent in poverty rate. There are large segments of us in this population that you want to help in making decisions that we have to think of in a very different environment. The other thing that I wanted to mention is that politically this debate comes at a very bad time in terms of the ability to approach this open mindedly, and that’s be- cause at this point I can’t even possibly begin to consider handing over my health care benefits to private enterprise and privatization at a time in our history when business is getting more and more rapacious, selfish, and profit-driven. I won’t go into it—we all know what’s happening on the horizon. Business ethics has gone out the window. So we have no reason to trust that those decisions are going to benefit us. Ken Apfel: A reduction in poverty from 35 percent to 10 percent shows us how far we’ve come, but it also points out how far we still have to go in terms of alleviating poverty in the elderly population of this country, particularly for elderly women. But your point is a good one—there are millions more seniors with incomes just over the poverty level, and we need to be concerned about their well-beings as well.
  • 42. — 35 — Medicare Reform Audience Member: I know we’re out of time, so I’ll make this very short, and I won’t expect an answer now. All three people up there on the platform agree on one thing—that we need a debate, a national debate about what kind of country we’re going to have in the future. And we need to debate the whole question of medical services for older people. I haven’t heard any one of the three people indicating where that debate is going to take place and who is going to be responsible for it and who is going to participate in it. Ken Apfel: If this issue is really going to get consideration, it’s going to happen when groups of Americans come together and struggle with these choices. Health care is an incredibly complicated issue, and the detail can numb you. But the only way that we’ve seen significant change take place—and some significant change has to take place—is with the involvement of the American public. That’s our desire. One of our modest goals in this symposium series is to get people involved in these big choices. Without the involvement of the American people, we’re not going to be getting any- where. So that is part of what this is all about, this forum. Marilyn Moon: That’s why I’m here.
  • 43. Chapter 3 Medicare Prescription Drug Benefit Reform Panelists: David Certner, Jeff Lemieux, and Priscilla Chatman David C. Warner: This panel is going to be focused on the prescription drug benefit that was just passed. A lot of the issues raised earlier today at this conference over the future of Medicare are reflected in the debate over Medicare prescription drugs. But before we turn to the panel, I’d just like to say that since Wilbur Cohen died in 1989, I have been the Wilbur Cohen Professor at the LBJ School. As many of you probably know, Wilbur was the principal person in charge of pushing Medicare and Medicaid through Congress when he was Assistant Secretary for Legislation at what was then HEW (U.S. Department of Health, Education, and Welfare); he subsequently be- came the Secretary of HEW. Wilbur had a theory based on three data points in which he claimed that every 30 years, there was going to be a substantial change in social policy in the United States. He based that on the fact that in 1905, we had Teddy Roosevelt and the food and drug reform laws, among other things, were passed. And, of course, the thing that brought him to Washington in 1922 was Social Security, which passed in 1935. Then, Medicare and Medicaid was passed in 1965 and implemented in 1966. So Wilbur always said that somewhere around 1995 or 1996, there would be the next big change in social entitlement. I think Mrs. Clinton took him seriously, but it didn’t quite work the way she had projected. But then the Republicans took control of Congress, and Newt Gingrich laid out his edict of where things were going to go. He said health care in the United States was going to go either to Canada or to Wal- Mart. And now that we talk about the prescription drug benefit, I think we can find that it has gone in both directions. Today we have a particularly well-qualified group of panelists to speak on this sub- ject. They will each make a presentation, and we’ll save the questions until afterwards. We’ll also try to save some time at the end for the speakers to respond to each other. Our first speaker is David Certner, who is the Director of Federal Affairs for AARP.
  • 44. — 38 — Big Choices: The Future of Health Insurance for Older Americans He is an attorney who has been with AARP since 1982. He directs the association’s lobbying efforts at the federal level before Congress, the administration, and federal agencies. He also served as the chairman of the 1994 ERISA Advisory Council at the Department of Labor and was appointed as a delegate to the 1998 and 2002 national summits on retirement saving. He is going to give a short description of what AARP’s position is in addition to some discussion. The second speaker is Jeff Lemieux, who is the Executive Director of Centrists. org. Jeff holds a master’s degree in economics from the University of Maryland. He served as a consultant and then between 1990 and 1992 was with the Office of the Actuary in the Health Care Financing Administration. Between 1992 and 1998, he was principal analyst at the Congressional Budget Office, where he estimated the cost of both the national health reform plans and later the impact of Medicare reforms enacted in the Balanced Budget Act of 1997, as well as other laws. Between 1998 and 2003, he has been with the Progressive Policy Institute, where he is responsible for studies of overall economic and federal budget tax and entitlement issues as well as health care. Our third speaker is Priscilla Chatman, who is also an attorney, who was Special Assistant to then-U.S. Senator Harris Wolford, who some of you remember back in 1990 got elected to the Senate on a national health insurance initiative and helped bring the issue to the 1992 election and thereafter. She is the counsel and Director of Government Relations and Policy at the National Committee to Preserve Social Security and Medicare, which is a grassroots education and advocacy membership or- ganization for seniors. She develops the organization’s lobbying plan and formulates strategies to implement it. She is also chair of the Health Committee of the Leader- ship Council of Aging Organizations, which is a coalition of over 50 nationwide organizations that address seniors’ issues. So I think we have three people who are very well qualified to talk about the new prescription benefit and give us a number of different perspectives. David Certner: I’m going to start off today by giving you a brief overview of the benefit that is in the new prescription drug bill. The standard benefit design includes an estimated $35 monthly premium and a $250 yearly deductible. After you pay the deductible, 75 percent of your drug costs are covered until you hit $2,250—in other words, the first $2,000 of costs are covered. Then, there is this hole, or coverage gap, between the $2,250 of your total prescription drug costs and a total of $3,600 a year in out-of-pocket costs. Basically, the next $2,850 of prescription drugs costs are not covered at all. After you reach this out-of-pocket cap of $3,600, which is basically the equivalent of $5,000 in total drug costs, then Medicare covers you with a 95 percent rate or greater, thus you may only be paying a 5 percent co-pay or alternatively a cost of $2 for generics or $5 for the brand name drugs. That is a little complicated, as Table 3.1 indicates. I think you heard Marilyn talk this morning about the fact that this was not
  • 45. — 39 — Medicare Prescription Drug Benefit Reform Table 3.1 Medicare Complexity: The Standard Benefit Design $35 Monthly premium $250 Annual deductible 75% Coverage until $2,250 in total prescription costs “Hole” between $2,250 per year total prescription cost and $3,600 per year out-of-pocket maximum (equals $2,850 out-of-pocket) After $3,600 spent per year, then 95% coverage (the greater of 5% co-pay or $2 generic/$5 brand name applies to each prescription); stop-loss threshold is $5,100 in total prescription costs somebody’s idea of what a good benefit would look like. This was the benefit that came out of the fact that there was a limited pot of money, essentially about $400 billion, to be used to create a benefit package. As you can see, you’re not covered for the first $250. Then you’ve got decent coverage for the next $2,000 of costs. Congress also wanted to make sure that they were covering catastrophic drug expenses, so you have a cap on the initial coverage, and great coverage kicks in again once you hit those high out-of-pocket costs. But there simply wasn’t enough money to cover that gap, or donut hole, which would have cost perhaps another couple hundred billion dollars to cover. So Figure 3.1 is the benefit design that we ended up with. It’s certainly not a design that we preferred or we wanted. That donut hole makes no sense to people. It doesn’t make sense in the context of insurance, where, quite frankly, if you have $5,000 worth of insurance costs, what you’ll find is sometime around June or July you’re not going to have any more coverage for your drug costs Figure 3.1 Medicare Standard Benefit Design 75% $250 $2,250 $3,600 Out-of-pocket Total RxTotal RxT Rx Spending Spending $35 Monthly Premium ($420 per Year)Year)Y Referred to as the “Donut Hole” 95%
  • 46. — 40 — Big Choices: The Future of Health Insurance for Older Americans for the rest of the year. So this is obviously not going to be good health policy. It’s not a particularly good insurance policy in that regard. But when you have only a limited pot of money, and you want to target your money in different ways, there are only so many ways to spread out those shaded areas. Ultimately, this is what Congress thought would provide the most benefits to the most people. Part of the idea behind designing it this way, quite frankly, is to get more people who had lower benefit costs to sign up for the program. The bigger the pool, as we all know with insurance, the more likely the pool is going to work. So that, in es- sence, is how the standard benefit design was developed under the prescription drug program. I also need to point out a couple of other things. First of all, this is a voluntary pro- gram. You can purchase this stand-alone drug plan that we’ve just described, or one similar to it, which will be offered by a private-sector entity. Or you can join a PPO or HMO, the so-called “Medicare Advantage plans.” These are broader plans that will include a drug benefit as part of a whole package of Medicare benefits. It may have more or fewer benefits on the drug side because essentially the private entity has some greater leeway about how to design the entire plan. Your third choice, of course, is not to choose any of these new Medicare drug op- tions, but to stick with the plan you have now, whether it be an employer-provided plan or perhaps a Medigap plan. Every year there will be an “open season”. This ben- efit begins in 2006, so the annual open season will be in November 2005, when you will get to choose between these various types of options. Of course, there is a late sign-up penalty, just as with Medicare right now—you can’t choose to stay out of the program until you begin to have health care costs or have drug costs and then choose to sign up for the program. If you don’t sign up right away for a program, you’ll be hit with a fairly significant penalty. If you’re in a qualified plan now, you can switch later on without penalty, but you need to be in a plan program now. Obviously, they want to get you to sign up as soon as possible for a plan, not to just wait until you’re sick. So that is basically the overall design of the plan and part of how the enrollment process works. Now, this is about a 600-page bill, which I’ve tried to summarize briefly. A lot of other issues are intertwined in this package. I should mention that the bill also includes a drug discount card, which will be available for two years until the ben- efit starts in 2006. You will be charged up to $30 a year for this discount card. The discount card may not get you any more significant discounts than other discount cards that are available today. We don’t really know exactly what kind of discounts we’re going to get. Estimates range from as low as 10 percent to perhaps as high as 25 percent on some drugs. So if you don’t have a discount card now, this will probably be a good deal for you. If you do have another discount card now, you may be better off with another discount card that’s available. However, the other advantage of this discount card is that for the next two years, before the benefit goes into effect in 2006, there will be an additional $600 credit on
  • 47. — 41 — Medicare Prescription Drug Benefit Reform the discount card for low-income people, that is people who are at 135 percent of the poverty level. So people at that income basically get a $600 credit on their cards that they can use to help purchase drugs—$600 this year and $600 next year before the actual Medicare benefit goes into effect. So this will be the first benefit from the new law that rolls out. That is an overview, a very bird’s-eye view, of the benefit that this new prescrip- tion drug plan provides. Now, I think as many of you know, this has been a fairly controversial bill. There are lots of issues in this bill that were not touched on in what I’ve just said to you. But let me get to the issue that I think a lot people want to ask AARP, which is why did AARP support passage of this bill? Let me go through a few of the key reasons. One of the most important reasons is that, for the first time, we have finally locked in a prescription drug benefit in Medicare. And it’s one that we think we needed to get into the program to build on. We have been trying to get a prescription drug ben- efit in Medicare for over a decade. In 1988, we had a prescription drug benefit plan, but it was repealed a year later. Since that time, we have been trying to get prescrip- tion drugs back into the law. We have gone through a number of Congresses now, including a number of Congresses where we have gotten fairly close. But each time we have come away either with a stalemate between the parties, or not having enough money put on the table by either of the parties to make it an adequate drug benefit. We’ve walked away having nothing. And each year in each new Congress, we have had to begin again and try to get a prescription drug benefit in Medicare. As you already know, this bill is not even going to be effective until 2006. And we believe it was really just becoming imperative that we begin to make some progress, that we actually begin to put something in the law that begins to provide some ben- efits to some people. Even if it wasn’t all that we wanted, we thought it was important to start making progress on the prescription drug benefit. We were tired of rolling that boulder up the hill every year, only to find that we had to start every other year back at the bottom again. We thought, let’s get something in place, something that begins to provide some benefits, and we can build on that from there. Primarily, we were looking to help who we considered the most vulnerable people in this bill. The first part was getting benefits to the low-income population. There are approximately 13 to 14 million poor and near-poor elderly who get a very good, generous package under this bill. A coverage gap does not exist for this population. It’s a very good low-income benefit. Second, we put into law the catastrophic benefit that I was talking about. Anyone who hits the $3,600 out-of-pocket cost will have very good drug coverage. Basically, what you’re seeing here is this bill begins to put into place the framework for a good prescription drug benefit. It covers low-income people, and it provides a catastrophic benefit for those with the highest drug costs. So this bill is primarily aimed at those with the lowest incomes and those with the highest drug costs. This bill also begins, and I emphasize begins, to make some effort to start to ad-
  • 48. — 42 — Big Choices: The Future of Health Insurance for Older Americans dress the high costs of prescription drugs. As anybody in this room who has been buying prescription drugs knows, prescription drug costs have been skyrocketing. They have been growing at 10 percent a year over the last decade, far outstripping inflation. We needed to begin to get some changes in the law to start pulling down the costs of drugs. This bill makes some changes, but not nearly enough. One of the critical shortcomings of this bill is the failure to do more to control drug costs. Some things in this bill will help to bring drug costs down. For example, the newly created private-sector plans assume negotiations with drug companies that will bring costs down somewhat. And there is some push in this bill to move people to generic drugs, which will help bring costs down. In addition, chronic care man- agement is addressed, to some extent, and some funds and research authorization are included to begin some comparative effectiveness studies of drugs. These studies attempt to discover which drugs in which classes really work and which are the most cost effective. Finally, and perhaps more importantly, we had an opportunity this year. There was $400 billion put on the table to do a prescription drug benefit. Let me put that in context for you. The last Clinton budget proposed about $150 billion for a five-year prescription drug benefit. The first Bush budget proposed at most somewhere under $200 billion for a Medicare prescription drug benefit. If we go back to the 2000 presidential campaign, Al Gore put on the table on behalf of the Democratic Party platform, yes, you guessed it, $400 billion for a prescription drug benefit. Remem- ber—these monies were put on the table at a time when we had rising surpluses. We knew that with rising budget deficits there was not going to be as good an opportunity to try to lock in some money to do a prescription drug benefit. And we thought it was imperative not only that we lock in a drug benefit for Medicare, but also that we lock in that money before it was used for something else. With the large budget deficits, you can see how much of that surplus money has already been used for other priorities. As you can see in Table 3.2, this really is a very good benefit for the low-income population. If you are below 135 percent of the poverty level—that is about $13,000 for a single person and about $17,600 for a couple—you basically pay no premium and no deductible, and there’s not that coverage gap that you see for the rest of the population. At most you’ll be paying a $2 co-payment for a generic drug or a $5 co- payment for a brand name drug. A little over 11 million seniors fall into that income category. This is a tremendous benefit for the low-income population. Now, some of these folks already have coverage either through Medicaid or through a state program. But we’ve locked into the Medicare program now a very, very good program for low-income beneficiaries. We don’t stop at just 135 percent—the benefit actually goes up to 150 percent of the poverty level, which is $14,400 for a single person and $19,500 for a couple. There is a sliding-scale premium, and their deductible is only $50. Again, there is no coverage gap. There is only 15 percent co-insurance. So that
  • 49. — 43 — Medicare Prescription Drug Benefit Reform Table 3.2 Low-Income Medicare Beneficiaries Helped: 13.4 Million Dual Eligibles Below 100% FPL •No Premium •No Deductible •No Coverage Gap •$1 Copay for Generic •$3 Copay for Brand-name •No Copay if in nursing home •No Copay over the $3,600 limit 4.4 million Below 135% FPL Assets Below $6,000 •No Premium •No Deductible •No Coverage Gap •$2 Copay for Generic •$5 Copay for Brand-name •No Copay over the $3,600 limit 6.9 million Below 135% FPL Assets Below $10,000 •No Premium •$50 Deductible •No Coverage Gap •15% Coinsurance •$2 Generic or $5 Brand-name Copay over the $3,600 limit 0.7 million 135% and 150% FPL Assets Below $10,000 •Sliding Scale Premium •$50 Deductible •No Coverage Gap •15% Coinsurance •$2 Generic or $5 Brand-name Copay over the $3600 limit 1.4 million Source: Congressional Budget Office Estimates, 2003. is another 2 million people beyond what I just described who are also getting pretty good prescription drug coverage. This, from our perspective, is really one of the best parts of this bill—this is where we begin to provide the good coverage. It’s not for everybody. It’s primarily aimed at the 13 to 14 million low-income beneficiaries. Al- most one-third of the entire elderly population falls into these categories—and they will receive very good drug coverage. That is not to suggest that it’s only low-income people who need prescription drug coverage. Far from it. We would much prefer for this to be a much broader benefit, but the limited dollars that were available made this impossible. So what is the benefit for everybody else? This is basically broken down in Figure 3.2 by what your prescrip- tion drug costs will be. You can see the bottom portion of each bar is basically the premiums that everyone has to pay each year. The middle section is the co-payments that people have to pay based on their level of drug costs. And you can see, particu- larly as you fall into that donut hole category in the $3,000 to $5,000 amounts, that you’re paying very significant co-pays of the total of what Medicare is paying. But Medicare is really picking up a lot for people who have the catastrophic drug costs. It’s picking up significant amounts for everybody else, though nowhere near the kind of coverage that most people in the private sector are used to. Certainly we would have preferred to have better coverage—but once again, this was really the best that we were able to get out of this Congress. We hope that we can go back and revisit this bill and this issue and the lack of coverage for middle-income folks, particularly the coverage gap that really makes the benefit a lot less worthwhile to people. But, in a nutshell, those are the reasons that we thought it was important
  • 50. — 44 — Big Choices: The Future of Health Insurance for Older Americans Figure 3.2 Impact of New Medicare Law in 2006 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 $500 $1,000 $2,000 $3,000 $5,000 $10,000 Prescription Cost TotalPrescriptionSpendingTotalPrescriptionSpendingT $188 $563 $1,313 $1,500 $1,500 $6,155 What Medicare pays Individuals Co-pay Individuals Premiums to get behind a bill that we knew was only half a loaf. We knew that a lot of our members would be disappointed in this bill because they certainly wanted something more. But we thought this was the best deal that we could get this year, and we thought it was important that we take it. Jeff Lemieux: I work for a new group in Washington called Centrists.org. Of my two most recent jobs, one was with a think tank called the Progressive Policy Institute, which is associated with more conservative, pro-business Democrats. Before that, I worked for the Breaux/Thomas Medicare Reform Commission, a commission gener- ally thought of as conservative. Senator Breaux is from Louisiana, and Representative Thomas is from the Ways and Means Committee and is generally referred to as “god” in Washington. So I was politically confused. I thought the best thing to do would be to find the right niche—and I think I have in that I work for a think tank whose central role is to try to create bipartisanship. We didn’t have bipartisanship on this Medicare bill. This Medicare bill was es- sentially a Republican bill. Some Democrats voted for it, and some, frankly, more
  • 51. — 45 — Medicare Prescription Drug Benefit Reform liberal-leaning organizations like AARP did go along with it. But it is essentially a Republican bill. I’m going to talk about three things. The first is the budgetary context of what’s going on. The second is the political context of what’s going on and how to interpret what’s going on between liberals and conservatives on this. And then, third, are some predictions about what might happen to this drug benefit in the future. First, the context—the budgetary context essentially boils down to “Are you guys nuts?” We have a budget deficit that will probably be about $450 billion this year. It’s not going to go down. We’ve got the baby boomers coming on in about five to ten years, defense spending—we have all these problems. The political context is similar to the budgetary context: “Are you guys nuts?” Everyone in Washington, except for a precious few, exists to beat the crap out of the other party. That is what they talk about when they go into conference, that’s what they think about in their weekly and daily plans. Their goal is to try to make the other party look foolish or to do something they don’t want to do. And the question of whether we’re actually doing the right thing by way of public policy is often left behind in all that. Figure 3.3 shows the four biggest entitlements. Social Security is at the bottom. It is about 4.5 percent of GDP now. It’s going to grow by about 2 percent of GDP, GDP being the whole economy, over the next 30 years. The next largest, and even faster growing, is Medicare. It is likely to be as high as 6 percent of GDP by 2030 with this drug benefit. Many senior citizens over 85, especially if they have nursing home care, get Medicaid benefits. And so the surge in Medicaid spending occurs after the surge in Medicare spending as the baby boom generation gets over about 85. And finally, interest on our federal debt—interest is another entitlement of the federal government. The more federal debt we have, the more interest we have to pay. We pay it to ourselves as citizens and investors, and we also pay it to foreign investors. We’ve had a big narrowing of the interest curve over the last five years or so because we reduced the deficit. We had a surplus for a little while, and so interest rates are very low right now. That’s not going to persist. We’re building up the deficit at $450 billion a year. The interest rates are going to go back up. And this interest entitlement could be the largest entitlement by the time the baby boomers are fully retired. Now as Marilyn mentioned earlier, sometimes things that don’t happen or that can’t happen, won’t. We don’t have any leadership in Washington at this point, essentially in either party, but you have to bring the preponderance of the blame to the Republicans since they’re in charge—who is willing to take on this issue. The deficit is just not in their vocabulary right now. They don’t care how big it is, they just want to talk about tax cuts. And when spending comes around, we’ll spend it. Non-defense spending is increasing, not as fast as defense spending, but it is still increasing very fast. Now let me try to explain how I think about the political context of health care debates in Washington, and this Medicare debate in particular. I was in Las Vegas making a speech a couple of weeks ago, and we were in this
  • 52. — 46 — Big Choices: The Future of Health Insurance for Older Americans Source: Centrists.org. Figure 3.3 Four Big Entitlements 9 8 7 6 5 4 3 2 1 0 1980 1990 2000 2010 2020 2030 PercentofGDP Interest on Public Debt Social Security Medicare Medicaid space alien bar where the bartenders are all dressed up as various characters of the Star Trek series. It was great. They had a virtual reality thing behind the bar where you pay a fee and you can go into a simulator where they simulate a Borg invasion. Now the Borg are bad guys. As they scoot around through the universe, they tend to be ruthless and interchangeable. They all look alike. They are very patient. They are almost robotic or insect-like. They hate individuality. They hate inequality and confusion and disorder. The other ride was the Klingon attack. Now the Klingons are very passionate. They are very violent. They are sometimes sort of mystical. They have these beliefs that are unshakable. They are often unencumbered by what you would call normal logic or systematic thinking. Here is what happens in Washington. Liberals are es- sentially like the Borg. Their goal is to assimilate all private health care into the gov- ernment realm. And assimilate means that they stick these things in you, and while you’re on the ride, they actually stick pins out at you from the chair. They suck you in and you become part of their collective. And from then on out, you are under their control and part of their team.
  • 53. — 47 — Medicare Prescription Drug Benefit Reform What liberals in Washington essentially try to do is take what exists of private health care and give it to government to run because they sincerely believe that is bet- ter. And that is an important point. This is not an evil thing. They sincerely believe that government-run health care is better. They believe that only government control can really rationalize the chaotic, inequitable health system that we have. They believe that price and benefit controls will have to be applied, and that the government will have to set prices for health care and set benefits. And probably most distressingly, I think that they believe sometimes that it is okay to destroy the current health care system in order to create the new revolution. That can be a little bit distressing, and like with the Borg in Star Trek, resistance is futile. Conservatives, of course, are the Klingons. Conservatives tend to think, well, they don’t really know what they want about health care. Stuart articulated the main con- servative position very well, which is sort of a federal employee-style system. But their positions really oscillate between that plan and defined-contribution health care, which Marilyn said is a codeword for higher deductibles. But their main goal is to prevent private health care from being assimilated into the government. They tend to like private plans like HMOs and Medicare. The more private, the better. They tend to like catastrophic insurance, and they tend to like health care savings accounts. Now this drug benefit was essentially a liberal or Borg idea, and the style of it came from the Clinton Administration. Back in the days when we were having these sur- pluses, the Clinton Administration thought that this was the time to address the drug benefit in Medicare and that doing so would help slow down the previous movement in Medicare, which was aimed at increasing privatization to save money. They said no, let’s not do that privatization to save money. Instead, let’s have a drug benefit. And the benefit design that they came up with was a stand-alone drug benefit. You’ve heard that word from David—“stand-alone” means that it is just a separate policy with a pretty substantial premium—$35 is the estimate in this case. And the clever ones, and they are very clever, realize that a stand-alone drug benefit with a pretty high premium was likely to be a big actuarial problem. What I mean by that is it might not work very well as insurance. The main reason is that when you have a premium, people without any drug expenses aren’t going to want to have to pay that premium, so they won’t sign up. And if you have a lot of drug expenses, you’re going to rush to go ahead and pay that premium because at least you’ll be getting some help. That creates a situation where you have people with high drug costs purchasing in, and people with low drug costs dragging their feet. So you end up with higher and higher premiums, which is actu- arially unsound. When the Klingons came to power, they had to think about this whole drug ben- efit thing. President Bush had made some promises about a drug benefit. There are big surpluses. What are they going to do? As I said, Klingons tend to be emotional, and they thought about this very hard. They thought about the Clinton drug benefit. They thought also about a centrist approach. A centrist approach said look, if we only
  • 54. — 48 — Big Choices: The Future of Health Insurance for Older Americans have $400 billion—which sounds like a lot of money, but for health care benefits, it turns out it’s not—what we should do is not charge a premium. Just let everybody have drug coverage. Since we won’t be collecting premiums, we won’t have quite as much money, so the drug coverage will be even less. Then the centrists said, why don’t we have a zero-premium catastrophic benefit? People will be able to get some discounts, and they’ll know that if they have huge drug spending, the government will take care of it. Now this isn’t very popular be- cause people want cash money. They don’t want to have just insurance protection in case of disaster. But it is actuarially sound. The cost would be manageable, and it would be easy to sync up with employer coverage, Medigap coverage, and coverage that people already have. Well, the conservatives thought about this quite a bit, but it came up against one of their sacred theories, which was that everyone should pay a premium. When you have to pay a premium, you end up having to make all these concessions, and you have problems, like administering the late enrollment penalty. If you don’t have a premium, you don’t have to worry about that. You just give people stuff. If they don’t want to take it, it’s their loss, but you’re just giving it away. But with a premium, you have to get these healthy people in, these people with low drug costs. That’s why there is late enrollment, and that’s why there is that expensive front-end coverage, which has all the strange deductibles. And that’s why there is so much controversy over whether or not this will really sync up well with employers’ coverage. You have to make a choice when you have a more comprehensive benefit like this. Table 3.3 is a different look at the benefit than what David provided. It’s essen- tially the same numbers, but presented in a different way. You look on the left-hand column at your drug spending in a year, and you subtract off your premium if you Table 3.3 Conference Agreement on Drug Proposal Annual Drug Initial Premium Net Benefits Spending (Rises over Time) Benefits (Including Losses) $0 $420 $0 -$420 250 420 0 -420 500 420 169 -251 750 420 356 -64 1,000 420 544 124 1,500 420 919 499 2,000 420 1,294 874 3,000 420 1,444 1,024 4,000 420 1,444 1,024 5,000 420 1,444 1,024 6,000 420 2,352 1,932 7,000 420 3,302 2,882 Source: Centrists.org.
  • 55. — 49 — Medicare Prescription Drug Benefit Reform want this benefit. The third column from the left tells you what your benefits would be, how much Medicare would actually pay. And the fourth column is your net ben- efit after you subtract off the premium. So if you have no drug spending, you would have spent $420 a year on premiums and not gotten anything. If you had $500 in drug spending, you would have spent $420 on premiums, received benefits of $169, and been $251 in the hole. And it gets better—as you get up to $1,000 worth of coverage, you break even. With $1,500, you’ve made $500. It sort of levels off after a time—that’s when you’re in the donut hole. If you get between $3,000, $4,000, $5,000, you don’t get any more benefits because you are building up that donut hole. And then once you get above $5,100, like David mentioned, the really generous benefit kicks in. So again, people are going to look at these numbers and say, “Do I want this?” And if they don’t have drug costs, they ’re unlikely to want it unless they fear the late enrollment penalty, which I think is essentially the main source of controversy. Here are the possible outcomes that I see right now, with my estimated chances of each: • Extend discount cards, add catastrophic, beef up low income: 30% chance? • Fill donut: 20% chance? • Benefit works as intended: 10% chance? • Works via price controls: 40% chance? There is a chance that this drug benefit will be delayed, and people will have a couple of extra years on the discount card that David mentioned. I think that people are go- ing to like these discount cards. Granted, it’s only 10, 20, 25 percent discounts, but that is better than nothing for a lot of people. Plus, the low-income people get a nice $600 benefit each year, which, if left unused, could actually roll over in case there are more expenses the second year than the first. Now there’s a chance that we’ll move toward 2006 and the regulations won’t be ready. People are still worried about the drug benefit, the late enrollment penalties, and the employer problems, so we’ll say, “Why don’t we just go another year with this?” And if there is money in the budget, perhaps we could add a catastrophic benefit and beef up the low-income protections even more. Of course, if you do that, you end up with the centrists’ plan—the zero-premium discount card with the catastrophic benefit. I think there is also a chance that we’ll try to make this thing work by filling in the donut hole. This plan will work if the benefits get more generous. If the benefits are generous, everybody will sign up for the plan, regardless of the premium, and then you don’t have an actuarial problem.
  • 56. — 50 — Big Choices: The Future of Health Insurance for Older Americans So there is a chance that the budget money will be available, especially if the economy booms the next couple of years, and we lose track of the long-run problems with the budget. Then we’ll just go ahead and add to the benefit. There is a chance the benefit will work as intended, but it is a pretty low chance. I don’t think there is a very strong chance that these plans will come forward, that they will be able to compete, that everyone will join up, and that the thing will work just as it’s written in the law. This current benefit could work if we used price controls on medicines. A lot of people say, “Great, lower prices on medicine!” But I have to say, with any sector of the economy with price controls, you’re going to have distortions and problems down the road. You’ll have differences in the way that drug companies and biotechs do re- search. This is a very important issue. A lot of our politicians would rather say “Let’s import drugs from Canada.” They want to get around it without really confronting it. I think this is a very important issue—if we do want to impose price controls, we’ve got to be very careful about it. But I think that is one way to make it work. It’s not my preferred solution, but it’s one way. Priscilla Chatman: Good afternoon. I’m Priscilla Chatman, and I’m with the Na- tional Committee to Preserve Social Security and Medicare. Two people asked ear- lier, “What about speaking for senior citizens? What about speaking directly for us?” Well, I hope I’m going to bring that perspective. Our organization is a senior citizens’ membership organization. We have members all over the country, and I see many of them here today. Thank you for coming. Our perspective is really a different one— and that is actually very sad. In Washington, we are often speaking to ourselves. We have liberals and conservatives, Democrats and Republicans, fiscal conservatives and people who are liberal in their view of spending. But all of us are still inside the Belt- way, and there is a disconnect between what seniors really want and need and what we do. So I’m so glad to be here in Austin, Texas, and to hear from you to see what is really important. I’ve been traveling all over the country, as has the rest of my organi- zation, to talk about the Medicare bill and to see what we hear from the public. A woman in the audience alluded to the fact that there are far more people who are low-income than 10 percent. Well, I’ll tell you why that is another disconnect. The reason is that the federal government defines poverty at around $9,000 a year. But if you have an income of $11,000 or $12,000 a year, you certainly feel that you’re still in poverty, even if you’re not defined as part of the 10 percent in poverty. You can’t afford to buy prescription drugs out-of-pocket. So these people are suffering, and they need a lot of assistance as well. The average female who is a widow has an income of about $15,000 a year in her senior years. The average income for seniors overall may be about $22,000, but that still is a very small amount of money. So, therefore, when we look at this prescription drug bill, we want to look at it from that perspective, and see how it really impacts real people who are going to need this coverage. We often talk about this bill as if it were just a prescription drug bill. We wish in
  • 57. — 51 — Medicare Prescription Drug Benefit Reform fact that it were. Actually, there are many other things that were snuck into the bill. There are a lot of structural changes that were made to the Medicare program, and they actually cost a lot of money. When we talk about the fact that the bill is $395 to $400 billion, a lot of that money was used for other pieces, such as more money for providers, in particular rural providers. Now, we’re not opposed to that, but that’s not the point. Rural providers perhaps need more money, but the fact is that is not something that is going directly to seniors, so we can’t say that we have given seniors $400 billion. Parenthetical to that, I’m sure you have all read that the cost of the bill is not go- ing to be $400 billion, but about $535 billion. That was a little secret that was kept from us until much later. Organizations such as ours don’t necessarily disagree with the dollar amount of $535 billion—rather we disagree with the way it was spent. The fact is that over the course of ten years, the Congressional Budget Office tells us that seniors will actually utilize $1.8 trillion in prescription drugs. So $400 billion, if we use that number, is only 22 percent of that—a drop in the bucket. Just looking at the numbers, you’d say that $400 billion is certainly a lot of money. But the reality is that it will do very little to cover the real costs that is $1.8 trillion. So there’s really a problem. There is a fiscal strain here, which everyone recognizes. Certainly, the government can’t afford to pay $1.8 trillion to do a very comprehensive bill. No one is advocating that. Let me talk a little bit about what the structural threats are to the Medicare pro- gram from this legislation. As I said, we are calling the bill a Medicare prescription drug benefit bill, but it actually does a lot more. This is a summary of our key objec- tions to the new legislation. We believe no bill is better than a bad bill due to the structural threats to Medi- care. These include the following: • Privatization • Demonstration programs (CCA) • Private plans offer drug benefit • Means testing • Cap on general revenue funds. First of all, it begins the privatization of Medicare. People will not call this privatiza- tion—but what it really does is use private health plans to do certain things. The first thing that the private health plans will do is to offer the prescription drug benefit on January 1, 2006. Of course, before that, starting on June 1, 2005, you have private companies, various health insurers and others, who can offer the drug discount card.
  • 58. — 52 — Big Choices: The Future of Health Insurance for Older Americans However, the very first money out of the Medicare bill in early 2005, the first benefit Congress enacted, was to pay private plans additional funds. They have a $12 bil- lion slush fund from which private plans can begin to draw additional money. The rationale was so that private plans would continue to participate in the Medicare Plus Choice plan, which will now be called the Medicare Advantage plan. So if we look at the timeline, it is very interesting that private plans got their money immediately, but seniors won’t get the drug discount card until June 1, 2005, and they won’t actually get the prescription drug benefit itself until January 1, 2006. Marilyn talked indirectly about the demonstration programs when she talked about competition. One of the only good things about the demonstration projects is that we are hearing from conservatives that it’s very likely they may not happen, be- cause the conservative members who voted for the bill are saying, “You can’t put those demonstration projects in my congressional district. We don’t want to do it here, we want to do it somewhere else.” So if everybody says “not in my back yard,” these proj- ects may not happen at all. Of course, the threat to Medicare is that if private plans compete directly with the traditional Medicare program, as you heard, only the oldest and sickest people will stay in traditional Medicare. The healthy beneficiaries, who cost the program less money, will enroll in private plans because initially they would get a little more in benefits at a little lower cost. So that is a great thing initially. Of course, this segmentation will drive up traditional Medicare premiums. Look at Medicare Plus Choice plans now—what has happened to them? Well, at first they had reasonable premiums with extra benefits. Then, they abruptly withdrew from any number of areas, leaving seniors to scramble to get new coverage. Either seniors had to find another Medicare Plus Choice plan if they could, or they had to go back to traditional Medicare. Now traditional Medicare is great, but the point is that these seniors were relying on particular doctors and hospitals, and they may very well have had to change their coverage. If we get that same type of thing with these private plans, then seniors certainly have a lot to worry about. The other piece is means testing or what others are insisting be called “income relating of the premium.” Now, the Part B Medicare premiums will be based on a senior’s income. Those with incomes of $80,000 or more will be paying a larger percentage of their premium. We may not have too much sympathy for people who have an income of $80,000 or more— Bill Gates is often mentioned. However, it really isn’t about those individuals with the $80,000 income. The reality is that the program will save very little money by charging more to only those with incomes of $80,000 or more. What the reality is, is a slippery slope. Over time, this amount will be decreased from $80,000 to 70 to 60 to 50 to 40. Since the average senior does not have an income of $40,000, the program can very easily say, “People with $40,000 a year are higher income people, and they have to pay more.” These persons can’t afford to pay more, and shouldn’t have to. That’s the slippery slope. Plus, means testing ends the universal nature of Medicare. Right now, Medicare is not income-related. Those who earn more do pay more,
  • 59. — 53 — Medicare Prescription Drug Benefit Reform they pay more Medicare taxes while working. That was mentioned earlier. So why should they not get the same, ultimately, when they collect the benefit? Lastly, the new Medicare law puts a cap on general revenue funds, and Marilyn talked about that in terms of creating an artificial price. What this bill says is that once 45 percent of Medicare funding comes from general revenue, the president has to do something, he must work with Congress to make some changes. Now what will those changes be? Will it be that beneficiaries have to pay more out of pocket? Most likely. Or will it be a decrease in the pay to providers? Of course, Congress still has the option of putting more money in, but that is not likely to happen. This is the new definition of when Medicare is insolvent; once 45 percent or more of Medicare funding comes from general revenue. According to Rick Foster, who is the chief actu- ary of the Medicare program, that is likely to happen in 2005 to 2006. So the created crisis will be upon us. Now let me talk more directly about the meager drug benefit itself. Actually that is a lesser problem. Most people would agree that although the Medicare benefit could be much more generous, by itself it might be some form of a starting point. Rather, it is those aspects of the bill that begin to erode the structure of Medicare and social insurance that have led the National Committee to Preserve Social Security and Medicare to come to a final tough decision to actually oppose the bill. Early on, with the Senate version of the bill, we were somewhat supportive, saying let’s try to work with it, perhaps it is a starting point, a building block. However, the structural pieces made that a no-go. Now we have already talked about the fact that the prescription drug benefit will be offered by private plans. And the fact is, as I be- lieve David stated earlier, there is a standard benefit, with the $35 a month premium and the $250 deductible. However, private companies do have the ability to vary that in any way they choose as long as the variance has “an actuarial equivalent value.” Only insurance actuaries know what that means. It is going to be very confusing for seniors. The fastest-growing segment of the senior population is those over 85. Could they sit down and take ten different plans and compare whether they are actuarially equivalent? Of course not. There are young, healthy seniors who are 65 who may be able to do that, even though they don’t want to. But they may be able to. But we have to look at the reality of seniors who are getting older and older and who may have some dementia setting in. In our organization our membership are all people gener- ally over 65, and the outcry we have gotten from them is they don’t want a choice of plans, they want a choice of doctors. So when we talk about choice and we talk directly to seniors, whether we talk to our membership over the phone or we talk to them at town hall meetings, they say, I want my choice of doctor and maybe to a lesser extent my choice of hospitals. But I don’t care about a choice of plans because I don’t want to read all of those plans anyway. Another problem, and this has been alluded to as well, is the gap in coverage. Once a Medicare beneficiary has accumulated $2,250 in drug utilization, the benefit
  • 60. — 54 — Big Choices: The Future of Health Insurance for Older Americans stops and it will pay absolutely nothing at all. The beneficiary must then pay all drug cost totally out of his or her own pocket until and if costs reach $5,100. The fact is that about one-third of seniors are going to fall into that gap. For seniors who don’t fall into the gap, the benefit may be a little bit workable. But for those who do have prescription drug costs over $2,251, then they certainly could have a problem. Also, some seniors have directly complained about not having first-dollar cover- age. Now, realistically, $250 is not a very high deductible, and it seems to us in Wash- ington, even to liberal groups, that that should be manageable. But when we talk to real people in the real world who have an income of $15,000 a year, they say, “You find $250 in my budget.” So that is a sobering fact. Another aspect of the plan is the prospect of escalating premiums. They start out at $35 per month for the standard plan, but the premiums are going to be indexed to health inflation, and they are going to increase every month. Next year we will have the highest-ever increase in the Medicare Part B premi- um—a 17 percent increase that will drive the Part B premiums up to $78 a month. This year we had a 13 percent increase, which drove the premiums up to $68. So health inflation overall, but particularly Medicare, is drastically increasing. We can expect very high increases in that program. Another aspect of this bill has to do with the employer plans—the fact that they do not have the ability to do what we call wrap-around or supplement the Medicare program. For the Medicaid program, that can be very problematic. In some of our more generous states, seniors don’t pay anything out of pocket if they are on Medicaid. Under this new plan, even Medicaid eligible seniors will have to pay a co-pay of $1 to $2 for generics or $3 to $5 for brand name drugs. So again although that may sound like a small amount of money, for people who are eligible for Medicaid, it’s not a small amount of money, particularly for those who are taking ten drugs a month—their co-pays can add up to $30 per month. There are a number of those people, and as I go around the country, I meet them all the time. They look fine and are doing fine, especially if they can take those ten drugs paid for by the Medicaid program. The following points summarize our concerns about the new drug benefit: • Offered by private plans—variability • Gap in coverage ($2,251 to 5,100) • Not first dollar coverage ($250 deductible) • Escalating premiums ($35 month) • Medicaid and employer plans can’t wrap around the Medicare benefit. So in conclusion, we would say that this bill really does not bring forth the struc-
  • 61. — 55 — Medicare Prescription Drug Benefit Reform ture that is most beneficial to seniors. It is far too complex, far too confusing. We are told that one in four seniors is using the Internet now. However, they are the younger, healthier seniors. So when we talk about going to the Internet and comparing the var- ious prescription drug plans and various discount cards to choose which one is best for you, I think we really are ignoring the fact that many seniors have physical and mental problems as well as dementia setting in at the advanced ages that will really make this unfair. There really could have been a better bill structured for seniors. The best scenario now is to begin to work on Medicare—on fix-it bills that would improve the existing program, in particular, allowing Medicare re-importation of prescription drugs from Canada and allowing the secretary of HHS to negotiate prices directly with the pharmaceutical companies. As I talk to town hall meetings, that is something that seniors really understand and are very angry about. They say this makes absolutely no sense. In fact, private companies negotiate with their provid- ers to get the best price possible—so seniors should have that done for them by their Medicare program as well. Audience Member: I would like to ask a question about what employers are going to be able to do. I have a plan under IBM retirement. It is certainly nowhere near Me- digap, and it has gotten worse and worse every year that I’ve been retired. As I try to understand this, companies will get money if they continue a plan if that plan meets the minimum requirements of the new Medicare plan. That means they can still drop it further below where it is now, and they will be paid for doing that. Is that correct? David Certner: You have to understand the context of employer-provided health insurance over the last decade. About 50 percent of employer-provided health insur- ance has gone away. There is nothing right now to prevent employers from cutting back, reducing, and in fact eliminating their retiree health benefits. And what we’ve seen over the last decade is a significant erosion across the board of employer-pro- vided health benefits. You’ve seen it in your own company. There is nothing in the law to stop that. One of our highest priorities going into this bill was to try to encourage employers to keep providing the coverage they were currently providing because by and large, the coverage they are providing is better than what Medicare is providing. So what we agreed to do, and quite frankly worked together with the labor unions and with employers to do, is to provide substantial subsidies in this bill directly to employers to encourage them to continue to provide their retiree health benefit. Now is that a guarantee that they will continue to do so? No, because they could all save money by dropping or getting rid of their retiree health benefits. But by providing subsidies to employers, we were hoping to encourage and incentivize them to stay in the system and continue providing the better prescription drug benefits. So I cannot guarantee to you that your former employer will not further reduce your drug cover- age. But what we think we have done is provide significant financial incentive to the employer to maintain that drug coverage.
  • 62. — 56 — Big Choices: The Future of Health Insurance for Older Americans Audience Member: But they can be paid for dropping it to this level? David Certner: They can be paid for providing a benefit that is at least as good as Medicare. And if they are providing better than that, they may want to drop it. I can tell you they’ll save more money by getting rid of their benefit all together. Jeff Lemieux: Just a quick follow up. Basically, what you said was accurate. Com- panies don’t know what they’re going to do yet, as least the ones that I’ve talked to. Some of them may take this subsidy money and keep their benefits. Others say that what we’ll do is have the seniors buy the Medicare program, and then we’ll wrap around it. We’ll provide additional benefits so it’s not just the Medicare level. There is a little bit of a problem with that though because if you think about it, part of the Medicare drug benefit is based on when your out-of-pocket spending hits $3,600, which is when you get the generous catastrophic benefit. And if your employer wraps around and tries to fill in the gaps of the Medicare benefit, then that will push that out-of-pocket ever farther away. To an economist that is an incentive for them not to wrap around. It’s all very confusing. I’m not sure how this whole wrap-around busi- ness would work. Priscilla Chatman: Yes, I think that is basically the answer to the question. The fact is it is really true that employers have been dropping coverage regardless, because they have been saying it is too expensive, and they no longer want to be in the health care business. So I don’t think it is specifically related to this bill, although the provisions could have been drafted differently so that employers would be more likely to keep coverage. The most significant piece, as Jeff was saying, it the fact that if the employer pays to cover that gap in coverage or the doughnut hole, their spending does not count for filling the out-of-pocket spending. It doesn’t count at all. So therefore it really is to the employer’s disadvantage. That part of the bill should be changed. Audience Member: I would like to continue to get my drugs from Canada. But I guess the drug companies always win. They will not allow that. Is there any kind of promise that we can continue to get our drugs from Canada? Priscilla Chatman: Actually, both Republicans and Democrats have introduced a number of bills regarding re-importation of drugs from Canada. Just the other day Kennedy, Durbin, and two Republicans, McCain and Snowe, as well as others, in- troduced a bi-partisan bill. So it seems that the issue of re-importation is actually getting some support now because it is based on the united cry of seniors—you have to continue to cry out and make that demand. There’s a slight possibility that if any- thing happens on Medicare this year, this is the fix-it that is possible. As of now, when individual seniors go to Canada for prescription drugs, on most occasions, they are certainly not stopped. In terms of Internet pharmacies, that is another issue.
  • 63. — 57 — Medicare Prescription Drug Benefit Reform David Certner: The problem really is quite frankly that Canada is a small coun- try. Even though individuals are still legally entitled to get their drug benefits from Canada, we’ve seen the prescription drug industry taking steps to limit their supply to Canada, which they can do, therefore cutting off supplies to people wanting to get their drugs from Canada. That’s why we’ve seen some of the changes in the bill in Congress right now going beyond Canada and including some of the countries in the European Union and other parts of the world. Looking to other parts of the world will certainly be a response to drug companies limiting supply to Canada, but it also does start to open up the issues of whether or not we can be sure the drugs coming into the country are safe. Drugs in Canada are as safe as they are here. But when we begin to open up to the rest of the world, the FDA starts having a little bit less control over the drugs coming into the country. But re-importation is an issue with incredible popular support. Lots of people are moving toward it in Congress, so we are very hopeful we can get something done this year. There is not a place in the country that an elected official can go right now and not hear about this issue. We are very hopeful that we can combine both opening up the borders to get lower-priced drugs in and making sure we include the safety feature so that we know the drugs coming in are safe. Audience Member: I think one thing that is often lost in this prescription drug bill debate is the fact that the pharmaceutical industry has developed a lot of medicines that are really benefiting mankind in a lot of ways. Oftentimes we lambaste the drug companies for charging high prices and making these drugs unaffordable, but you have to remember that they have created a lot of innovative medicines that are help- ing to serve our health and extend our lives. And I’m wondering how feasible it is and how right it is to engage in something like having drug re-importation from Canada or other countries when in effect that what it going to lead to is much lower revenues for the drug companies to be able to do research. And I also have a concern about Lemieux’s position that the bill is probably written for price controls, and I wonder how feasible that is for drug companies going forward. I’d be interested in hearing what AARP has to say about price controls. Jeff Lemieux: Let me make two quick points. As an economist, if you want price controls over product, you should do that through your own government. With the importation thing, let’s just take the price controls that the other countries have figured out, and let’s bring them in. If you want price controls, do them. But think through what you’re doing. With the drug companies, of course, their behavior is often bad, and we all know that they are in it for the money. The thing that worries me just as much is the po- tential biotech future innovation stream because who’s going to pour money into it? Here’s what happens—if the government has price controls, you have to make sure that they’re really good price controls because the temptation is going to be that
  • 64. — 58 — Big Choices: The Future of Health Insurance for Older Americans you have some new life-saving drug, and it costs five, six, eight, $10,000 a year, and people say this is crazy, we have to have a control on this. Let’s get it down to $2,000 so people can afford it. So the government price control guy gets a cheap price on this drug because it’s a wonderful drug and it’s saving all these lives. And of course all of the biotechs then go out of business, or they convert all of their research into the next Viagra because they know nobody is going to worry about controlling that because it is a voluntary lifestyle kind of thing. So instead of being for life-saving, all the research would be going for quality of life, which would be a distortion. Also, if you think about prices from all over the world, what that leads to in most markets is one world price. And we have to wonder—do we really want the people in Egypt or Thailand to pay the same amount for drugs as the people in the U.S.? A lot of people say yes, everybody should pay the same amount. But I wonder if medicine might be a special enough deal that we ought to negotiate this through trade agree- ments that would have the richer countries paying more than the poorer countries. Maybe we should be paying the same amount as Germany or Sweden, maybe that is fair. But probably not Botswana or Bangladesh. David Certner: Let me just follow directly onto that point. Americans right now pay the highest drug prices in the world. And because seniors basically buy the most drugs and have the least coverage, seniors here are paying the most for prescription drugs in the world. But if you want to look at it in one context, seniors in this country are subsidizing lower drug prices in the rest of the world. Now that makes no sense. And people in Congress have come to understand that that makes no sense. We could cer- tainly support the kinds of products that the drug industry puts forward, but it makes no sense that America, and particularly America’s seniors, should have to support the higher drug prices so that people in the rest of the world can pay lower drug prices. And importation is a way of breaking down that barrier and making sure we are not over-subsidizing the industry. Priscilla Chatman: First, let me say this about re-importation. We are saying great things about re-importation, but actually that is a very sorry solution to the problem. It is not a solution at all. Why should United States citizens have to go to another country? It’s really no solution at all. We should be ashamed that we have to do that or even think about it. But directly to your question—of course pharmaceutical companies make great drugs. Everyone realizes that. But it is their approach in terms of the dollars that has earned them such a bad reputation, unfortunately. Pharmaceutical companies spend a lot of money on direct-to-consumer advertising. Physicians complain that this kind of advertising increases the demand for certain brand-name drugs when there is a generic equivalent that they would prefer to give that individual—but they don’t have the time to sit and argue with that individual, so they just give them the high-cost brand-name drug.
  • 65. — 59 — Medicare Prescription Drug Benefit Reform The other point is that NIH (the National Institutes of Health) does a lot of bench research, which creates the basis for the drugs. Then, this information is sold for a very cheap price to the pharmaceutical companies, and they do the last step of creat- ing the drugs. So when they talk about spending of billions of dollars for research and development, some of that is true, but much of that is not. Much of that is actually done by NIH, and that is the taxpayers’ dollars. Audience Member: I am a senior. I am an unrepentant liberal, and as many people in this room know, quite outspoken. I am angry. I have followed this issue since its very beginning. I’ve got a computer full of articles about this issue. And I think that most of the people in this room are going to be ill-served by this new Medicare bill. And that is because it was put together by special interests who have profits to be made. I would have anticipated that AARP would have resisted this type of profit-making bill. That is my only comment. David Certner: I can tell you that I think part of what you say is true. There is a lot of money in this bill going to places that we would rather not have had it going to. Right now, we are doing some absurd things in this bill. We’re actually taking this absurd step of overly subsidizing private plans because we think private plans can save money. It makes no sense. We don’t think that kind of situation can stand for a long period of time, particularly in a deficit situation. Unfortunately, we don’t get to control the government. We negotiate with those in power and try to do the best we can. It would have been very easy for us, quite frankly, to stand up and say we don’t like this bill, and we think you should go back to the drawing board. But we would have been in the same place we were in 1993, which is nowhere. And we felt that in order to break the gridlock, the lack of action that we have seen for the last 15 years, we needed to take a step forward that we knew was going to be controversial, that we knew was going to disappoint people, because the benefit was not what people wanted, and not what we wanted. It was not an easy decision for us. The easy thing would have been to just say this is no good, go back to the drawing board. And we could have started trying to roll that boulder up the hill again. Instead, we tried to do the best we could to push that boulder up as far as we could and keep the gains that we had for our members and make the best deal we could. Now we think we need to keep going and do more, but that was the decision we made this year, and I think that over time it will prove to be the right decision unless people just want to start all over again, which I think some people do. Audience Member: What is the rationale for trying to privatize health care, either through Medicare or the health care industry? I’m sure there is a rationale, and I’d like to hear it.
  • 66. — 60 — Big Choices: The Future of Health Insurance for Older Americans Jeff Lemieux: I’d like to be the devil’s advocate on that one, whether it is right, left, or middle. The Medicare Plus Choice enrollment peaked at a little less than six mil- lion, and now it is down to about four and a half million. I think it is very valuable to have a wide variety of different plans out there doing different things and seeing what seniors want and like and what works. I think we wouldn’t even have this drug benefit debate if those private plans hadn’t really taken off in the mid-1990s—their enrollment was growing like crazy. And that is what caused all this Medicare reform and federal employee-style thing that morphed into the drug debate because Medi- care didn’t have what the private plans had. So I think it is extremely valuable to have a wide variety of private plans in Medicare as comprehensive plans, the HMOs, the PPOs. Let people choose them. Let the bad ones go bankrupt and pull out. I am a lot more skeptical of the private provision of the stand-alone drug benefit just because I don’t think it is actuarially sound. But in general, I think we gain a lot from having the chaos of the marketplace teaching us some things rather than having the government do the same thing it did for 30 years and never make improvements and not know how to make things better. David Certner: I would say that the one-word answer to your question is “ideology.” The party in control in government right now believes fervently in private-sector plans in health care, despite the fact that there is not a whole lot of evidence that they can do anything to lower health care costs. Our goal in this was to make sure that because we have private plans in Medicare now—Medicare Plus Choice plans—that we maintained the viability down the line of the Medicare program. And if these private-sector plans worked, well I guess that would be great. But if they didn’t work, we’d still have the Medicare program. That is a dynamic we think we have set up right now. But, quite frankly, it is because the people in control in Washington believe firmly in having private-sector plans. And I do need to add that the initial step in this is that Medigap plans that include prescription drug benefits cannot be sold after 2006. The largest seller of those plans is AARP. So as an initial point, we’re going to end up losing money on this bill. Priscilla Chatman: David, can I add to that? Also, one of the things going on with privatization has to do with where the money is going. The fact is that Medicare Plus Choice plans are greatly overpaid, so it is very likely that with these private plans, the same thing will occur. The Medicare Payment Advisory Commission just did a study, and they released the results last week. They said that if you look at the Medicare Plus Choice plans, they were overpaid on average of 7 percent. Now, they said that in some cases, the overpayment is more than 20 percent in some particular coun- ties. With that they did not include the fact that Medicare Plus Choice plans enroll people who are younger and healthier. They didn’t even include that fact. And they made reference to the fact that if you were to include that, the overpayment would be even larger.
  • 67. — 61 — Medicare Prescription Drug Benefit Reform Now we take that and look at the Medicare Advantage Plans, which will be the exact same plans, getting this additional $12 billion. I think part of what David said is abso- lutely correct. There is no reason other than two things. One is ideology, exactly as he said. The other piece—and this is why we really should be alarmed—is that this is also a very deliberate step to undermine Medicare as we have it now so that eventually the Medicare program will, as they said, “dwindle on the vine.” And then, all you will have is an option of a variety of private plans all over the place that of course, don’t want to insure seniors be- cause seniors are too expensive. I think we all agree with them on that. Why should they? Seniors cost a lot of money, which is why it is the responsibility of we the collective—and we the collective are called “the government.” Audience Member: You just said, in other words, most of what I wanted to say. I might suggest to the lawmakers that next time, you might consult us. There might have been a forum before you spring something on us, and we would like to be con- sulted. What we wanted was a drug prescription plan within Medicare. We wanted cheaper drug prices for everyone, not only for us. You wouldn’t have to spend $16 billion or $150 or however much, but what you have done is privatize Medicare and guarantee that drug prices will rise forever. In January, I wrote my two senators with a question and thoughtful letters. To this day, I have not received a response. I realize, of course, that if only I had written on Pfizer or Eli Lilly letterhead or maybe had enclosed a check, I would have gotten a solicitous phone call the very day the letter arrived. And I don’t think I need to com- ment any more. That’s the way it is and that is who was pleased. It wasn’t about us, it was to help the drug companies. Audience Member: Is the outsourcing of U.S. jobs to foreign countries going to have an effect on Social Security and other funds available in this nation? It may be totally unrelated, but when you say two million jobs have moved out, and Social Security is not being paid to this country, is there an effect on Social Security and Medicare? Jeff Lemieux: The larger question is, is the economy going to keep growing as fast as it has in the past. It probably will for a while. And then as the baby boomers start to retire, it will probably slow down. Outsourcing jobs is similar to outsourcing drugs. If it is cheaper overseas, you get it from there. And that has some downsides as well as all the positive things. Audience Member: Other than a comment by Priscilla about the need to negoti- ate with drug companies, would the panel comment on the specific prohibition in this Medicare reform act that prevents the government from negotiating with drug companies? David Certner: I think we agree with Priscilla that that provision should not have
  • 68. — 62 — Big Choices: The Future of Health Insurance for Older Americans been in the bill. Interestingly enough, that provision actually was in both Republican and Democrat bills. People thought it was meaningless because the way the bill was set up, you have the private-sector pharmacy benefit managers negotiating with the industry rather than Medicare. But it is obviously a flash-point to everybody because they understand that prescription drug prices are so high, and people want the collec- tive power of Medicare to be used to help to reduce those prices. That’s not the way this bill has been set up. It has been set up so that individual companies like those in the private sector can negotiate to bring prices down. The Congressional Budget Office in effect is saying that private sector companies can do just as well in negotiating lower prices. I don’t know. We’ll see about that. We’ll be able to tell in a couple of short years whether there has been any ability to reduce prices by these kinds of negotiations by private-sector companies rather than Medicare. We know, for example, the VA uses its collective purchasing power to get much cheaper drugs, but that is also a form of price control because if Medicare is the big buyer, they essentially set the price in the market. So that is another alternative. And I think if we don’t start to see drug prices come down, people will start to look to that kind of alternative. Audience Member: We are talking about re-importation of the drug Lipitor coming from Ireland. How can we allow a drug from Ireland to come here and not from Canada? David C. Warner: Well, birth control pills largely come from Mexico. Jeff Lemieux: I just want to throw out one more point because I can’t resist. People sometimes think that conspiracies are much more important than incompetence when bad policy is made. And we’ve heard a lot of suggestions that this is all about the drug companies, and they do all this stuff, and yes, they were definitely trying to get the best that they could out of all of this. But you shouldn’t forget my slide with the three Klingons hunched over the computer screen trying to figure out what the heck are we going to do for a Medicare drug benefit. I think there is a fair bit of that, and this will evolve with subsequent legislation, which will try to make it not quite so goofy in spots. David Certner: One of the aspects of prescription drug prices has to do with drugs that are ready to come off patent—that’s really when prices begin to drop. Drug companies fight like hell to keep them from coming off patent. They have a lot of legal devices they can use to stall for years to keep those drugs on patent—because when drugs are on patent, the companies essentially have monopoly pricing, and that is when their prices are absolutely the worst. Audience Member: That is what upsets me—that there are so many ways that have not been tried to keep drug costs down.
  • 69. Part III Approaches to Medicare Reform
  • 70. Chapter 4 Framing Policy Approaches for Medicare Reform Presentation by Pamela Herd Kenneth S. Apfel: I don’t know how many of you read the New York Times or theNew York Times or theNew York Times Austin American-Statesman today. The New York Times has an article about significantNew York Times has an article about significantNew York Times changes in employer-provided health care coverage and one about changes in pen- sion policy in Maine. There is also a large article about five different states coming together to try to control costs of their prescription drug coverage. The newspapers are filled with the things we are here to talk about today, and I think they will be for the next several years, so it is important for us to be involved in these discussions. It’s a delight for me to introduce Pamela Herd. Pam received her Ph.D. in sociol- ogy from the Maxwell School in Syracuse. Right now she’s a Robert Wood Johnson scholar in health and social policy at the University of Michigan in Ann Arbor, where she’s writing a book on inequality, gender, race, and old age. Welcome, Pam Herd, to Austin, Texas. Pamela Herd: Good morning. My job today is to try to frame policy options for Medicare reform. We’ve spent a lot of time trying to think through how to do this. And the one thing I’d say starting off is that Medicare reform is very, very compli- cated. On the surface Medicare is a relatively simple program, but the way it func- tions and the kind of reforms we’re talking about are quite complicated—much more complicated than Social Security reform. I thought an interesting way to start out would be to provide a brief reminder about why we have Medicare in the first place. So I found a speech that Lyndon Johnson made in 1964 when he was trying to convince Congress to implement the program. He said, “Nearly 30 years ago, this nation took the first long step to meet the needs of its older citizens by adopting the Social Security program. Today, most Americans look toward retirement with some confidence that they will be able to meet their basic needs for food and shelter. But many of our older citizens are still
  • 71. — 66 — Big Choices: The Future of Health Insurance for Older Americans defenseless against the heavy medical costs of severe illness or disability. One third of the aged who are forced to ask for old age assistance”—which, at the time, was basically welfare—“do so because of ill health. And one-third of our public assistance funds going to older people is spent for medical care. For many others, serious illness wipes out savings and carries their families into poverty. For these people, old age can be a dark corridor of fear.”1 Given this situation, as President Johnson described it, you can see that Medi- care has dramatically contributed to the overall well-being of older Americans. It is important to keep that in mind as we think about what kinds of solutions we want to use for Medicare’s current problems. While it has been a tremendously significant and popular program, it does have some problems, and we need to think about how we want to fix those. Just a quick review: We all know the population is getting older, so we’re go- ing to have a lot more Medicare beneficiaries. The second issue is rising health care costs—in other words, the bigger problem with Medicare is not so much the aging population as it is generally our larger problem of rising health care costs in the U.S. This leads to some significant fiscal problems. Figure 4.1 shows this a little more clearly. The bottom of the bars are Medicare as a percentage of the overall economy, and the top portion is the rest of health care. So you see, Medicare certainly comprises a chunk of that—but the overall problem is that by 2030, over a quarter of the economy will be devoted to health care. So a lot of the solutions would really apply to people of any age. The larger issue is how to reduce health care costs. I think it’s important to keep that in mind. The first solution that I am going to talk about is one that all health insurance com- panies, including the government in its Medicare program, use to control costs—and that is to cut prices. Basically, Medicare would simply pay doctors, hospitals, and health care suppliers less money for the services and the products they produce. This is a feasible approach and one that Medicare has used quite often. One of the reasons it is relatively easy for Medicare to do this is because almost all older people are in this single pool of beneficiaries. The government has a lot of negotiating power. Because they have so many people in their pool of beneficiaries they can negotiate—or pretty much demand—lower prices. The positive side of this kind of approach is that it doesn’t require older people to absorb the costs. Your premiums wouldn’t go up. Your deductibles wouldn’t go up. But the disadvantage is that you can take this approach only so far before the people who supply your health care needs will rebel. A striking example of this oc- curs in Medicaid. While it’s a wonderful program in many ways, Medicaid has some significant problems. In particular, it doesn’t pay doctors enough, so a lot of doctors refuse to see people who are on Medicaid. We don’t want that to happen to Medicare. We don’t want physicians and hospitals to simply refuse to take Medicare patients because the government isn’t paying enough. So you have to balance those two issues when you are thinking about cutting costs as the solution.
  • 72. — 67 — Framing Policy Approaches for Medicare Reform Figure 4.1 Health Care Costs As a Percent of the Economy Sources: Federal Old-Age and Survivors Insurance and Disability Insurance Trustees, 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Online. Available: http://www.ssa.gov/OACT/TR/TR03/ index.html. Accessed: November 22, 2005; and David Cutler, Harvard University, “An International Look at the Medical Care Financing Problem,” July 2003. Online. Available: http://post.economics.harvard.edu/faculty/dcutler/papers/cutler_japan_paper_7-03.pdf. Accessed: November 22, 2005. 30 25 20 15 10 5 0 2002 2030 Percent Medicare Total Health Care CostsTotal Health Care CostsT The second way of cutting costs is to reduce service use, to get people to use less health care. This is always a difficult thing to do. But you could begin by reducing access to new technologies. When new drugs and surgical treatments become avail- able, we’re not always very good at evaluating how helpful these new treatments are. Hormone replacement therapy is a good example. We had lots of people on hormone replacement therapy, and then, years later, it turns out, maybe this wasn’t such a good thing. But meanwhile we’ve spent a lot of money keeping people on those drugs. So Medicare could institute more controls about which new services or drugs or tech- nologies it would cover. In addition to rationing access to new treatments, we could also use another approach to reducing the use of health care. This option, which is a bit more palatable for most people, relies on the fact that if people don’t get sick in the first place, then they don’t need to use medical services. So there is a popular argument that we need preventive services. When Medicare was created, it didn’t contain any preventive care services. We have started to add more over time. One really reasonable approach to increasing preventive care coverage would be to cre- ate incentives for prevention, such as reducing deductibles and co-payments, or adding new preventive services. There are a lot of ways to get people to use more
  • 73. — 68 — Big Choices: The Future of Health Insurance for Older Americans preventive care. In the long run, this might mean that people aren’t quite as sick and won’t use as much health care. Now, this approach certainly has its advantages. But the potential disadvantage is that in the process of trying to reduce long-term costs, you might actually increase the costs of Medicare. As with all the options, what we think will happen when we implement a policy sometime doesn’t—or it works in really surprising ways. It may be that people will use more preventive services, but the cost reductions associated with improved health will not offset the increased costs associated with the use of those services. So we have to keep that in mind when we make changes. The second alternative to reforming Medicare is far more radical than cutting costs. This alternative would require a fundamental change in the structure of Medi- care. I do want to emphasize this. It would be a dramatic reorganization of the way older people get their health care insurance. Currently, almost all older Americans— about 90 percent—are essentially insured by the government. The government acts as one big giant insurance company. Even those people who access coverage through HMOs still rely on the government as their primary source of health care support. In this second option, however, older people could choose to be insured by any one of hundreds of different health insurance companies. Advocates of this approach want us to be able to choose to be insured by either the government’s Medicare fee-for-ser- vice plan, or Cigna’s HMO, or Traveler’s HMO, or whatever. You could choose from one of many different health insurance companies along with the government. That is the idea behind option two. In fact, the way it would work is that older people would get a check in the mail or a voucher, and they’d go out and buy their insurance coverage from one of a number of different health insurance companies. As with all three options, certain key questions frame the issues: Who is your health insurance provider? What does the benefit package look like? How much will people have to pay? Under the current system, as I mentioned, the government is the primary insurer for all older Americans. Under the new premium support plan, while Medicare fee-for-service would still be an option, you could potentially choose from a lot of different insurance companies. Now, how many choices you had in terms of HMOs, PPOs, and health insur- ance companies would vary significantly depending upon where you lived and who wanted to participate. So if you lived in New York City, most likely you would have a lot of different choices in terms of your health insurance companies. But if you lived in rural Alaska or rural Nebraska, you might have only Medicare fee-for-service and maybe one or two other health insurance company options. So under this option, heath care choices could vary a lot depending upon where you live. What about the benefit package? Under the current system, everyone is guaran- teed the same basic package of benefits for a certain premium price. This package doesn’t vary depending on where you live or whether or not you’re in an HMO. But under the premium support plan, there would be all kinds of different benefits op- tions. If, for example, you’re in pretty good health, and you just wanted catastrophic
  • 74. — 69 — Framing Policy Approaches for Medicare Reform coverage, you could buy that relatively cheaply. Or if you wanted more than the current Medicare package of services, potentially you could get more—depending, of course, on how many health insurance providers in your geographic region will actually participate and what health care plans they will offer. Under this option, we don’t really know in the end how many choices you would have. The one thing that, in theory at least, is supposed to be consistent is that all the companies would offer the basic, current Medicare package that we have. After that, there should be a lot of variety in terms of the benefit package which you could choose. And people who chose to stay in traditional Medicare could still get their supplemental insurance from other vendors. What about the price? How much would your premiums cost? These questions point to another big difference between this option and what we have now. Everyone in the current Medicare system pays the same Part B premium. You pay the same pre- mium and generally you have the same deductibles and the same co-payments. It is a standard benefit package that everyone’s got. And consequently, the price is relatively standard. Now, of course, some people use more health care and end up paying more, but that kind of basic structured cost, or the portion of the cost that you’re supposed to pay, is the same for everyone. Under option two, the premium support plan, costs could vary quite a lot. For example, if you choose more health care coverage, you’re obviously going to pay more for the plan. The second factor is where you live because health care costs more in some parts of the country than in other parts. So if you live in Michigan, you’re prob- ably going to pay less for your health insurance coverage than if you live in Florida. The third factor depends on who is in your insurance pool. Because we currently have one big insurance pool with Medicare, everybody’s costs get averaged out over every- body else’s. But once you start dividing people up into pools, the average cost of each of those individual pools changes depending upon who is in that pool. So the more sick people you have in one pool, the more expensive that coverage becomes. The result of all these factors is these premiums will change every year. Costs will constantly fluctuate in a way that they don’t now for Medicare beneficiaries. So how is the government going to determine what your voucher looks like? How much money will you get to go out and buy one of these health insurance plans? The way the price of that voucher would be determined would be through a pro- cess in which all of the participating health insurance companies would send in a bid for the current Medicare package of services. One might say, “We’re going to charge beneficiaries $500 for the current package,” and another might say “$400,” and an- other “$600.” Then administrators would average all the bids and pay 90 percent of the average price. So if the average price of all these different companies is $500, the government would send you a check for $450. I’m going to stop here to see if anyone has any questions or if everything is rela- tively clear.
  • 75. — 70 — Big Choices: The Future of Health Insurance for Older Americans Audience Member: What happens if your HMO goes out of business? Where do you go? Pamela Herd: Right now you can go back to traditional Medicare. But with this new approach, regulation is incredibly important—the government could say you are guaranteed admission to another plan, or it might not offer any protection at all. The big advantages that proponents of this kind of approach claim are that you get a lot more choices about your health insurance provider, about what your benefit packages look like, and, potentially, about how much you pay. We’re Americans, and we love lots of choices—just go to the grocery store to see that. So, in theory, this approach offers a big advantage for us. The second advantage, or claimed advantage, is that this approach could lower costs. This is based on the idea, for example, that if you have one car dealership in your town, you are going to pay a lot more for the Ford Taurus you want at that car dealership than if you get to choose from hundreds of other car dealerships. Nowa- days, you may have 20 car dealerships in your area, and you can also go online. It’s going to be a lot cheaper the more car dealerships you have, and you’re going to get more for your money—in theory. So the idea with premium support is that because you are giving people more health insurance company options, they are all going to compete with each other to get your coverage, so they can insure you. And all that competition is going to generate lower prices and you are going to get more for your money. What is appealing to a lot of people about this system is that doctors don’t have to be paid less, and you don’t have to be told that you can’t access certain kinds of health care. So there is something intuitively appealing about the idea that competi- tion would help take care of the cost containment without our having to make some difficult choices. Whether that is true or not is a whole other issue. We do not know, for sure, whether competition would reduce prices. We’ll never know unless we actu- ally do it. The biggest concern in relation to this approach is that some beneficiaries might be hurt. The first thing to remember is that because all these different health compa- nies are in it to make a profit, their main goal is not always to protect you. Sick people may be concentrated in certain pools that end up being more expensive. You might ask, well, if your plan gets expensive, why don’t you just leave it? The answer is that most of these plans are going to be HMOs, so that when you change plans, you have to change your doctor—and for people who are really sick, this is not an appealing thing to do. There’s also a research-based argument that changing doctors in this way isn’t good for people’s health. Profit-seeking companies are better off having healthier people in certain plans. They may encourage this by adjusting their benefit package, for example. I’ll give you a little story here. My mom worked for an HMO in Connecticut, which shall remain nameless. I was talking to her about this, and she said they didn’t specifically
  • 76. — 71 — Framing Policy Approaches for Medicare Reform target healthy people. I said, “Oh, you don’t?” She said “No, we only segment by geography.” And then she thought about it for a second and realized that her HMO was going after people who lived in the wealthier, suburban districts in Connecticut, who were generally healthier. While regulation might make it harder for HMOs to try to enroll only the health- iest beneficiaries, it’s not clear whether we could completely eliminate this effect, so this system could bode poorly for sicker and poorer people. The other issue here is that most people think that the sickest people are going to end up in Medicare fee-for-service. The real issue with premium support is that if you end up with all the really sick people in traditional Medicare, the government option might just disappear. Now of course we could just say no, this is never going to hap- pen—we’re always going to fund traditional Medicare and make sure that Medicare can’t go bankrupt. But if you do that, you’re not going to end up with reduced costs. How much you should regulate is a tricky issue. The degree to which you regulate really has an impact on how protected we all are. For example, if I tried to buy health insurance as an individual in the private market right now, insurance companies could deny me coverage because of a condition I have or they might refuse to cover for a period of time some prior condition that I have. So if we did this kind of ap- proach, we would need regulations to make sure that didn’t happen. The second big disadvantage to this approach is the argument that it wouldn’t really reduce costs. Here’s why. First of all, this approach requires beneficiaries to choose new plans every year. But will they do that? If they don’t, there’s no incentive for companies to actually lower their costs. But choosing health care plans is astound- ingly confusing. For example, I had five options last year to pick from for my health insurance coverage. I’m funded right now by the Robert Wood Johnson Foundation, which is the largest health care foundation in the world. They spend all of their money basically looking at health insurance and things like that. And I couldn’t figure out my health insurance options. I was calling my mom, saying, what do I do, which one should I pick? It’s not like going out and comparing a Ford Taurus. You can go out and look at the exact same Ford Taurus at 50 different dealerships. The problem with health insurance plans, by and large, is they don’t look exactly the same depending on where you go. So comparing health care plans can be like comparing apples and oranges. It’s really hard to figure out which one you are getting the most for your money in. There are ways that the government could step in and help. With Medigap, people who buy supplemental coverage for their Medicare can choose from six different plans that all these different health insurance companies could offer. That gives you some means for comparison. So there are ways we could regulate this approach to help people choose. But from the perspective of the people who want more competi- tion, the more you regulate, the less competition you get. The second reason this approach could end up not reducing costs is the higher administration costs involved. Currently, everyone is in the same pool, so administra-
  • 77. — 72 — Big Choices: The Future of Health Insurance for Older Americans tive costs in Medicare are relatively low, somewhere between 2 and 4 percent. In the private market, administrative costs are much higher. You get different estimates, but the average is around 15 percent. So we would increase the administrative load and thus increase administrative costs. That is a potential downside. The other issue is that the private sector does not tend to do as well in controlling prices. Marilyn Moon published a study looking at the past 25 years in terms of who controlled costs better, the private sector or Medicare. It seems to be the case that Medicare is a bit more effective at controlling health care prices, mainly because they have everyone in the same pool and thus have a lot more leverage to negotiate with providers. It is a lot easier for physicians to say I’m not going to take Aetna’s HMO than it is to say I’m not going to take any Medicare beneficiaries. So Medicare has a bit more leverage that way. So that is the world of premium support. It is complicated. The advantage is more choice and potentially, more for your money. The disadvantages are that some benefi- ciaries might be hurt and that it is not clear that it will cut costs. The third option involves things we may need to do whether or not we pick tra- ditional cost measures in Medicare or this premium support approach. We might, for example, raise the Medicare eligibility age, which is currently age 65, to age 67 or 68. The argument is that when both Social Security and, later, Medicare were created, people weren’t living as long and spent very few years in retirement. Maybe people just need to stay at work a little longer and keep their health insurance that way, and wait to roll onto Medicare until they are 67 or 68. That may produce some meaningful cost savings, because you have fewer people on the program, and, also, if it stimulates people to work more, that generates more revenues for both Social Security and Medicare. So that does have some advantages. The disadvantage is basically that most estimates are that if we did this, about one in five people between the ages of 65 and 67 would be without health insurance coverage. That is a pretty big downside, and would certainly be a higher uninsured rate than for people age 65 and under. The other piece of this is the people who are aged 65 to 67 are the youngest and healthiest Medicare beneficiaries, so while in theory you would lower costs, you might not get as much bang for your buck as you might like. The second alternative, of course, is to raise taxes. You could raise the payroll tax, which is currently 1.45 percent divided between employers and employees. You could also raise income taxes or maybe roll back some of the tax cuts we just got. There are a variety of different approaches, and raising taxes is one of them. In general, Americans seem opposed to rising taxes. But we have to weigh that against losing Medicare. I think if you put it as a blanket option to people—“Do you want to pay a little more taxes or do you want to lose Medicare?”—most people are going to pay a little more taxes. In terms of this issue about being bur- densome on younger folks, I think this is something younger people in the room have to think about. You may not pay higher taxes, but I know for me, at least,
  • 78. — 73 — Framing Policy Approaches for Medicare Reform if Medicare dramatically cut benefits or if Social Security were dramatically cut, I am ultimately going to be responsible for my mother. I am paying for it one way or the other. It might be cohesively through a big group through higher taxes or I might just be doing it myself out of my after-tax budget. The third option is, of course, raising premiums. In general, this is an issue about do we want to raise the cost of health care for beneficiaries by raising premiums or deductibles. The advantage to doing this is that it doesn’t place as much of a cost or burden on young people. The disadvantage is that older people are already paying one-fifth of their incomes for health care costs—so this would put us back to where we were in 1960, when Medicare was created. The estimates are that these costs are only going to get higher, partially because of some of the changes we made to the program, which shifted more of the costs onto beneficiaries’ backs. So we have to be careful about how far we take that and how much of the burden we expect beneficia- ries to contribute. Now, here is one thing that I want to make clear. We talked a little bit about means testing—should Bill Gates get Medicare or not? This is an intuitively appeal- ing approach for a lot of people who are worried about how more vulnerable people will fare. Why not just target more resources to people who need them? It is a very logical way to think. And it is a very logical way to go about conducting social policy. The problem is we are not always so logical in terms of how we respond to things. Generally, what we find is that most targeted programs tend to be pretty unpopular because only certain people get benefits from them. This includes pretty much any means-tested program in the U.S.—Medicaid, SSI, AFDC, which is now TANF— generally, these programs are not very popular. Second, only about half of people who are eligible ultimately get benefits. So while this approach is intuitively appealing and, if done right, potentially really great, in general it doesn’t tend to work incred- ibly well at protecting poor people. The argument is that when we are all participating in a program, when we all pay taxes and receive similar benefits, everyone is outraged if something happens to that program. You have an investment in it, and you are going to go out and argue for it. And when you have more people invested in a program, the more likely it is to sur- vive. So an option within raising premiums is more means testing within Medicare to make wealthier beneficiaries pay a little more. Just keep in mind that that is a concern with that approach. I want to close with something that LBJ used to conclude his speech about health care. “These problems will not be fully solved in 1964 or for a long time to come.” Obviously, he was right about that. “They will not be solved by the federal govern- ment alone nor even by government at all levels. They are deeply rooted in American life. They must be solved by society as a whole. I ask the help of all Americans in this vital work.”2 I’m an optimist, and I think this is really true. The more you all are involved, younger people included, the more we will start to see solutions to these programs that we want.
  • 79. — 74 — Big Choices: The Future of Health Insurance for Older Americans Notes 1. Speech by Lyndon Baines Johnson, President of the United States, “Special Message to the Congress on the Nation’s Health,” February 10, 1964. Social Security Online History Page. Online. Available: http://www.ssa.gov/history/lbjstmts.html#healthmsg. Accessed: November 28, 2005. 2. Ibid.
  • 80. Part IV Civic Dialogue and Deliberation: What the Public Has to Say
  • 81. Chapter 5 Big Choices: The Practice and Potential for Public Deliberation by Taylor L. Willingham and Vanessa L. Davis At the heart of the Big Choices facing the U.S. is the need for a public voice on the issues. Aside from elections, polling is the most common method of finding what the public thinks on any particular issue. But polls are often inadequate in that they represent what people think when confronted with a particular question, phrased in a particular way. A more useful, if less common, way of seeking public opinion is to ask, “What would people think if they were informed about the issues and had the chance to speak with other citizens about the advantages and disadvantages of differ- ent options?” This kind of interaction is known as “deliberation.” Deliberation is based on the premise that when people have a way to come to- gether to talk about divisive issues, they can make sound decisions based on shared values. When citizens deliberate, they recognize their own and others’ assumptions, acknowledge the validity of diverse perspectives, learn about the costs and conse- quences of public policy alternatives, move from “I” to “we” language, and define their shared interests and values.1 In order to engage in deliberation with others, people need to see the issue named and framed in terms that resonate with them—a reflection of their hopes, concerns and way of thinking about the issue. This is often different from the way the issues are characterized by the media, policymakers, and experts. How Deliberation Differs from Other Forms of Public Discussion Most opportunities for public discussion promote a “sound bite” approach that of- ten further divides people with diverse perspectives. Media commentary, attuned to the standards of spectacle and diversion, is typically confrontational and ideological, consisting of exchanges among people who have already made up their minds. Media accounts tend to focus on personalities and not issues.2
  • 82. — 78 — Big Choices: The Future of Health Insurance for Older Americans In public hearings, for another example, comments usually consist of one-sided advocacy statements of an individual’s position before a governing or public policy- making authority. A third example of public conversation—formal debates—can provide the public with an opportunity to compare and contrast different views, but they do not help us explore common concerns or think together about how we as a public might actwe as a public might actwe together to solve public problems. Typical conversations among trusted friends, family members, and professional colleagues is a step toward an authentic conversation. However, these conversations may simply reinforce our own perspectives. Our professional and social networks are usually composed of like-minded individuals or at least individuals with similar in- terests and/or common experiences. These conversations lack the rich complexity of public deliberation because diverse perspectives may not be fairly represented within our existing social and professional circles. Public policy based solely on the outcomes of a conversation among like-minded individuals is bound to fail or at a minimum to have adverse effects on large populations not represented in the conversation. In contrast, deliberation requires participants to weigh the consequences and costs of various options based on what is truly valuable. This kind of interchange helps citizens fully understand the implications of their own opinions—how they would affect others who may have life experiences very different from their own. What is most valuable about these conversations is what they reveal about the struggles that citizens go through as they sort out the trade-offs and consequences of pursuing one option over another. Framing the Issues Using the methodology pioneered by the National Issues Forums Institute, Texas Forums3 members created a framework for the Medicare issue using the following criteria: • The issue must be named and framed in terms that reflect how people are experienc- ing the issue. • The framework must propose various alternatives that do not allow the participants to resort to deeply entrenched and divisive positions. • There must be more than two approaches (otherwise a debate will ensue), but usu- ally no more than four approaches in order to keep the approaches and the conver- sation manageable. • Each of the approaches must have elements that are appealing to the participants as well as potential trade-offs that might be unacceptable.
  • 83. — 79 — Big Choices: The Practice and Potential for Public Deliberation • The approaches are not mutually exclusive. The participants, through deliberation, may select actions within the approaches that are acceptable. At the same time they may determine possible outcomes that are not acceptable based on what they heard from heard in their interviews with stakeholders. The framework helps participants to talk through the “gray” aspects of the issue and narrow the range of options for moving forward together. • The framing captures the most fundamental concerns behind the way people see the problem. In other words, everyone can see themselves in the approaches that they are asked to consider. The framework was constructed with hope that it could be useful for any group that wished to create a deliberative dialogue on the big choices we all face in relation to Medicare. Notes 1. Nancy Kranich, Michele Reid, and Taylor Willingham, “Civic Engagement and Academic Librar- ies,” College and Research Libraries News, vol. 65, no. 7, July/August 2004. 2. Keith Melville, Taylor Willingham, and John Dedrick, “Different Approaches to Conducting Na- tional Issues Forums,” in The Deliberative Democracy Handbook: Strategies for Effective Civic En- gagement in the Twenty-First Century, ed. John Gastil and Peter Levine (San Francisco: Jossey Bass, forthcoming). 3. An initiative of the LBJ Library to train citizens in techniques of deliberation and to provide a sup- port system for deliberative dialogues. See http://www.texasforums.org for more information.
  • 84. Chapter 6 Framing the Issues for Public Discussion—Three Options Medicare Overview Medicare is without question one of the most successful government programs in our Nation’s history. While Medicare does not cover all health care needs, the program has enabled almost all older Americans to gain access to basic health care services. For most older Americans, a major illness no longer translates into a financial catastrophe for the family. Medicare is also without question one of the most expensive government programs in our Nation’s history. Last year, Medicare costs were nearly $300 billion, 2.6 percent of our entire economy, and 13 percent of the federal budget. Financed by beneficiaries through premiums, by workers through payroll taxes and through general government revenues, Medicare is the third largest government program, after Social Security and defense spending. Medicare faces growing challenges in the years ahead. The number of beneficiaries will double over the next 30 years, as the baby boomers enter retirement. Health care costs continue to grow much faster than the U.S. economy, placing economic strains on taxpayers and beneficiaries alike. And Medicare’s gaps in coverage will place large and growing burdens on many beneficiaries in the years ahead. In 20 years, Medicare may be the single largest item in the federal budget, exceeding the cost of Social Security. The Medicare system currently faces significant funding shortfalls in the years ahead. Starting this year, Medicare revenues started to fall behind spending. By 2019, the Medicare Trust Fund will be insolvent. And even if nothing is done to reform the system, in 10 years: • Monthly Medicare premiums will grow from $67 to $165 (including the Rx drug premium), and considerably higher levels for upper-income beneficiaries. Note: This chapter was originally published in a pamphlet given to participants in the deliberative forums in order to frame the issues for discussion.
  • 85. — 82 — Big Choices: The Future of Health Insurance for Older Americans • General tax revenues for Medicare, primarily financed by the federal income tax, may increase from 0.8 percent of our economy to 2 percent. • Out-of-pocket health expenses for older Americans will grow significantly. Our nation faces big choices in the future. Should we tighten health expenditures? Should we rely more on private competition to control costs? And/or should we raise taxes even further to strengthen the system, and if so, who should pay? Option 1. Defined Benefit: The Government as the Insurer Option 1. Defined Benefit: The Government as the Insurer Option 1. Defined Benefit: What should be done? Studies show that over the past 20 years the cost of health care has risen more slowly in Medicare than in the private health insurance market because Medicare can negotiate low prices from health care providers and suppliers. The govern- ment could further trim Medicare’s cost by reducing both the cost and the use of health care services and products by reducing the amount it pays to doctors and hospitals, and negotiating lower prices for health care products, such as wheel- chairs, etc. Furthermore, the government could negotiate lower prices with phar- maceutical companies. Experimental medical technology increases health care costs. Medicare could re- strict the use of untested and experimental treatments. If there is not solid evidence that they work, Medicare should not cover them. Medicare should cover and encourage the use of preventative care, thus lessening the need for more expensive treatment later. Moreover, Medicare could better coor- dinate care for the sickest beneficiaries who use the most services. What are the potential costs and consequences? The quality and availability of care may decline if physicians and hospitals do not receive enough compensation for the services they provide. Older Americans who completely rely on Medicare for their health plan may not be able to obtain services if doctors do not receive adequate compensation to cover the cost of treatment. If Medicare pays only for “tried and true” treatments, there may be less of an incentive to develop new procedures and drugs to solve health problems facing the older population, such as Alzheimer’s, osteoporosis, and diabetes. Furthermore, there is no guarantee that prevention and coordination of care will reduce costs. What do you think? • Should the government be the primary negotiator of health costs on your behalf? If not, then who should ensure affordable health care for older Americans?
  • 86. — 83 — Framing the Issues for Public Discussion—Three Options • Would you be willing to accept give up the option to pursue experimental treat- ment to cut costs? • If prevention becomes a primary focus of Medicare, what should be done to cover those who do not choose healthy lifestyles? • Who is most likely to be adversely affected by this option? Option 2. Defined Contribution: Private Health Insurance Companies as Insurers Option 2. Defined Contribution: Private Health Insurance Companies as Insurers Option 2. Defined Contribution: What should be done? Under this approach, the government would provide premium support (“defined contribution”) that older Americans could use as a basis for their health care cover- age—but they would then be free to choose their insurer —the current Medicare sys- tem, a Health Maintenance Organizations (HMO) or a health insurance company. The beneficiary would pay the difference between what the government supported and the cost of the plan they select. Beneficiaries would have many more choices about both who would be their health insurance provider and what kind of coverage they wanted. Medicare would compete with private insurers to provide health insurance. This competition should reduce the amount of health insurance premiums and increase service coverage as companies compete for you to be their customer. Basically, beneficiaries should get more care for less money. Premium support would also simplify older American’s coverage. Medicare covers only half of older people’s health care costs, so most beneficiaries purchase supple- mental coverage from private insurers. With premium support beneficiaries would apply their government support and personal resources to a single health care plan. What are the potential costs and consequences? More choice, however, could have disadvantages. There is evidence that the sickest, and therefore the most expensive, beneficiaries would remain in traditional Medicare. Because premiums are tied to the costs accrued by the pool of beneficiaries within each plan, the costs for traditional Medicare could spiral out of control and bankrupt the government run program. Moreover, it is unclear whether or not more choice and competition will actually lead to lower costs. Critics argue that a market system is unlikely to drive down prices because beneficiaries would have to switch health plans on almost a yearly basis to create enough competition to reduce prices. Every year, beneficiaries will have to choose from hundreds of different health plans. Most people have difficulty analyzing that many options.
  • 87. — 84 — Big Choices: The Future of Health Insurance for Older Americans What do you think? • What are the advantages to having more choices about who will provide your health insurance? • Who should make the decision about what treatments do and do not get covered by Medicare dollars that go to private insurers? • What is our responsibility to those who are under insured because they have chosen a plan that does not meet their needs? • Who is most likely to be adversely affected by this option? Option 3. Raising Revenue: We All Pay for the Benefits We Want Option 3. Raising Revenue: We All Pay for the Benefits We Want Option 3. Raising Revenue: What should be done? Neither tinkering with the current defined benefits system nor moving to a defined contribution system will save Medicare. We must raise revenue. Medicare should be a defined benefit that ensures high quality health care for all older Americans, and we should all share in the cost of these benefits. Older Americans are living longer, and more older Americans will enter the system in the next two decades. We can reduce costs by raising Medicare’s eligibility age from 65 to age 66, 67, or even higher. This option would provide incentives for people to work longer, further improving tax revenues for Medicare. In addition, we should increase the 1.45 percent tax employers and employees each pay for Medicare. This approach would adequately fund the Medicare system over the long haul and enable older Americans to receive the quality care that they need. Beneficiaries would not be forced to compromise the quality of their health care. What are the potential costs and consequences? Beneficiaries already devote 20 percent of their income to out-of-pocket health care costs. And changes to Medicare in 1997 already shifted more of Medicare’s costs to beneficiaries. By 2025 beneficiaries’ out-of-pocket health care costs are expect- ed to rise to 30 percent. Further, delaying eligibility could be very problematic for Americans approaching retirement. Current estimates show that increasing the age of eligibility to 67 would leave one in five people between age 65 and 67 without any health insurance coverage. Further, given that beneficiaries between 65 and 67 are the healthiest and least costly of the Medicare population, the cost savings from this approach would not be very high. Increasing costs for working-age Americans by raising the payroll tax would pro-
  • 88. — 85 — Framing the Issues for Public Discussion—Three Options duce its own disadvantages. Working-age adults already pay a significant amount of taxes for Medicare and Social Security. As the population ages, working-age adults may face a significant burden supporting older Americans. What do you think? • Is basic health care for older Americans, like education for younger ones, a right that you are willing to support through higher taxes? • Would more revenue for Medicare result in higher quality health care? • What impact might this approach have on health care costs? • Who is most likely to be adversely affected by this option?
  • 89. Chapter 7 Medicare: A Deliberative Dialogue Composition of the Participants Ideally, participants in a deliberative dialogue would comprise a representative sample of the population—in this case, they were interested volunteers. In recruiting par- ticipants, the symposia organizers consciously targeted organizations that represent populations of varying age ranges. For example, a significant number of roundtable participants were recruited from the membership of the following groups: • Third Age, part of the University of Texas at Austin’s Continuing Education Pro- gram for senior adults (over 60 years of age). • Future Forum, an LBJ affiliate that seeks to expand the involvement of young Tex- ans with the LBJ Library and to foster greater civic involvement within the com- munity (typically ranging in age from 25 to 45). • LBJ School of Public Affairs graduate students in Ken Apfel’s course “Pensions and Health Care in the 21st Century.” Participants were assigned to tables to maximize diversity of age, ethnicity, and gender in each forum. Each intergenerational forum was comprised of students, Medicare beneficiaries, and young professionals. No group was larger than 15 par- ticipants, thus ensuring adequate opportunities for all to participate. Moderators and Recorders The forums were moderated and recorded by trained volunteers from the LBJ Library Texas Forums network. These volunteers had completed a two-day training session This is a summary of the deliberative discussions held at the conference on April 23, 2004, and serves as an example of what sorts of issues and conversation might arise during a deliberative dialogue on Medicare.
  • 90. — 88 — Big Choices: The Future of Health Insurance for Older Americans during which they had learned the theory that supports deliberation as well as practi- cal skills in moderating a deliberative forum. The Forum Process Following Dr. Herd’s overview of the three approaches (framed in Chapter 6), Taylor Willingham described the process of deliberation, the role of the moderators, the participants and the recorders, the timeline for the forums, and the process for con- cluding. Willingham charged the groups to listen to each other for understanding and to think through the costs and consequences of each of the approaches, taking note of those consequences they would be willing to support and those that would not be acceptable based on what they hold valuable. The moderators gave an overview of guidelines for an effective forum: • The moderators are neutral. • The goal of the forums is to deliberate, not to debate or win people to your side. • Listen for understanding. • Even if you disagree with someone, try to understand what motivates his or her perspective. • Seek common ground. The moderators then invited participants to share a personal story or experience that illustrated why the topic of Medicare is important to them. Sometimes referred to as the ice-breaker stage of the forum, these stories reminded the participants that they were not simply engaged in an intellectual discussion, but were undertaking a deliberation about an issue that deeply touches people. Stories build empathy and lay the groundwork for the group to work together. The forums then moved into the deliberation phase, exploring the benefits and costs of each approach and the underlying values that motivate the participants to hold a particular perspective regarding that approach. During the forums, two conference coordinators and a Texas Forums moderator circulated among the forums, selecting one youth and one elder from each table to participate in a final debriefing forum. This debriefing forum was held “fishbowl” style, with the selected participants seated in the middle of the room around a table and the remaining participants observing from outside of the circle. Willingham moderated the debriefing, asking participants to reflect on the elements that should frame decisions about Medicare—for example, their group’s common themes, over- riding concerns, unacceptable outcomes, and deeply held values.
  • 91. — 89 — Medicare: A Deliberative Dialogue What the Participants Said Summary Notes The starting point for many of the participants was a recognition that Medicare could not be discussed fully without a broader conversation about the entire health care system in the United States. The participants in these forums leaned toward universal health care as a means of addressing equitable distribution of health care. • Participants acknowledged that Medicare would have to be changed, but said that the current system reflected their values of fairness and an elderly person’s right to a basic level of health care. • Participants wanted to see a greater emphasis on prevention in our health care sys- tem and expressed a willingness to endorse more prevention programs within Medi- care. • Participants recognized that some level of rationing is necessary in order to provide health care services for all elderly people; however, they were cautious about how rationing would be implemented and insisted that it should not be based on ability to pay. • Participants strongly believed that government involvement is the best way to share costs across a larger pool of participants and ensure coverage for everyone. They were concerned that shifting coverage to private insurers would leave the sickest and poorest in the government pool. • Participants would not support policies or plans that limited their choice of health care providers. • Being able to choose health insurance plans was not a high priority for the partici- pants, and they were skeptical that competition among providers would result in lower health care costs. • Participants firmly acknowledged that health care costs were going to increase and that we would have to pay more, but both the elderly and the youth in the forums were concerned about the impact that raising revenue would have on the other generation. Approach 1: Defined Benefit—The Government As the Insurer Shared Costs/Greater Negotiating Power This first approach was seen as the most effective way of sharing costs because it
  • 92. — 90 — Big Choices: The Future of Health Insurance for Older Americans involved spreading the risk across the largest possible pool of participants. As one person said, “That is probably the best way to contain costs because that large a pool can actually negotiate better than any of these small ones.” Participants also felt that this large pool would give government a strong position in negotiating lower prices with pharmaceutical companies: “We do need the government in the business of negotiating prices.” Participants were less enthusiastic about the govern- ment limiting or further reducing reimbursement to health care providers. Participants noted that the current reimbursement rate has negatively impacted health care providers and did not want to drive physicians out of the health care business. They were less mag- nanimous when discussing the cost of pharmaceuticals and the power that the pharma- ceutical lobby has on policymakers, and they endorsed a stronger role for government in negotiating prices with the pharmaceutical companies. Prevention The participants soundly supported a greater emphasis on prevention in our health care system, not just for those on Medicare, but also for the youngest members of our society. Preventive care was discussed in several contexts, and, as heads vigorously nodded affirmatively, one participant speculated that the group would endorse more prevention coverage within the existing and future Medicare programs. When the participants discussed prevention, they noted several key factors: • Prevention must begin before age 65 and become a priority for our entire health care system, “making sure that the younger people have access to preventive benefits and good health care in order that we know how to preserve our health as we age.” • The system must include incentives for preventive care. The participants proposed incentives such as early education programs in schools and corporate subsidies for employees who stay healthy. • Prevention is not currently covered by most health care plans. Rationing One option proposed by this first approach is to reduce health care costs by reducing the use of health care services and products, particularly if the medical technology is still experimental and unproven. Participants were very aware of the issue of ration- ing. However, as participants explored this option, they seemed less interested in limiting access to new, untested technologies, and more willing to consider rationing based on the beneficiary’s age and other critical factors. One group speculated that perhaps people who have reached a certain age should not get all of the health care that is available “because we know that with Medicare costs so much of it is incurred at the end of life and last year of life,” but the group did not resolve what the condi- tions for rationing might be.
  • 93. — 91 — Medicare: A Deliberative Dialogue Approach 2: Defined Contribution—Private Health Insurance Companies As Insurers Choose Providers, Not Insurers The premise of this approach is that everyone would receive a defined contribution that they could then use along with additional personal resources to shop for insur- ance plans. The current Medicare system would be an option and still available for those who might not be insurable by the private sector. The argument based on valu- ing “choice of insurance plans” did not ring true for the participants. In fact, choice of insurer was a non-issue for them. “Choice” only mattered when it came to the right to choose the provider. Reduced Costs Are Not a Guarantee Participants strongly questioned whether or not market forces and competition be- tween insurers would keep costs down in a market that does not have sufficient or useful information to make decisions. Participants were skeptical of this option and concerned about a dizzying array of insurance options that are difficult to under- stand, loopholes in insurance policies, and the possibility that a pre-existing con- dition might prevent you from switching insurance companies or cause you to be dropped by your current company. One group noted that consumers do not want to go back to the private insurance shopping cart each year to sort out what one lawyer described as “legalese that the average consumer cannot wrap their mind around be- cause it is just not clear.” Another group concurred that without an active consumer base that regularly changes companies based on price—something they saw as highly unlikely—the insurers would have no incentive to keep their prices affordable. The administrative costs of private insurance were also a factor. One woman ex- pressed concern that increasing the role of private health insurers for elderly Ameri- cans would only increase health care costs because it added another level of admin- istration: “Why do we pay the middleman? I don’t understand why we pay these HMOs as an organization—doesn’t that just add to the amount that we pay?” Ac- cording to another group, this was not simply a matter of “the old traditional private versus public sector arguments as much as there are just so many built-in uncertain- ties, and there are so many built-in costs, particularly administrative costs.” Approach 3: Raising Revenue—We All Pay for the Benefits We Want Not an Approach, but a Reality In discussing the third approach, participants noted that this is not an approach, but a reality that we will have to accept. Participants were concerned about who should pay for Medicare. They felt that approach 3, raising revenue, was not an option, but an inevitability, no matter which kind of health care program is crafted. Healthcare costs will rise, and Medicare will require more revenue.
  • 94. — 92 — Big Choices: The Future of Health Insurance for Older Americans Some younger participants said that they would be willing to pay higher taxes to sup- port the healthcare of older Americans, as long as they are guaranteed that they will re- ceive the same care when they are older. They younger participants were concerned that changes to Medicare financing would mean breaking promises to the elderly and were wary that any promises of Medicare for them would be fulfilled. However, others among the youth are reported as “somewhat reluctant to admit that they wanted to pay more. . . . So we have to assume, those of us who have already paid those [taxes] . . . that maybe there is going to be some reluctance to [pay more taxes].” Many elders were concerned about the fall-out of overtaxing younger generations and were willing to pay higher co-pays to prevent overburdening the nation’s youth financially. But overall, they felt the bulk of the Medicare expenditures should be pro- vided and administered by the government. In discussing how much each generation should contribute, one woman’s comment caused a pause in the conversation when she noted, “I just want to remind everybody here that we all still pay taxes. Those of you who are under 50 and under 30, you pay taxes on Social Security. It is not a free ride after you retire. So we still all pay our fair share of taxes.” General Common Themes Medicare Reflects Commonly Held Values As often happens in a deliberative forum, the participants focused on the values reflected by various policy options and how their own values connected with the out- comes of different courses of action. In several comments about our current Medi- care system, participants spoke of how it appeals to values that they hold, and they wanted “whatever kind of system we’re going to have . . . to preserve the principle . . . of Medicare.” This is reflected in comments like, “Medicare presented an equalizer for everybody.” Several times they expressed concern that a move to private insurance would pose a problem for high-risk and high users of the health care system because private insurance companies would not be required to cover them. Participants did not want to see a system where anyone would be left out and saw Medicare as being the means to achieve that goal for everyone. One participant reflected her under- standing of the group’s sentiment: “We as a society have decided, I think, and thank- fully, in my opinion, that we are not going to just let people pass away without any kind of care. I didn’t hear any voices advocating that we just can’t afford to provide that care. We as a society have to find a way to afford that.” Several of those who are currently in the Medicare system expressed satisfaction with the system as it is and did not want to throw it out for an uncertain and untested new system. They felt confident in the current system because it has worked for them. They liked the program the way it is, and their comments reflected a pragmatic approach to the challenge. One woman said “If it ain’t broke, don’t fix it!” Another woman reported that, “One of the themes that I heard [at my table] is that I like my Medicare like it is now. . . . I’m satisfied with it. It’s given me good service. And it’s important to me like it is.” What
  • 95. — 93 — Medicare: A Deliberative Dialogue many of these participants were expressing is that the current system reflects much of what they hold as valuable or important, even though they came to acknowledge that it might not survive without some painful choices. Fairness The concept of fairness permeated the conversation of Medicare reform. Participants believed that each citizen is entitled to a minimum level of care, regardless of their ability to pay. They did not define the components of minimum care, and only briefly discussed how, and by whom, such decisions are made. Fairness was also discussed in terms of who should be actively participating in the development of policy. Participants felt that all parties were entitled to participate in creating a new Medicare system. In fact, they felt it unwise and unfair to craft a new Medicare program without consulting all affected parties. Several times, they echoed concern about the presence (or absence) of stakeholders in the forums that morning. Stakeholders identified in those concerns were beneficiaries, policymakers, the gov- ernment, health care providers, and developers of health care products. In fact, by the conclusion of the forums, fairness had emerged as one of the most important values. At the close of the debriefing forum, the participants were asked, “What costs can we live with?” Interestingly, by the third response, the participants were explicitly listing what they could not live without. They could not live with a system that did not consider the issue of fairness. While this forum was a good begin- ning to the conversation about fairness, much more deliberation is needed to craft a definition of what fairness means to the group and what one group trades in order to achieve that definition. Choice Older Americans expressed a hearty suspicion of the meaning and implications of “choice” in any kind of Medicare system. They voiced a strong desire to choose their own providers (doctors and hospitals) but expressed little interest in expanding their choice of health plans. They reasoned that health plans are laden with confusing language, exclusions, and fine print. The process of “shopping” for a health plan is too complex; in this case, they said, more choice would cause more burden and con- fusion, and the losers would be the “supposed beneficiaries” of this system of choice. Younger people varied in their desire for choice. Some younger participants said they wanted more choice and did not trust the government to administer a fair health care system. Others felt that choice as presented in the Medicare discussion is illu- sion. They expressed the conviction that it is the responsibility of our country to provide a safety net even for older people who choose poorly and find themselves underinsured. “What if you are a senior and you choose a certain coverage program that might be somewhat cheaper, but covers fewer things because you don’t have any acute problems or serious problems, and you are trying to make your house payment, your mortgage or whatever, on a fixed income. And then six months down the road,
  • 96. — 94 — Big Choices: The Future of Health Insurance for Older Americans all of a sudden you have some sort of serious problem that is not covered. What do you do with those folks? Then you are back to indigent care in the hospital and the emergency room, which is not very efficient.” There was a considerable suspicion about what “choice” really means when it comes to individual choice of insurance companies and level of coverage. Is this type of choice truly a benefit? Participants were overwhelmingly concerned that they be able to choose their own particular doctor. Health care for them ultimately came down to the relationship that they had with an individual in the health care field. No one was willing to sacrifice that choice, so decisions about insurance policies are likely to be driven by the policies that will cover the patient’s choice in provider. Medicare Cannot Be Solved without Broader Consideration of Health Care Every small group entered the conversation by noting that Medicare must be broadened to include the rest of the healthcare system. Some groups explicitly referred to universal health care while others focused on the rising cost of health care for all and the need for some way to also address the lack of health care for many younger people. One woman also felt that Medicare would be a great place to start modeling a uni- versal health care system that would benefit all U.S. citizens: “There was an underly- ing point of view, I believe, within our group that it is unconscionable for the United States to be the only developed country as far as I know that has no universal health coverage. And although we are here and convened to discuss Medicare for those over 65, if it doesn’t start with us, the wiser elders, those who have experience with the government-controlled and managed program, where will it change?” There were two terms that were employed by more than person: “universal health care” and “womb-to-tomb” care. Each was considered an equitable distribution of healthcare, although the nuances of each are not clear. Both systems were assumed to enhance preventive care, ultimately decreasing the financial burden on the Medicare system and increasing efficiency of the entire health system. In fact, this advocacy of preventive care, either through womb-to-tomb comprehensive service, employer in- centives to provide adequate health insurance, employee health education programs, or school programming on health was quite strong. “Universal coverage doesn’t just mean that we take care of people until they are old and then they die, but we need to start taking care of our babies and young people, too.” Health Care Rationing and Cost Containment Participants viewed health care rationing as a moderately acceptable method of cost containment, but raised concerned about potential infringements on basic health care entitlements and the ethical dilemmas of rationing. Participants in the “fishbowl” were posed with the following two questions to conclude the debriefing forum: “We’ve been talking some about rationing. Are there any costs we can live with? If we were going to craft a policy, what elements are a ‘must have’”?
  • 97. — 95 — Medicare: A Deliberative Dialogue When addressing this first question—what costs are we willing to accept—partici- pants quickly reverted to explicitly naming unacceptable costs: fairness and a citizen voice. They wanted all stakeholders at the table, consultation of the people affected by the policy before the policy is enacted, a substitute for Medigap that was fair, equal access to the basic elements of health care, and consideration for negative and positive economic consequences of such changes. When faced with the second question, participants reiterated their answers to the first question. They added that they are willing to pay more money and compromise some services to create a system that supports their values, but only if the resulting revenue is earmarked for health care, all citizens are guaranteed basic services now and in the future, and all stakeholders are involved in the crafting of the new plan. As one participant put it, “I think the main issue as we got down to the discussion was it set- tles on how much is it going to cost in terms of taxes and my personal premium and how much of my choice can be preserved in the process, my choice of providers.” Participants were willing to tolerate some level of health care rationing, but only to achieve the basic entitlement for all. They were willing to accept rationing as an instrument of cost-containment provided it did not infringe upon the individual’s basic health care. The question becomes, “How do we define basic health care?”—a question that will require further exploration in future forums. These discussions were not easy, however. More than one group reported that they struggled with the costs and benefits of health care rationing. One reporter’s group reasoned that most expenses are incurred at the end of life, and most of the Medicare money is spent on a minority of Medicare beneficiaries. A possible solution, then, was to impose limitations on end-of-life care or specific health conditions and redi- rect these to support basic care for more people. The ethical dilemmas of such limita- tions were raised, but not fully explored due to time constraints. Health Care As an Industry Most discussion of a privatized Medicare system revealed the sentiment that big busi- ness is an intruder in the health care system. Many comments reflected a great deal of skepticism, fear, and suspicion of a privatized Medicare system (the foundation of approach 2). In general, people felt that privatization would worsen a system in which we already have a health industry that lacks healthindustry that lacks healthindustry care. They felt that health care should be about people, not profit. “There was a real fear of privatization that was expressed. And I think that will just have to be there.” The question for participants was whether health care should be based on profit and, if so, how much profit, particularly with regards to coverage for the elderly: “What we have to ask is, how much profit is enough?” And yet, without a profit motive, some questioned whether or not there would even be a health care industry. As one person said, “I think that would be a way to think about health care in the future so we don’t drive out physicians and we don’t drive out whole industries from wanting to get in the business of health care. Because
  • 98. — 96 — Big Choices: The Future of Health Insurance for Older Americans we do have to remember that at the end of the day, these companies are here to make a profit. We live in a capitalist system, and they do need to maximize revenues for their shareholders. Unless we want to have the whole federal government completely run the health care system, and we don’t want to have any more private industry, we really need to think about ways to incentivize them to stay in it.” Some participants pressed the idea that we live in a capitalistic economy and as such, business has a vital role to play in the health care industry. “I am concerned that we not exclude the private sector in providing [universal, womb-to-tomb] coverage. I am not an advocate of a single-payer system. I think there are opportunities and experience within the health care industry to provide adequate care in a well-man- aged system. . . . I think that we make a mistake when we put ourselves in a position of saying that all things commercial are bad. I think that we need to be willing to accept the experiences of the for-profit industry, if you will, in terms of its ability to produce a good product.” While participants were skeptical of the health care industry, they were deeply committed to and trustful of their own physicians and wanted to preserve their abil- ity to choose their physician and to make sure that Medicare reimbursements were adequate to keep doctors in the business of accepting Medicare. They wanted to limit the intrusion of insurance companies and health care industries while protecting their own health care providers. The Impact of Private Accounts The biggest concern about private accounts was the impact they would have on those who have the fewest options and how the smaller beneficiary pool would be a drain on public resources and weaken the government’s negotiating position. Participants were concerned that a defined contribution plan would reduce the size of the benefi- ciary pool and leave the government Medicare program with the sickest and poorest beneficiaries. This ultimately increases the premium cost for those people left be- hind—people who already can’t afford health care. Decreasing the beneficiary pool would also decrease the government’s ability to negotiate costs. One participant said, “I would just like to underscore for people making policy that there was absolutely zero interest in plan 2 for people who were 65 and up [in my group]. So if you go that route, you better look for another job in four years. Two, I would like to add that almost everybody at the table said that health care should not be a profit-making industry. So they were really concerned about how much the drug companies were making and how much doctors were making, and they were really into heavy regula- tion of both.” This Is a Community Issue Requiring a Community Solution Forum participants readily accepted the challenge and responsibility of discussing Medicare reform, even though some felt they needed more education in order to truly understand this complex, confusing, and overwhelming issue. Participants were
  • 99. — 97 — Medicare: A Deliberative Dialogue convinced that the time is ripe to discuss the issue, but their urgency about the importance of this issue escalated during the forums. Their comments reflected a thoughtful approach to Medicare reform and demonstrated their capacity to sort through the complex alternatives and identify core values that motivate their support for various courses of action. They charged that resolving the Medicare crisis is a social, community respon- sibility, and they were ready to accept the challenge of addressing the issue. In fact, several participants noted passionately that Medicare is a societal responsibility that will require a community solution. “I think that we came to the conclusion that it is a community issue in its largest context of community. . . . So it is going to still require that it is not just the government in the conversation, but a lot of the private pieces . . . because it is a community issue requiring a community solution.” They were eager to continue the dialogue and even expand the range of stakeholders at the table to invite more diverse perspectives and stakeholders with seemingly conflicting objectives. As participants deliberated, they became more and more aware that Medicare will have to be reformed if it is to be available to future generations; their sense of urgency increased. However, there was never the sense that “reform” should be a complete overthrow of the current system. “One thing I think we should be thinking about is what is it that we have now? Let’s start with that. Let’s not go back. We start with that and let’s see what else we can do to improve it without really wanting to improve it overnight. It is going to take time, but something steady and long run.” Another person said, “The other thing that I heard, if we are going to end on an encouraging note, is that there is a lot of willingness, at least in this room, to compromise—from the elders, from the young folks, paying more taxes, etc. What that says to me is two things. One is that this is a much more progressive group than average [audience laughter]. Two, it says that we have some real failures of political leadership because this issue has not been crystallized for the public to really face the choices that we are talking about today.” Concluding Thoughts As noted in the earlier chapter, deliberation produces thoughtful acknowledgement of the difficult choices we face as a public and the possibility of new relationships, or, at a minimum, a new understanding about the reason for our differences and a willingness to continue to engage with each other. Keeping people at the table talk- ing despite their differences is no small feat, and its benefits should not be underes- timated. Throughout the forums on Medicare, participants articulated the difficult choices that decisions about Medicare reform will require. They talked about the tension inherent in decisions about how much it will cost each person, either in taxes or higher health care costs, who pays, who gets access to what level of services, and who makes the decisions about the future of Medicare. An overriding theme of the forums
  • 100. — 98 — Big Choices: The Future of Health Insurance for Older Americans was the desire to be involved in future conversations and decisions about Medicare. People also spoke of a willingness to engage with others who hold different perspec- tives because that level of engagement was seen as a means to long-term, publicly supported solutions. No single forum can fully resolve the kind of complex problems that require pub- lic deliberation. But when people begin to see themselves as political actors work- ing with others to find common ground, new possibilities emerge. The charge is to continue the deliberation, to continue to tease out the gray areas, and to make difficult decisions together that can lead to sustainable action. As one woman noted, “I applaud this kind of forum, but I hope it doesn’t just end up with another report that is going to be filed, and then we move on to something else, because there are some basic issues, the role of government of the people and by the people. We are the people—we’ve got to do something.”
  • 101. Part V Policy Alternatives: Additional Resources
  • 102. Chapter 8 Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future by Shea McClanahan, Kenneth Apfel, and Parisa Fatehi Medicare is, without a doubt, one of the most successful social programs in our nation’s history. Today, elderly Americans enjoy almost universal access to health care that provides substantial protection against most of the financial burdens associated with a major illness. The combination of Social Security and Medicare now provides tens of millions of older Americans with basic health and income security. The condition of older Americans was not always this encouraging. In 1960, the poverty rate among those 65 and older hovered around 35 percent,1 while almost half (44 percent) of the elderly were without any form of health insurance.2 On average, the elderly spent almost 20 percent of their modest incomes on health care.3 The passage of Social Security and Medicare were milestones in hedging what had been daunting trends that threatened the standards of living of older Americans. On the whole, Medicare has been widely successful in providing access to health care and protecting older Americans from major health care expenses. But despite major achievements, the system faces real strains, including a looming expansion in the number of Medicare beneficiaries, skyrocketing health care costs, significant gaps in coverage, and Medicare’s growing fiscal shortfall. In the face of these trends, finding ways to meet the mounting health care needs of older Americans—to make good on one of the central tenets of our nation’s social contract—represents one of the greatest challenges we face today. Can we reach consensus on the proper approach that ensures the well-being of older Americans, while reconciling Medicare’s long- standing tradition with America’s values and resources? This chapter traces Medicare’s historical evolution and growth since enactment, assesses alternative mechanisms that have been instituted to deal with emerging challenges, provides an overview of where the program stands today, and evaluates
  • 103. — 102 — Big Choices: The Future of Health Insurance for Older Americans Medicare’s fiscal and demographic future. The balance of the book contains detailed description and analysis on various policy options and approaches for strengthening Medicare in the 21st century. It is based in part on the conference held in April 2004 in Austin, Texas, entitled “Big Choices: The Future of Health Insurance for Older Americans.” Medicare’s Early Historical Evolution Enacting Medicare: Ambitious Ideas, Early Compromises On July 30, 1965, in Independence, Missouri, President Lyndon B. Johnson signed Medicare into law, marking the end of a long debate over whether the federal gov- ernment should provide basic health insurance for Americans. Since 1965, almost all older Americans have been legally entitled to a basic package of health benefits. Over the years, Medicare, touted by its supporters as one of the most popular social programs in U.S. history, has faced continued challenges.4 Pressed to improve on important coverage gaps (both in terms of benefits and of beneficiary populations) while controlling rising costs and keeping pace with private health insurance trends, Medicare has been in the spotlight of public debate since 1965. The idea of a social insurance system for health care went back many decades before Medicare was finally enacted. Nearly a century ago, individual states began to debate the possibilities of implementing European models of social insurance, such as the Bismarckian compulsory health insurance in Germany or England’s national health programs.5 The debate rose to the national level in the late 1930s and 40s, including most notably President Truman’s calls to implement national health insur- ance through the Social Security system. Legislative proposals to establish national health programs commenced in 1939, with a bill by New York Senator Wagner to establish a federal health program consisting of grants to states. A series of bills, the “Wagner-Murray-Dingell bills,” first in 1943 and then again in 1945 (the sec- ond time with significant backing by the Truman administration) proposed national health insurance, but the attempts failed, in part, due to powerful opposition by many groups led by the American Medical Association. Over the next 20, heated political opposition to so-called “socialized medicine” sealed the early fate of national health insurance proposals.6 Since the passage of Social Security in 1935, the United States has provided unique social protections to older persons. Proposals aimed at providing targeted health in- surance for the aged became a political middle ground to the universalistic proposals of the 1940s that aimed to provide coverage for the entire population. Although the quest for national health insurance was relegated to the back burner during the Eisenhower decade,7 bills to include health insurance for Social Security beneficiaries were nevertheless introduced every year between 1952 and 1960.8 Interest groups remained sharply divided. On one side, those favoring a social insurance approach with benefits financed by worker payroll taxes hoped to build on the existing Social
  • 104. — 103 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future Security system. Others opposed to a universalistic scheme suggested a means-tested plan for low-income seniors.9 Despite these earlier attempts, it was not until the Kerr-Mills Act passed in 1960 that any form of health coverage for aged Americans was enacted. Kerr-Mills pro- vided a means-tested system of federal grants to states to pay for needed medical services for the elderly poor,10 but it was not the comprehensive plan envisioned by social health insurance proponents. Kerr-Mills emerged as a counterstrategy to earlier efforts at enacting the more universalistic “Medicare.” Amidst a climate of growing public support for health insurance for the aged, staunch opposition to a universal- istic approach gave rise to the alternative encapsulated by the proposal authored by Robert Kerr and Wilbur Mills. Rather than provide universal health insurance for the aged, the Kerr-Mills bill sought to expand federal assistance to states in order to provide needed medical assistance to the elderly poor. Specifically, the federal gov- ernment would match between 50 and 80 percent of the costs for states choosing to participate in the program.11 With a presidential campaign looming—President Kennedy promised to make Medicare a priority—opponents of federal health insurance saw Kerr-Mills as a de- sirable alternative. Accordingly, Congress passed the Kerr-Mills law in 1960. The election of John F. Kennedy that same year put Medicare back on the agenda, but Kennedy’s efforts also failed. In the early 1960s, Kerr-Mills continued to be the only means of providing federal assistance to portions of the elderly population. While its proponents no doubt considered Kerr-Mills to be a political success, it was unsuccessful in terms of achieving its policy objectives. Essentially, states were reluctant to participate; in fact, after five years, 90 percent of the Kerr-Mills funds were going to only five states.12 Because of its extremely limited reach (most elderly had no access whatsoever to Kerr-Mills benefits), Kerr-Mills failed to alleviate the financial burdens of older Americans who were seeking affordable health insurance, regardless of their income. Medicare’s passage was ensured with the victory of Lyndon Johnson and his Great Society in 1964. With a clear supportive majority in Congress, some version of health insurance for the aged was bound to emerge, but it would not be without more politi- cal battles and eventual compromise. In January of 1965, the House Ways and Means Committee considered three competing proposals for the elderly: President Johnson’s call for a hospital insurance program; a state-run means-tested plan promoted by the AMA; and a voluntary system advocated by many Republican members. The end result—H.R. 6675, “Medicare”—was a compromise that incorporated elements of all three of the proposals. Medicare Part A would be a hospital insurance program for the elderly financed by workers’ payroll taxes, and Part B would cover outpatient services through a supplementary scheme based on doctors’ and patients’ voluntary participation, paid for by beneficiary premium payments and general federal revenues. The AMA plan, in turn, became the template for the federal-state means-tested Medicaid program, enacted in the same year.13 Medicare was enshrined
  • 105. — 104 — Big Choices: The Future of Health Insurance for Older Americans into law as a near-universal health insurance program for the elderly. Though sub- stantially less than the national health insurance envisioned by Truman, given the political battles of the decades that followed, the final product was actually broader than many had anticipated.14 Solid Coverage, but Gaps from the Start Medicare was a clear political victory for supporters of a social insurance approach for health care. It was assumed that the new program would draw the elderly into the mainstream of American medicine, not to mention equalize coverage for all aged in- dividuals.15 Medicare’s initial coverage scheme included a basic package that covered hospital services, very limited extended care and home health care after hospitaliza- tion, as well as outpatient diagnostic services.16 These benefits, available universally to all enrollees, represented a dependable basic coverage plan and was a vast improve- ment on the disjoined and underdeveloped programs of the past. Many supporters of national health insurance saw Medicare as a first step on the road to an eventual goal of universal health insurance for all persons. Facing sharp political opposition from fiscal conservatives, Medicare’s architects limited the scope of benefits in the name of political and fiscal feasibility.17 As one scholar tells it, “protection from the un-budgetable expenses of acute illness was the announced aim of the Medicare program, but few of its backers imagined that the program features of 1965 constituted reasonable provision of that protection.”18 It was clear from the start, then, that Medicare was never intended to foot the entire medical bill for older Americans.19 Instead, it was designed to be a sizeable subsidy to make health care more affordable for this vulnerable population. Despite this basic acute care coverage, Medicare’s benefit structure had substantial gaps from the start. Its modest coverage failed to encompass such important areas— especially for the elderly—as catastrophic coverage, long-term care, outpatient pre- scription drugs, or preventive care. The overall modest levels of coverage lead many older Americans to purchase supplemental insurance to fill some of the gaps. These gaps in coverage can be attributed on the one hand to political and fiscal constraints, and on the other, to the private health insurance market that existed in the 1960s that focused on basic acute care coverage. Medicare was engulfed in the broader health insurance market that traditionally focused more on providing financial protection from acute illness or injury and less, if at all, on reimbursement for chronic care.20 Medicare’s benefit structure, then, was patterned after the private insurance model, which was heavily oriented toward insur- ance for hospital stays and physician services.21 With this model, it is not surprising that the original Medicare benefits package failed to cover the costs of chronic ill- ness, prescription drugs, or medical physicals. Furthermore, the private market em- phasized minimizing the “moral hazards” associated with insurance. To discourage overuse of services, Medicare, in turn, instituted a number of so-called “cost sharing” mechanisms such as insurance co-payments and hospital deductibles.22
  • 106. — 105 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future Perhaps what was most noteworthy about the original benefit package was its em- phasis almost solely on acute care, with gaps in coverage in areas of health care that affect the elderly most of all, such as prescription drug coverage and long-term care.23 Very soon after Medicare’s passage, the exclusion of some of these benefits was called into question. As early as 1967, President Johnson formed a Task Force on Prescrip- tion Drugs to investigate the possibility of adding prescription drug benefits to the Medicare program, though nothing was enacted at that time.24 Long-term care was never seriously considered, since it was understood less in medical terms, and more as the “maintenance of frail persons.”25 This mismatch between Medicare’s benefits and the health circumstances of many of the elderly has been part of the reform debate for decades.26 Political battles over extending coverage in these areas continue to rage, testifying to the still large gulf that separates the overall health needs of the elderly from society’s willingness, or ability, to collectively pay for them. Medicare’s Growth since 1965 All in all, Medicare’s story is one of expansion. Since Medicare’s enactment in 1965, the program has grown significantly. Growing numbers of beneficiaries, an increasing range of benefits, and rising health care costs have heightened the need for greater resources. Not only has the number of Medicare beneficiaries almost doubled since its enactment, but the spectrum of benefits Medicare provides has also broadened in order to keep pace with trends in the medical sector. Medicare now provides coverage for more extensive hospitalization, home health care, hospice care, and ambulatory care services, and will soon provide limited prescription drug coverage. The federal government has used a variety of approaches over the years to meet rising costs and expanding obligations, including efforts aimed at both raising revenues and containing costs. Payroll taxes have gone up and premiums have increased. On the regula- tory side, efforts to control costs have varied immensely, ranging from the promotion of private sector involvement through incentives to direct intervention in the prices of health goods and services. Section 3 examines these trends in greater detail. Expanded Beneficiary Population One of the major areas of expansion for Medicare over time has been in the size of the beneficiary population. Since the enactment of Medicare in the mid-1960’s, the elderly population increased by 70 percent. Over this same time period, the percent- age of the overall population over the age of 65 increased from just below 10 percent of the total population to 13 percent in 2000.27 In addition to a growing elderly population, over the years Medicare has gradually incorporated new beneficiary populations. In 1972, Congress extended health insur- ance coverage to include those Americans under the age of 65 with long-term dis- abilities, as well as those suffering from end-stage renal disease (ESRD). By the mid- 1980s, the proportion of non-elderly disabled Medicare beneficiaries represented 10
  • 107. — 106 — Big Choices: The Future of Health Insurance for Older Americans percent of total enrollees.28 Also in 1972, participation in Medicare was opened for the first time to voluntary buy-ins for those not covered under the program. Then, in 1984 spouses aged 65 to 69 of workers under age 65 were also added to the ben- eficiary population.29 With these additions, plus the general growth of the elderly population, the fed- eral government increased Medicare’s coverage to more and more individuals. In the nearly 40 years since its enactment, the Medicare beneficiary population has more than doubled.30 Expanded Benefits Just as Medicare has expanded to include additional beneficiary populations, its ben- efit package has expanded substantially since its original passage.31 In 1965, basic Medicare coverage included, through Part A, a 90-day hospitalization provision, ex- tended care after hospitalization for up to 100 days, and home health care after hos- pitalization for up to 100 visits per year, and through Part B, outpatient services.32 Overall, the Medicare benefit package has generally kept pace with an evolving health care sector. Technological changes in the health care system made it necessary for Medicare to modernize and expand in tandem. In response to these trends, legis- lative changes over the years have gradually (though perhaps more slowly than some would have liked)33 made coverage more and more comprehensive, especially in the areas of hospitalization, home-health care, hospice care, and respite care. In addition, a new prescription drug benefit was recently added to take effect in 2006. After an initial benefit in 1968 that extended hospital stay coverage to include a lifetime reserve of 60 additional days,34 Medicare saw almost no substantial expan- sions to benefits until the early 1980s, when home health benefits were broadened and hospice care added.35 In the same year, while it did not itself constitute a ben- efit expansion, the inclusion of Medicare supplemental insurance (Medigap) under federal oversight was a significant development. Medicare supplemental insurance consists of private insurance plans purchased by beneficiaries in order to cover some of Medicare’s gaps in services and cost sharing. Just after Medicare was enacted, less than half of beneficiaries had some kind of private supplemental insurance, but by the 1980s, the market had grown to include more than 70 percent of Medicare en- rollees. The development of the more comprehensive supplemental insurance market was also significant politically, ultimately having the effect of reducing support for the inclusion of catastrophic coverage in Medicare throughout the 1970s and most of the1980s.36 Since Medicare’s enactment, ambulatory care services have also grown substan- tially.37 In particular, the proliferation of Ambulatory Care Facilities (ambulatory surgical centers—“ASCs”, and outpatient departments—“OPDs”) has increased ac- cess to health care for many poor and disadvantaged groups, including the elderly.38 Ambulatory care services include medical evaluation and management visits, minor surgical procedures, diagnostic imaging, and laboratory tests. Medicare paid for a
  • 108. — 107 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future good portion of ambulatory care, although beneficiary co-payments have also risen over the years.39 The growth in ambulatory care centers can be attributed in large part to the fact that most of the added benefits fell under Medicare’s reimbursement pay- ments as outpatient services. In addition, the Medicare Participating Physician and Supplier Program, imple- mented as part of the Deficit Reduction Act (DEFRA) of 1984, constituted another key policy change of the 1980s that affected benefits. This program rewarded phy- sicians for agreeing to accept Medicare “assignment” (payment in full) for patient health services.40 Participating physicians were guaranteed an annual update on Part B charges, providing an important financial incentive for accepting assignment. The program effectively translated into reduced out-of-pocket expenses for beneficiaries, which resulted in an increased demand for services, and consequently, increased Medicare payments.41 Whether and how to incorporate catastrophic coverage has been a key point of debate in Medicare’s history. In 1988, the Medicare Catastrophic Coverage Act was passed, marking what would have been the largest benefit expansion since the pro- gram’s enactment 23 years before. The Catastrophic Act increased Part A benefits by lifting time limitations and expanding existing benefits (such as skilled nursing facility coverage, hospice care, home health care, and mammography screening), sig- nificantly reduced co-payment expenses, and offered outpatient prescription drug and respite care coverage for the first time.42 Some catastrophic expenses, such as long-term care, were left essentially uncovered by the 1988 act. Unlike traditional Medicare, these new benefits were to be self-financed through monthly premiums paid by Medicare beneficiaries themselves.43 Only 16 months after its enactment, almost all of the new provisions of the Catastrophic Act were repealed (es- sentially, only hospice care survived) due to opposition from many Medicare beneficiaries to the increased premiums associated with the act’s financing provisions.44 The repeal of the 1988 Catastrophic Act was significant on several levels. Not only were important benefits like prescription drugs and the cap on out-of-pocket expenditures once again left uncovered, leaving many beneficiaries vulnerable to ris- ing health costs, but in addition, what many perceived as a deficient benefits package would become the center of debate over Medicare during the 1990s.45 To address these important gaps in benefits, President Clinton proposed eliminat- ing existing co-payments and deductibles for preventive services covered by Medicare (including pelvic exams, mammograms, and screening for prostate and colon can- cer). He also proposed a voluntary prescription drug benefit. Under the plan, each beneficiary would pay a $24 premium each month. Subject to an annual limit of $1000, Medicare would pay for half of each beneficiary’s drug expenses. The premi- um was projected to increase to $44 a month by 2008, and the benefit was expected to increase to an annual maximum of $2,500 (half of expenses totaling $5,000).46 For low-income beneficiaries (singles with income under $11,000 and couples earn- ing less than $17,000 annually), Medicare would cover the entire bill as long as costs
  • 109. — 108 — Big Choices: The Future of Health Insurance for Older Americans remained under the annual limits. The prescription drug benefit was projected to cost the government over $160 billion. While legislation was not enacted at that time, it set the stage for recent legislated changes.47 President Bush proposed significant increases in the Medicare benefit package and in 2003 major reforms were enacted. Under the new prescription drug benefit, also referred to as “Medicare Part D,” private companies will offer a range of drug plans from which beneficiaries are given the opportunity to choose during an annual enrollment period. Those who wish to participate will pay a $250 yearly deductible (this is in addition to the Part B deductible the individual is already paying), plus a monthly premium estimated to average about $35. Both the premium and the de- ductible amounts will rise each year. People with alternative prescription drug cover- age, either through Medigap, state pharmacy assistance programs, or employer retiree plans will, in some cases, have to choose between Medicare and their existing plans, or they will be given options for combining benefits in various ways. The other key change to Medicare as a result of the 2003 law is added preven- tive care services. Individuals will be covered for a one-time wellness exam, as well as screenings for cardiovascular disease and diabetes (cancer and osteoporosis were already covered services under Medicare).48 Expanded Costs Medicare’s program costs have steadily risen since its inception, reflecting expanded coverage, the growing beneficiary population as well as rising cost trends in general health care. Needless to say, the more people entitled to benefits and the more ex- pansive the benefits, the greater Medicare’s costs. By the mid-1970s, Medicare’s costs had already tripled, although early assessments of Medicare’s progress over the first decade attributed growth in Medicare costs primarily to inflation.49 Over the next two decades, spending on Medicare continued to grow, showing the highest rates (an average of almost 10 percent per year) during the years between 1987 and 1997. Overall, national spending on health went from 5 percent of GDP in 1960 to almost 14 percent in 1997, with a growing share of this spending going to Medicare. Federal spending on Medicare itself grew exponentially, from $3.3 billion in 1967 to around $241 billion in 2001.50 It is important to recognize, however, that rising costs are general trends reflected across the entire health care sector, not just in Medicare.51 Health care costs are af- fected by a combination of factors. In addition to the rising number of beneficiaries, Medicare’s increasing costs also reflect rising health care workers’ salaries, general in- flation in the prices of goods and services used in the health sector, as well as increases in the average utilization and “intensity” (complexity) of health services.52 Compared with private spending on health care, there is a great debate on how well Medicare has done to control rising costs. Some studies show that compared with private insurance providers, Medicare showed a lower cumulative growth in per enrollee expenditures over the last three decades. These findings would suggest that
  • 110. — 109 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future government efforts to control spending have been relatively effective since Medicare’s enactment.53 However, other studies counter this claim to Medicare’s efficiency, argu- ing that Medicare has not been able to limit health care spending any better than the private sector. These claims are based on the fact that private insurance plans have become more generous in providing benefits than Medicare, and thus the “value” of private insurance, even in the context of greater spending, increased compared with Medicare spending.54 These sorts of ambiguous (and indeed contradictory) findings have consistently made political decisions regarding Medicare’s future all the more difficult. In fact, the record shows that depending on the time period, Medicare cost growth has been faster or slower than in the private insurance market. What is clear is that for several years after 1997, Medicare actually showed negative spending growth due to enact- ment of legislation that pared back Medicare reimbursement levels for health care providers.55 Regardless of whether Medicare’s spending record is higher or lower than private sector performance, it is clear that dealing with Medicare’s growing costs has been a major focus of national attention. The next section will examine the ways in which the federal government has attempted to deal with the rising costs of health care and Medicare’s role in containing them. Government’s Dual Response to Rising Costs: Raise Revenues and Contain Costs Government’s Dual Response to Rising Costs: Raise Revenues and Contain Costs Government’s Dual Response to Rising Costs: In the face of rising costs, Medicare has consistently confronted the dual challenge of finding ways to raise revenues and control costs. On the one hand, building on the original financing system implemented in 1965, the federal government attempted five strategies aimed at generating new revenues to fund Medicare, including increas- ing the payroll tax dedicated to Medicare, removing the payroll tax wage cap on taxable income, increasing premiums, taxing Social Security benefits and using some of the added revenues for Medicare, and using more general revenues to support Medicare. On the other hand, efforts to contain costs revolved around two pillars: the implementation of strict regulatory and pricing policies and the use of market-based mechanisms like HMOs and Medicare + Choice. Raising Revenues Medicare is funded through a combination of payroll taxes, premiums, and general revenues. According to the original system established in 1965, Medicare’s Part A (Hospital Insurance, HI) is financed through payroll taxes which are deposited into the HI Trust Fund for inpatient benefits and administration. Part B (Supplemental Medical Insurance, SMI), on the other hand, is funded solely through beneficiary premiums and general revenue transfers to the SMI Trust Fund. Any revenue that ex- ceeds expenditures (i.e., is not used to pay benefits or other program costs) is invested in U.S. Treasury securities.56
  • 111. — 110 — Big Choices: The Future of Health Insurance for Older Americans While the original structure has largely remained intact, the need for new revenue generation necessitated certain changes to Medicare’s financing mechanisms. Payroll taxes paid by employers and employees serve as the primary source of financing for the HI Trust Fund. The payroll tax shares, originally set at 0.35 percent for employ- ers and employees, rose gradually over time to 1.45 percent in 1986, where they still stand today.57 In 2000, payroll taxes accounted for 56 percent of all Medicare fund- ing, and 86 percent of Part A. A second, related initiative for generating revenues involved Congress’s raising the maximum taxable earnings base for Medicare payroll taxes, and finally removing the cap altogether in 1993. At the same time, Congress expanded the taxation of Social Security benefits, with added revenues provided to the Medicare Trust Fund. All of these measures were designed to increase revenue to Medicare’s HI Trust Fund.58 Revenues for Medicare Part B have also been raised by increasing premiums paid by beneficiaries and by increasing general federal revenue transfers. Although partici- pation in Part B is voluntary, today approximately 95 percent of seniors take advan- tage of the major subsidies it offers, not surprising given that 75 percent of the costs are covered through general revenue transfers.59 The federal government’s share of Part B payments has vacillated over the years, as have Medicare beneficiaries’ corresponding premium amounts. In the early years, beneficiaries and the government paid equal shares of Part B costs (50 percent each), but as costs of services rose disproportionately relative to seniors’ average incomes, Congress capped the amount of annual premium increases to seniors to equal the increase in the cost-of-living increases calculated for Social Security. By the 1980s, seniors’ share of Part B expenses had fallen to 25 percent, where they remained throughout the decade. As a consequence of these limitations on premiums in the midst of rising health costs, by 1989, the government spent more of general revenues on Medicare Part B than on any other domestic program.60 Starting in 1990, Congress implemented a system whereby premiums were to increase by specific dollar amounts, rather than proportionally. Though these fixed increases were intended to maintain premiums at 25 percent of costs, incorrect price projections overestimated the degree of increase in total costs, such that by the mid- 1990s, the elderly were once again footing a greater share of the Part B costs than an- ticipated (31.5 percent).61 In 1997, under the Balanced Budget Act, premiums were legally set to cover 25 percent of annual expected Part B costs, regardless of nominal cost increases. Lastly, the 2003 Medicare law increased premiums to be paid by up- per-income elderly, thereby reducing the need for general tax revenues to finance Part B. As Part B costs have escalated over the years, so have premiums and general tax revenues. Containing Costs In addition to raising revenues, cost containment was the second major mechanism utilized to stabilize financing for the Medicare program. The federal government has
  • 112. — 111 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future attempted to control costs through a variety of regulatory as well as market-based ini- tiatives. Some of the key mechanisms included modernizing hospital reimbursement techniques through the development of the Prospective Payment System (PPS) and Diagnosis-Related Groups (DRGs), the application of a relative-value scale (RBRVS) to calculate the payment for physicians’ services, and a series of home-health and skilled nursing facilities regulations. On the market-based side, managed care and the encouragement of private health insurance purchase stand out as central initiatives. In its early years, Medicare primarily used private insurance standards to pay for care. For example, Medicare would reimburse a hospital for each day a beneficiary was in the hospital. By the 1980s, facing rapid expenditure acceleration, the increas- ingly acute threat of insolvency to the HI Trust Fund, and a growing federal budget deficit, Medicare could no longer rely on private insurance standards to calculate its payments to hospitals and physicians.62 Following the failures of President Carter’s attempt to regulate hospital reimbursement and the subsequent voluntary efforts of hospitals to rein in costs themselves, the regulatory policies of the 1980s were sig- nificant policy achievements. A favorable political climate coincided with techni- cal developments of new payment systems, leading to tightened control over federal Medicare payments for hospital and physicians’ services. In 1983, Medicare adopted a “prospective payment system” (PPS) for hospital reim- bursement for inpatient services. Prior to the implementation of PPS, Medicare had paid hospitals interim rates that were then adjusted according to hospital cost reports calcu- lated retrospectively at the end of each year. The new system rested on a patient classifica- tion scheme known as Diagnosis-Related Groups (DRGs) that categorizes individuals according to factors like age, gender, diagnosis, and treatment, and then calculates average hospital resource consumption for a diagnosis.63 In other words, hospitals were to be paid a fixed amount per case based not on actual services rendered or days of care received (cost-based), but rather prospectively, according to the corresponding DRG weight for a given diagnosis. This policy represented a major cost containment initiative that directly regulated payments through a system of administered pricing. In effect hospitals would be rewarded for finding ways to cut costs. Thanks in large part to the PPS, during the 1980s, Medicare expenditures for hos- pital care slowed. By the end of the decade, the federal government was paying signif- icantly less to hospitals for Medicare patients than before as well as substantially less than private insurers, whose costs had risen consistently throughout the 1980s.64 While hospital services were reimbursed according to DRG scales in an effort to induce efficiency in service use, other institutional providers—outpatient and post-acute services in particular—were still paid purely based on costs. According to one scholar, this arrangement “not only offered no incentive for efficient produc- tion, but gave hospitals an incentive to adopt accounting conventions that shifted as much joint cost as possible from prospectively reimbursed inpatient services to other parts of the hospital, such as the outpatient department, the Skilled Nursing Facility (SNF), and the rehabilitation unit.”65
  • 113. — 112 — Big Choices: The Future of Health Insurance for Older Americans As a result of those changes, the use of post-acute services rose dramatically after 1988; among these were home health services, rehabilitation, long-term hospital ser- vices, and skilled nursing facility services. In fact, by 1997, SNF days per beneficiary had increased to five times what they were in 1988. Home health visits increased by seven times over the same period.66 The Balanced Budget Act of 1997 made several important changes to address rising costs in the area of post-acute care reimbursement. These changes, coupled with PPS changes, limited growth in post-acute settings. While hospital and post- acute costs showed signs of control, payments for physicians’ fees continued to sky- rocket.67 To better control physician costs, Congress instituted the Resource-Based Relative Value Scale (RBRVS) for Medicare in 1992 that echoed the PPS model by codifying the calculation of Medicare’s payments for physicians’ services. The RBRVS consisted of automatically indexing a fee schedule based on the “relative value” of medical services. The relative-value scale replaced the previous physician reimburse- ment schedule that was based on the “customary, prevailing, and reasonable” history of charges, a system that was perceived to give rise to highly inconsistent physician fees.68 Like the PPS, the RBRVS was a policy that administered prices according to predetermined formulas, and it, too, gradually achieved its desired effect of lowering federal spending on physician reimbursements. The growth rate of Medicare Part B expenditures—most of which are for physicians’ services—slowed significantly in this period, from an average annual rate of over 10 percent in the five years preceding RBRVS enactment to under 6 percent in the five years following.69 In addition to regulatory mechanisms, Medicare also adopted some market-based initiatives to attempt to contain rising costs, especially in recent decades. These mar- ket-based reforms centered on the introduction of Medicare managed care through the establishment of Medicare health maintenance organizations and the encourage- ment of private insurance plans. Although managed care has its origins in legislation dating back to the 1970s, both of these market-based strategies have come to occupy center stage in the Medicare reform debates. The concept of managed care was developed in the early 1970s in response to growing concerns about the efficiency of the health care system. Supporters of man- aged care aimed to provide alternatives to the fee-for-service system, hoping that “capitation”—a payment to cover all services for a beneficiary—would give provid- ers incentives to cut out unnecessary costs, to do more to promote the health of their members, and most importantly, to generate competition among providers that would result in greater efficiency.70 Under managed care, a single entity orga- nizes both the financing and delivery of health care via arrangements between health plans and physicians.71 The HMO Act of 1973 provided start-up grants and loans for health maintenance organizations and gave preferential market treatment when such groups met federal requirements. Legislation in 1982 facilitated the process by which HMOs contracted with Medicare, furthering the role HMOs were increasingly play- ing in the field of health care provision for the elderly.72
  • 114. — 113 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future The Balanced Budget Act of 1997 further stimulated managed care plans. The in- clusion of the Medicare + Choice provision allowed beneficiaries to opt out of Medi- care to buy private plans offered through HMOs, PPOs (preferred provider organiza- tions), provider-sponsored organizations, private fee-for-services plans, and medical savings accounts.73 Furthermore, legislation in 1999 and 2000 increased payments to Medicare + Choice plans, providing important financial incentives to encourage the development of the private sector in the Medicare market. Major expansions were adopted in 2003 to encourage more market-based activ- ity in Medicare. Reimbursement rates for private Medicare insurers were increased significantly to increase private sector participation in Medicare. These changes were not adopted without considerable controversy. Some argue that private insurers weaken Medicare by covering healthier beneficiaries, thereby splitting up the user pool. Others have argued that offering these sorts of incentives to private insurers weakens Medicare’s universal system of coverage because it unfairly subsidizes private sector service provision, which goes against the original intent of generating fair market competition in health services.74 Questions regarding the success of both market-based and regulatory mecha- nisms, along with health cost increases, beneficiary growth and the looming Medi- care deficits all form the cornerstones of the present-day debate over the future of the Medicare program. A Snapshot of the Current System Where does the United States stand today in its efforts to provide adequate health care for older Americans? The situation of older Americans has dramatically improved over the years. Today, just 10 percent of the elderly live in poverty, compared with 35 percent in 1960. Older Americans now have considerably higher income levels to purchase health care, and Social Security has been the instrumental cause behind this major change. In addition, today, barely 2 percent of older Americans do not have basic health insurance, which stands in stark contrast to the early 1960s, when nearly half of the elderly population had no insurance whatsoever. Medicare has been the instrumental cause behind this major change. Medicare has succeeded in substantially lowering the financial risks associated with a major illness. Indeed, bringing older Americans into the mainstream of the health care system was arguably Medicare’s greatest achievement. With the enactment of Medicare, for the first time, nearly all Americans 65 and older were eligible for health coverage through a contributory insurance system that pooled risks and subsidized costs to make health insurance more affordable for the aged population. Although it is difficult to measure Medicare’s direct impact on the health of the elderly, it is clear that, since 1965, the elderly are living longer and healthier lives.75 On average, older Americans are living almost 3.4 years longer beyond the age of 65 than they did in 1960 (an increase of about 20 percent).76 However, extended life ex- pectancy is only partially attributable to Medicare. Improvements in income, health
  • 115. — 114 — Big Choices: The Future of Health Insurance for Older Americans care technology, higher levels of education, lifestyle improvements, and environmen- tal factors all help to explain some of the change in health status. Though critics of Medicare point to ambiguous findings regarding whether or not the program has positively affected the health of older Americans,77 there is little debate that Medicare greatly increased access to medical care for the elderly and pro- vided a significant financial cushion against the expenses associated with illness or injury. It is here that Medicare stands out as a very successful public program. Despite these unquestionable gains, there are still major challenges ahead. Rising health care costs mean that older Americans, even with Medicare’s help, are once again paying almost 20 percent of their income on health care-related expenses (albeit with considerably higher incomes). And while gaps still exist in benefit coverage—most notably long term care and to some extent prescription drugs—the Medicare benefit package has unquestionably improved over time. These solid accomplishments are accompanied by sizeable public costs. Medicare is not only one of the most successful government programs, it is also one of the most expensive government programs in our nation’s history. Last year, Medicare costs were nearly $300 billion, 2.6 percent of our entire economy and 13 percent of the federal budget. Financed by beneficiaries through beneficiary premiums, by work- ers through payroll taxes and by everyone through general government revenues, Medicare has become the third largest government program, after Social Security and defense spending. Medicare in the Future While Medicare has been enormously successful, it faces growing challenges in the years ahead. The number of beneficiaries is projected to double over the next 30 years, as the baby boomers enter retirement. Health care costs are projected to con- tinue to grow much faster than the U.S. economy, placing economic strains on tax- payers and beneficiaries alike. And Medicare’s gaps in coverage continue to place large and growing financial burdens on many beneficiaries in the years ahead. Within 20 years, Medicare may be the single largest item in the federal budget, exceeding the cost of Social Security. The Medicare system currently faces significant funding shortfalls in the years ahead. Starting this year, Medicare revenues fell behind Medicare spending. By 2019, the Medicare Trust Fund will be insolvent according to the Social Security Trustees estimates. And even if nothing is done to reform the system, in 10 years: • Monthly Medicare premiums may grow from $67 to $165 (including the Rx drug premium), and considerably higher levels for upper-income beneficiaries. • General tax revenues for Medicare, primarily financed by the federal income tax, may increase from 0.8 percent of our economy to 2 percent.
  • 116. — 115 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future • Out of pocket health expenses for older Americans may also grow significantly. The picture of Medicare in the future will be based on the answers to many ques- tions. How many beneficiaries will Medicare be expected to support? What kind of health care coverage will these future beneficiaries need? How much of the bill should beneficiaries be expected to pay? What is Medicare’s financial outlook for the short- and long-term future? Beneficiaries: What Will the Medicare-Eligible Population Look Like in the Future? As has been widely reported in recent years, the face of the U.S. population is pro- jected to substantially change in the coming decades. The “graying of America,”78 or the aging of the population, is one of the primary trends that will affect programs like Medicare and Social Security. Between the years 2000 and 2030, the number of those aged 65 and older is projected to double—growing from 35 million to almost 70 million (see Figure 8.1). As a percentage of the total U.S. population, this represents Source: Centers for Medicaid and Medicare Services, CMS Chart Series, Medicare Program Information, Profile of Medicare Beneficiaries, 2002. Online. Available: http://www.cms. hhs.gov/charts/series/sec3-b1-9.pdf. Accessed: June 1, 2004. Note: ESRD means End-Stage Renal Disease; numbers may not sum due to rounding. Figure 8.1 Number of Medicare Beneficiaries 80 70 60 50 40 30 20 10 0 1970 1980 1990 2000 2010 2020 2030 Calendar Year MedicareEnrollment(millions) Disabled and ESRD Elderly 20.4 25.5 3.0 31.0 3.3 34.1 5.4 38.6 7.3 52.2 8.7 68.2 8.6
  • 117. — 116 — Big Choices: The Future of Health Insurance for Older Americans an increase from 12.4 percent of our population in 2000 to 19.6 percent in 2030. By 2050, Americans over 65 are expected to number 86.7 million, constituting 20.7 percent of the U.S. population.79 The characteristics of Medicare beneficiaries are also likely to change in the future. Racial and ethnic minorities currently account for one in seven beneficiaries, but are projected to more than double as a share of the Medicare population by 2025.80 In 1995, African-American, Hispanic, and other racial and ethnic minorities repre- sented 14 percent of the 31 million elderly Americans eligible for Medicare. In 2025, they are expected to account for 35 percent of the 62 million beneficiaries.81 This has the potential to increase demands on Medicare, as these beneficiaries typically experience more health problems than do white beneficiaries. In the 2000 Medicare Current Beneficiary Survey (MCBS), 43 percent of black non-Hispanic respondents considered their own health fair or poor, 41 percent of Hispanic respondents indi- cated fair or poor health, while only 28 percent of white non-Hispanic beneficiaries reported fair or poor health.82 The aging of the population is certainly not unique to the U.S. In fact, most de- veloped countries have already seen significant increases in this portion of the elderly population. The trend is more pronounced and has already begun impacting devel- oped countries such as Japan, Italy, and the United Kingdom, but a similar progres- sion is now predicted for developing countries as well.83 The causes of this trend are many. Health advances have both reduced the mortal- ity rate and increased the longevity of most Americans. The ubiquitous “baby boom generation,” the 76 million Americans born between 1946 and 1964, is nearing re- tirement age.84 Concurrently, the fertility rate around the world has been on the decrease. In many industrialized countries, fertility rates are below the level needed to replace the current population. The fertility rate in the U.S., however, has not seen such a dramatic decrease. While many other developed countries’ birth rates have dropped well below 2.0, the U.S. has maintained an anomalous rate of 2.1.85 Nevertheless, fewer deaths, longer lives, and no increase in the number of births all add up to a shift in the distribution of the population. The changes are depicted in the population pyramids in Figure 8.2. The “baby boom generation” can be seen as the baseline level of the 1950 pyramid and moves its way up through the subsequent pyramids of 1998 and 2030. Basing policy decisions on long term projections can be problematic. The assump- tions on which these projections are based can change and generate varying out- comes. Rates of fertility, mortality, and immigration, for example, are three primary determinants of population projections. Trends have changed over the past 30 years, producing differing estimates from decade to decade. In addition, the aging trend that is upon us is not unprecedented. In fact, the number of seniors has doubled three times since 1900 and grown 107 percent since 1960 alone, while the rest of the population only grew by 50 percent.86 While there is some uncertainty about future trends, the overall direction
  • 118. — 117 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future is clear: the U.S. population is aging. These demographic changes will affect the demands on the programs serving the elderly. For both Medicare and Social Security, the aforementioned population pyramids show that the portion of the population eligible for benefits will grow more quickly than the working-age population who pay into the system. The Medicare Board of Trustees projects that in 2003 almost four workers were paying into Medicare for each beneficiary, while in 2030 there will be only about 2.4 workers.87 This ratio is expected to continue declining, but projections become less reliable as they reach further into the future. Lower ratios negatively impact the solvency of the HI trust fund. As payroll tax contributions slow down, expenditures on elderly benefits go up and more pressure is placed on the trust fund. Medicare’s fiscal solvency will be discussed in depth later in this chapter. A growing aging population poses challenges specific to Medicare. Life expectancy in the U.S. improved from 48 years in 1900 to 77 years in 2000.88 The average remaining life at the age of 65 went from 10.4 years in 1900 to 18.5 years in 2000.89 Beneficiaries rely on Medicare for a longer period of time. Another demographic development that will acutely affect Medicare is the growing portion of those over the age of 85. Within the over-65 population, those over 85 are the fastest-growing portion of the population, projected to reach between 19 and 29 million by 2050.90 Growth of this age group may necessitate higher expenditures, but the degree of increase is not clear. If most people are living longer because of reduced mortality from diseases that are expensive to treat, Medicare’s expen- ditures may not be negatively affected, but if people are living longer because of more expensive treatments and will continue to need such treatment late in life, Medicare costs will be negatively affected.91 Coverage: How Adequate Will Insurance Coverage Be for Future Medicare Beneficiaries? Although Medicare has been lauded for serving more than 97 percent of older Ameri- cans, gaps in coverage continue. Some of these gaps may grow larger in the future. One major challenge relates to long-term care. The need for long-term care grows with age, and as the elderly population grows, particularly the aged elderly (85 and over), the cost of long-term care increases. The number of elderly over 85 is projected to triple by 2040—from 4.3 million in 2000 to 14.3 million in 2040.92 Medicaid is currently the largest funding source for long-term care (45 percent),93 but many older Americans are not eligible for Medicaid, and state budgets are increasingly challenged by these expenditures.94 Some view this reliance on state Medicaid funds as unsustainable and have proposed a wide range of reforms, ranging from cropping Medicaid costs, creating a federal social insurance program devoted to long-term care, or integrating long-term care with Medicare’s acute care benefits.95 Although the high costs of long-term care are already posing challenges, future projections indicate that the challenges may only get larger. Between 1990 and 2020, the number of elderly who will be living alone with no living children or siblings is
  • 119. — 118 — Big Choices: The Future of Health Insurance for Older Americans expected to double, reaching 1.2 million.96 This growing population is most likely to need long-term care support. Another potential shortcoming is meeting the health care needs of those aged Figure 8.2 Population Pyramids, 1950 to 2030 1950 1998 85+ 80 to 84 75 to 79 70 to 74 65 to 69 60 to 64 55 to 59 50 to 54 45 to 49 40 to 44 35 to 39 30 to 34 25 to 29 20 to 24 15 to 19 10 to 14 5 to 9 Under 5 10,000 8,000 6,000 4,000 2,000 0 2,000 4,000 6,000 8,000 10,000 85+ 80 to 84 75 to 79 70 to 74 65 to 69 60 to 64 55 to 59 50 to 54 45 to 49 40 to 44 35 to 39 30 to 34 25 to 29 20 to 24 15 to 19 10 to 14 5 to 9 Under 5 12,000 10,000 8,000 6,000 4,000 2,000 0 2,000 4,000 6,000 8,000 10,000 12,000 continued on next page—
  • 120. — 119 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future Sources: 1950 data from U.S. Census Bureau, Historical Statistics of the United States: Colonial Times to 1970, Series A-119-134, 1975; 1998 and 2030 data from U.S. Census Bureau, Population Projections of the United States by Age, Race, Sex, and Hispanic Origin: 1995 to 2050, Table 2, 1996. Figure 8.2, continued— 2030 85+ 80 to 84 75 to 79 70 to 74 65 to 69 60 to 64 55 to 59 50 to 54 45 to 49 40 to 44 35 to 39 30 to 34 25 to 29 20 to 24 15 to 19 10 to 14 5 to 9 Under 5 15,000 12,000 9,000 6,000 3,000 0 3,000 6,000 9,000 12,000 Number in Thousands 55-64. Of the 27.4 million people in this age group, approximately 5.8 million retire early. In addition, millions of persons in this age bracket have no health insurance. Over half of these early retirees depend on employer-sponsored health coverage,97 but employer-sponsored health coverage for retirees has been declining drastically over the past 15 years. Recent surveys of large, private-sector firms reveal that this trend will likely continue.98 This trend is problematic as those aged 55-64 do not yet qualify for Medicare benefits, but can be at high risk for illness and other health conditions. Individuals without insurance are less likely to use preventive and routine care, only increasing the likelihood of expensive health conditions when they do reach the age of 65 and become eligible for Medicare.99 These individuals likely will have added health costs increasing the likelihood that they seek less treatment or expend more of their limited incomes on health care.100 Another gap relates to prescription drugs. While significant legislative steps have recently been taken in this area, sizeable coverage gaps remain. This topic is covered in depth in other sections of this book.
  • 121. — 120 — Big Choices: The Future of Health Insurance for Older Americans Costs: Will Medicare Costs Continue to Rise in the Future? As has been the case throughout its history, Medicare’s costs are projected to continue to increase in the future. The same is true for national health expenditures (NHE) on the whole. NHE is predicted to grow approximately 7 percent each year for the next two years.101 Medicare’s rate of growth, on the other hand, is projected to rise at slightly lower rates. In 2004 and 2005, Medicare expenditures are expected to grow by approximately 5 percent each year.102 This does not account for the new prescrip- tion drug benefit that is to take effect in 2006. The 2004 Social Security and Medicare Trustees Report indicates that Medicare’s expenditures were equal to 2.6 percent of the Gross Domestic Product (GDP) in 2003.103 By 2006, total expenditures are expected to be 3.4 percent of GDP, largely because of the newly passed prescription drug benefit in the 2003 Medicare Modern- ization Act. The Trustees project that expenditures will increase to reach 7.7 percent of GDP by 2035 and 13.8 percent by 2078, an amount twice as large as Social Secu- rity costs in 2078.104 (See Figure 8.3.) The projected growth rates of each trust fund (HI, Part B, and Part D) are comparable, though Part D’s prescription drug benefit adds a substantial new amount to the total expenditures. The rate of increase in Medicare spending is expected to outpace the growth of GDP. The Trustees primarily attribute the upward trend to the following: Adapted from: Centers for Medicare and Medicaid Services, 2004 Report of the Boards of Trustees of the Federal HI and SMI Trust Funds, Table I.E1, p. 7. Online. Available: http:// www.cms.hhs.gov/publications/trusteesreport/tr2004.pdf. Accessed: April 5, 2004. Figure 8.3 Medicare Expenditures As Percentage of Gross Domestic Product Part DPart DP HI Part BPart BP TotalTotalT 8 7 6 5 4 3 2 1 2000 2003 2006 2008 2011 2014 2017 2020 2023 2026 2029 Percent
  • 122. — 121 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future 1. Continuing growth in the volume and intensity of services provided per benefi- ciary throughout the projection period; 2. The impact of the increase in beneficiaries starting in about 2010 as the baby boom generation turns 65 and begins to receive benefits; and 3. The introduction of the Part D program in 2004, along with other provisions of the Medicare Modernization Act of 2003.105 The Trustees note other important contributing factors such as improvements in life expectancy and the projection that future birth rates will remain similar to the ex- periences over the past 20 years.106 Technology has also played a central role in the in- creasing costs per beneficiary. New procedures and tools such as magnetic resonance imagers (MRIs) can be more effective and less risky than prior diagnostic methods, but they can be much more expensive. More doctors are electing to use these tools, while surgeries such as cardiac bypass are also on the rise.107 All of these trends make for a more expensive health care system, but one that most find increasingly effective in treating illness and lengthening life.108 As shown in Figure 8.4, Part D costs will play a substantial role in the growing obligations for Medicare.109 The utilization and costs of prescription drugs have been rising and are projected to continue doing so. While it is not yet clear the extent that Adapted from: Centers for Medicare and Medicaid Services, 2004 Report of the Boards of Trustees of the Federal HI and SMI Trust Funds, Table I.E1, p. 7. Online. Available: http:// www.cms.hhs.gov/publications/trusteesreport/tr2004.pdf. Accessed: April 5, 2004. Figure 8.4 Medicare Prescription Expenditures (Part D) As Percentage of Gross Domestic Product 2.5 2.0 1.5 1.0 0.5 0.0 2004 2006 2008 2010 2012 2015 2025 2035 Calendar YearYearY Percent
  • 123. — 122 — Big Choices: The Future of Health Insurance for Older Americans the new law will affect overall national health expenditures, it will unquestionably add to the expenditures for Medicare.110 While much of this section has focused on the increased government costs of Medicare, it is also important to note that beneficiaries are bearing higher costs as well. Cost-sharing mechanisms such as deductibles, premiums, and co-payments mitigate the financial burden carried by the government. As expenses have risen, cost-sharing has also increased. For example, premiums paid by beneficiaries have been steadily growing and will do so more rapidly with the new voluntary prescrip- tion drug benefit’s premium (Part D).111 Figure 8.5 shows the rising Part B premiums that beneficiaries have paid since 1967 and reflects the premiums that beneficiaries will pay after enactment of the prescription drug benefit (Part D) in 2006. It must be noted that, projecting health care costs long into the future is specula- tive. Growth of health care prices has traditionally outpaced the growth of the rest of the economy,112 but the rates have fluctuated. Nevertheless, if costs continue to rise as projected, is clear that financing the Medicare program will be a growing challenge. Revenues: Will Income to the Medicare System Keep up with Growing Expenditures? Revenues for Medicare are scheduled to grow dramatically in the future, but not as rapidly as costs. The HI trust fund (Part A) revenues are funded by payroll taxes and the tax- ation of Social Security benefits. Payroll tax rates, currently 1.45 percent for employers and employees, can only be raised by a change in current law. The revenues to the HI trust fund are projected to stay constant, if not decrease, as Adapted from: Centers for Medicare and Medicaid Services, 2004 Report of the Boards of Trustees of the Federal HI and SMI Trust Funds, Table IV.C2, p. 164. Online. Available: http://www.cms.hhs.gov/publications/trusteesreport/tr2004.pdf. Accessed: April 5, 2004. Figure 8.5 Medicare Monthly Premiums Paid by Beneficiaries $180 $160 $140 $120 $100 $80 $60 $40 $20 1967 1977 1987 1997 2004 2007 2013 Percent Part D PremiumPart D PremiumP Part B PremiumPart B PremiumP
  • 124. — 123 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future a percentage of the economy. Each year, the Trustees calculate a 10-year (short- term) and 75-year (long-term) estimate of each trust fund (HI and SMI) to pre- dict the financial adequacy. 113 Currently, the HI trust fund receives more income than it spends. Ten-year projec- tions presented in the 2004 Trustees’ Report, however, show that assets will fall below 100 percent of annual expenditures within the next 10 years.114 Because payroll tax income is not expected to increase at a rate that will keep up with the rapidly rising growth in costs, the long-term picture deteriorates. As mentioned earlier, such long- term projections are in need of continued updating. In 1982, the Trustees projected that the HI trust fund would be exhausted within five years. In 1993, they again projected that it would be exhausted in six years. Under its intermediate assumptions, the 2004 report projects that the HI trust fund will be exhausted in 2019, a date that is seven years earlier than the 2003 report’s projections.115 Medicare Part B and Part D expenses are funded by general revenues and benefi- ciary-paid premiums. Part B and Part D each have a separate account within the SMI trust fund and current law does not provide for transferring assets between the two.116 The SMI trust fund does not require a change in law to cover increasing costs the way that the HI trust fund does. In fact, the revenues from general revenue transfers and beneficiary premiums are mandated to automatically increase to accommodate the following year’s expenditures. The general revenues required to cover these costs are substantial and add to the existing pressures on the federal budget. Part of Medicare’s projected revenue growth is due to added premiums, and grow- ing premiums add to the financial pressures of beneficiaries. The 2004 Trustees’ Re- port projects that average per-beneficiary costs for Part B and Part D benefits may increase by approximately 5 percent each year, matched by a commensurate increase in beneficiary premiums and coinsurance payments. Social Security benefits, on the other hand, are scheduled to increase at a lower rate from generation to generation, approximately 3.9 percent—requiring a higher percentage of income to be devoted to Medicare premiums.117 Figure 8.6 reveals the projected deficit for the HI trust fund. Despite the uncer- tainty of projections, it is clear that although revenues are projected to rise dramati- cally, they are not projected to grow as quickly as expenses, particularly if general rev- enue transfers do not increase automatically. Unless costs can be further controlled, even larger increases in revenues will be needed. The future of Medicare is dependent on balancing expenditures and revenues in a way that achieves financial adequacy and meets the health care needs of the elderly. The United States Faces Big Choices The previous discussion makes clear that the nation faces big choices regarding the future of Medicare. There are many reform options, but each is built on different values and varying attitudes about the role of government. Should we entrust the government to retain its role as insurer for the elderly and use much stronger regula-
  • 125. — 124 — Big Choices: The Future of Health Insurance for Older Americans Figure 8.6 Medicare Sources of Non-Interest Income and Expenditures As a Percentage of the Gross Domestic Product 8% 7% 6% 5% 4% 3% 2% 1% 0% 1966 1974 1982 1990 1998 2006 2014 2022 2030 Calendar YearYearY Percent HI Deficit General Revenue Transfers Total ExpendituresTotal ExpendituresT State Transfers Premiums Tax on BenefitsTax on BenefitsT Payroll TaxesTaxesT Adapted from: Centers for Medicare and Medicaid Services, 2004 Report of the Boards of Trustees of the Federal HI and SMI Trust Funds, Table I.E2, p. 8. Online. Available: http:// www.cms.hhs.gov/publications/trusteesreport/tr2004.pdf. Accessed: April 5, 2004. tory controls to tighten health expenditures? Should we rely more on some form of private competition to control costs? And/or should we raise taxes or restrict eligibil- ity to strengthen the financing of the system—and if so, who should be affected? A general description of these three approaches is provided below, with more detail provided in Chapter 14. Approach 1. Government As Insurer: Tough Regulations to Control Costs Under this approach, the federal government would develop new regulations and policies to control Medicare’s costs by restricting and regulating the amount it pays health care providers and health care products.118 Government controls could also limit the services it is willing to cover. One way to do this is to control the use of un- tested and experimental treatments and services. Because medical technology is one of the primary sources of rapidly rising health care costs, Medicare could save money by reducing access to newer treatments.
  • 126. — 125 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future This type of reform would leave the general structure of Medicare untouched, keeping the government in the role of insuring older Americans. Moreover, Medi- care would remain a defined benefit plan as opposed to a defined contribution plan, thereby leaving most beneficiaries assured that their basic health care costs will be paid for. An advantage of tight regulatory controls on prices and service use is that benefi- ciaries could potentially save money and avoid escalation of costs. The same might hold for government if it is potentially successful at negotiating lower prices and keeping overall costs down. One disadvantage to this approach could be a decline in the quality of care offered by physicians and hospitals. Further, some worry that government price controls and reduced access to new treatments would diminish the incentive for companies to continue developing new technologies. Approach 2. Private Health Insurance Companies As Insurers: Premium Support Model Under this approach, the federal government would provide beneficiaries with a voucher to help purchase health insurance. Individuals could remain in the current Medicare system, or sign up with a number of different health maintenance orga- nizations and health insurance companies. The size of the premiums and benefits could vary widely. Companies would compete with each other to provide health insurance, which could lead to reduced premiums and increased service coverage to attract customers. This change would offer beneficiaries more choices about who pro- vides health insurance. It might also simplify coverage for those who currently juggle Medicare and other supplemental insurance coverage. On the other hand, too many choices can be confusing and older people might be taken advantage of, paying more than they should for their health insurance. Fur- ther, if private companies try to attract the healthiest and least costly beneficiaries, Medicare might be left with the sickest and most expensive beneficiaries, leading to unmanageable premiums and costs. A long term issue of concern with this reform is that the elderly, rather than the government, may have to absorb more of rising health care costs. With a premium support or voucher-based system, there is the risk that eventually beneficiaries will be provided a certain amount of money to pay for their health care (a defined contribu- tion), as opposed to a guaranteed package of health care services (a defined benefit). This could leave older Americans with even higher out-of-pocket health care costs in the future. Lastly, there are questions whether premium support will actually control health cost increases. Many argue that over the past 30 years the government has been some- what more successful than the private sector at controlling health care costs. More- over, beneficiaries might have to continually switch health plans to create the kind of competition that would reduce prices.
  • 127. — 126 — Big Choices: The Future of Health Insurance for Older Americans Approach 3. Further Increases in Revenues or Limits on Benefits: Higher Premiums, Higher Taxes, and/or Increases in the Medicare Eligibility Age If premium support plans or traditional methods of reducing the price and use of health care services do not significantly reduce the rate of cost increases, there are other options: charge beneficiaries higher premiums, co-payments, and deductibles; raise Medicare’s eligibility age; or increase general tax revenues or payroll taxes on employers and employees. While these options are not popular, they would ensure solvency of the system and would not compromise the quality of health care for persons eligible for Medi- care. Some argue that a higher eligibility age could encourage people to work longer and improve tax revenues for both Medicare and Social Security. The disadvantage to this approach is the extent to which it raises cost burdens for a select group of older Americans. Delaying eligibility could leave some older Americans without any health insurance. Beneficiaries already devote 20 percent of their income to out-of-pocket health care costs, and beneficiaries’ out-of-pocket health care costs are expected to rise con- siderably. Increasing costs for working age Americans by raising the payroll tax has its own disadvantages. Working age adults already pay a significant amount of taxes for Medicare and Social Security. As the population ages, working age adults may face a significant burden supporting older Americans. These reform approaches leave the general structure of Medicare intact. The gov- ernment, not the private sector, would continue to balance the goals of reducing costs and providing access to health care for older Americans. Moreover, Medicare would remain a defined benefit as opposed to a defined contribution benefit, leaving most beneficiaries assured their health basic care costs are paid. Conclusion It is clear that the United States faces big choices regarding the future of Medicare, and as interest grows in addressing the challenge, so have the range of policy solutions. Different approaches to reform will likely lead to very different outcomes. What are the values underlying the various reform proposals? Where will each approach lead us as a society in the future? What are our shared versus individual responsibilities in this area? As this book makes clear, there is no consensus on the best approach. The balance of the book attempts to frame these approaches in more detail to help the reader come to a greater understanding of the choices we face and the implications for the future. Notes 1. Federal Interagency Forum on Aging Statistics, Older Americans 2000: Key Indicators of Well-Be- ing. Online. Available: http://www.agingstats.gov/chartbook2000/default.htm. Accessed: March 20,ing. Online. Available: http://www.agingstats.gov/chartbook2000/default.htm. Accessed: March 20,ing 2004.
  • 128. — 127 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future 2. U.S. Department of Health, Education, and Welfare, National Center for Health Statistics, Health Insurance Coverage: United States—July 1962-June1963, Series 10, no. 11 (August 1964), p. 3. 3. U.S. Senate, Finance Committee, “Medicare Matters: The Value of Social Insurance, Testimony Before the Senate Finance Committee,” testimony by Marilyn Moon, May 27, 1999. Online. Avail- able: http://www.urban.org/url.cfm?ID=900261. Accessed: April 15, 2004. 4. Bryan E. Down, Roger Feldman, and Jon Christianson, Competitive Pricing for Medicare (Washing-Competitive Pricing for Medicare (Washing-Competitive Pricing for Medicare ton, D.C.: The AEI Press, 1996), p. ix. 5. U.S. Social Security Administration, The Evolution of Medicare: from Idea to Law, by Peter A. Corn- ing (Washington, D.C., 1969). Online. Available: http://www.ssa.gov/history/corning.html. Ac- cessed: February 10, 2004. 6. Max J. Skidmore, Medicare and the American Rhetoric of Reconciliation (University, Alabama: The University of Alabama Press, 1970), pp. 75-95. 7. Lawrence R. Jacobs, The Health of Nations: Public Opinion and the Making of American and British Health Policy (Ithaca: Cornell University Press, 1993), pp. 85-110.Health Policy (Ithaca: Cornell University Press, 1993), pp. 85-110.Health Policy 8. Virginia P. Reno, “Introduction,” in Reflections on Implementing Medicare, ed. M.G. Gluck and V. Reno, (Washington, DC: National Academy of Social Insurance, 2001), p. iii. Online. Available: http://www.nasi.org/usr_doc/med_report_reflections.pdf. Accessed: March 15, 2004. 9. Ibid., p. ii. 10. Centers for Medicare and Medicaid Services, History of Medicare and Medicaid. Online. Available:History of Medicare and Medicaid. Online. Available:History of Medicare and Medicaid http://www.cms.hhs.gov/about/history/ssachr.asp. Accessed: March 15, 2004. 11. Jonathan Oberlander, The Political Life of Medicare (Chicago: The University of Chicago Press,The Political Life of Medicare (Chicago: The University of Chicago Press,The Political Life of Medicare 2003), p. 29. 12. Ibid., p. 28. 13. Reno, “Introduction,” p. iv (online). 14. Oblerlander, The Political Life of Medicare, p. 31. 15. Ibid., pp. 31-34. 16. Social Security Administration, History of the Provisions of Hospital Insurance, 1965-1996. Online.History of the Provisions of Hospital Insurance, 1965-1996. Online.History of the Provisions of Hospital Insurance, 1965-1996 Available: http://www.ssa.gov/OACT/HOP/hopii.htm. Accessed: March 15, 2004. 17. Oblerlander, The Political Life of Medicare, p. 40. 18. Bowler (1987) cited in Theodore R. Marmor, “Evolution of the American Social Contract for Care” in Long-Term Care and Medicare Policy: Can We Improve the Continuity of Care?, ed. David Blu- menthal, Marilyn Moon, Mark Warshawsky, and Cristina Boccuti (Washington, D.C.: National Academy of Social Insurance, 2003), p. 79. 19. Oblerlander, The Political Life of Medicare, p. 37. 20. Theodore R. Marmor, “Evolution of the American Social Contract for Care” in Long-Term Care and Medicare Policy: Can We Improve the Continuity of Care?, ed. David Blumenthal, Marilyn Moon, Mark Warshawsky, and Cristina Boccuti (Washington, D.C.: National Academy of Social Insurance, 2003), p. 78. 21. Oblerlander, The Political Life of Medicare, p. 37. 22. Ibid., p. 38.
  • 129. — 128 — Big Choices: The Future of Health Insurance for Older Americans 23. Marmor, “Evolution of the American Social Contract for Care,” p. 80. 24. Centers for Medicare and Medicaid Services, History of Medicare and Medicaid (online).History of Medicare and Medicaid (online).History of Medicare and Medicaid 25. Marmor, “Evolution of the American Social Contract for Care,” p. 80. 26. Ibid. 27. David Scott Johnson, “Economic and Social Conditions of Children and the Elderly,” Monthly Labor Review Online, April 2000, vol. 123, no. 4 (BLO). Online. Available: http://www.bls.gov/ opub/mlr/2000/04/art4full.pdf. Accessed: March 8, 2004. 28. Oblerlander, The Political Life of Medicare, p. 43. 29. Social Security Administration, History of the Provisions of Hospital Insurance, 1965-1996. Online.History of the Provisions of Hospital Insurance, 1965-1996. Online.History of the Provisions of Hospital Insurance, 1965-1996 30. The Henry J. Kaiser Family Foundation, Medicare Chart Book, 2nd ed. (Washington, D.C., Fall 2001). Online. Available: http://www.kff.org/medicare/upload/13598_1.pdf. Accessed: March 20, 2004. 31. There is some disagreement over the extent to which Medicare’s benefit expansions have been sat- isfactory, particularly as real program expansions are weighed against public expectations. Jonathan Oberlander, for example, argues in his chapter entitled “Going Nowhere: The Politics of Benefits ” (The Political Life of Medicare, The University of Chicago Press: Chicago, 2003, p. 37) that while it did expand its beneficiary population, Medicare did not improve benefit coverage in any significant way during the first 20 years of implementation. Benefits in 1995 were almost “identical” to those first in place in 1965, he asserts, primarily because “Medicare politics was governed by a ‘negative consensus’ that emphasized cost containment over benefits improvement despite public opinion that favored expanding Medicare benefits.” 32. Oblerlander, The Political Life of Medicare, p. 37. 33. Ibid., p. 8. For Oberlander, slow benefit expansion largely reflects a “gap between the promise of Medicare (as understood by the public) to protect the elderly against the potentially devastating costs of health care and the actual performance of the program in delivering that promise.” 34. The lifetime reserve is to be used only after 90 days of hospitalization (in other words, individuals must have utilized the first 60 days of full coverage after an initial hospital deductible--$876 in 2004—and used up 30 extra days at a 25 percent coinsurance rate). The lifetime 60 reserve days come at a 50 percent coinsurance rate. 35. Social Security Administration, History of the Provisions of Hospital Insurance, 1965-1996 (online).History of the Provisions of Hospital Insurance, 1965-1996 (online).History of the Provisions of Hospital Insurance, 1965-1996 36. Oblerlander, The Political Life of Medicare, p. 72. Oberlander notes that the development of the supplemental insurance market “creat[ed] a constituency within Medicare that valued its private health benefits more than the prospect of new government benefits” and that “confusion among the elderly over Medicare’s limitations and the benefits of catastrophic insurance enabled opponents of the legislation to persuade many beneficiaries that it was not in their interest.” 37. U.S. Congress, Medicare Payment Policy, “Changing Medicare’s Payment Systems for Ambulatory Care Facilities” report prepared by MedPac, Washington, D.C., March 1999. Online. Available: http://www.medpac.gov/publications/congressional_reports/Mar99%20Ch6.pdf. Accessed: May 24, 2004. 38. Karen Davis, “Public-Policy Implications” in Ambulatory Care: Problems of Cost and Access, ed. Stuart Altman, Joanna Lion, and Judith LaVor Williams (Lexington, MA: D.C. Health and Company, 1983), pp. 13-25.
  • 130. — 129 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future 39. Ibid. 40. A related policy implemented under DEFRA was a mandated freeze on physicians’ fees, but this policy only continued through 1986. See Mark V. Pauly, et al., Paying Physicians: Options for Con- trolling Cost, Volume, and Intensity of Services (Ann Arbor: Health Administration Press, 1992), pp.trolling Cost, Volume, and Intensity of Services (Ann Arbor: Health Administration Press, 1992), pp.trolling Cost, Volume, and Intensity of Services 24-25. 41. Mark V. Pauly, et al., Paying Physicians: Options for Controlling Cost, Volume, and Intensity of Services (Ann Arbor: Health Administration Press, 1992), pp. 29-30. 42. Commerce Clearing House, Inc., New Medicare Benefits: Medicare Catastrophic Coverage Act of 1988, Chicago, 1988 (pamphlet). 43. Oblerlander, The Political Life of Medicare, p. 63. 44. Oblerlander, The Political Life of Medicare, p. 68. Oberlander observes that the “opposition was led by more affluent beneficiaries” due to the redistributive nature of the tax to finance the Catastrophic benefits, although “support . . . eroded precipitously among seniors of all income groups—even those who stood to gain the most from the legislation.” 45. Oberlander, The Political Life of Medicare, p. 73. 46. “Clinton Lays Out Plan to Overhaul Medicare System,” New York Times, National Edition (June 29, 1999), p. 1. 47. “White Houses Raises Expected Cost of Medicare Drug Plan,” New York Times, National Edition (February 9, 1999), p. 28. 48. AARP, “Medicare Changes that Could Affect You,” Washington, D.C. (brochure), 2004. 49. U.S. General Accounting Office, History of the Rising Costs of the Medicare and Medicaid Programs and Attempts to Control These Costs: 1965-1975 (Washington, D.C., 1976), p. 4.and Attempts to Control These Costs: 1965-1975 (Washington, D.C., 1976), p. 4.and Attempts to Control These Costs: 1965-1975 50. Centers for Medicare and Medicaid Services, Program Information on Medicare, Medicaid, SCHIP and other programs of the Centers for Medicare and Medicaid Services, Section III-C, p.2, “Medicare Program Spending,” June 2002 Edition. Online. Available: http://www.cms.hhs.gov/charts/series/ sec3-C.pdf. Accessed: April 10, 2004. 51. U.S. Congress, Senate, Joint Economic Committee, “Assessing the Viability of Medicare,” testimony by Marilyn Moon, April 10, 2003. Online. Available: http://jec.senate.gov/_files/Moon04102003. pdf. Accessed: April 15, 2004. 52. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 23. Online. Available: http://www.cms.hhs.gov/publications/trusteesreport/2004/tr.pdf. Accessed: April 15, 2004. 53. Cristiana Boccutti and Marilyn Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades,” Health Affairs, March/April 2003, vol. 22, no. 2, pp. 230-237. 54. Joseph R. Antos and Alfredo Goyburu, Comparing Medicare and Private Health Spending, Web- Memo#250 (The Heritage Foundation, April 8, 2003). Online. Available: http://www.heritage.org/ Research/Healthcare/wm250.cfm. Accessed: August 12, 2005. 55. The Kaiser Family Foundation, Medicare Chart Book, 2nd ed., p. 16 (online). 56. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 7 (online). 57. Percentages for the self-employed increased even more, going from 0.35 percent in 1965 to 2.9
  • 131. — 130 — Big Choices: The Future of Health Insurance for Older Americans percent in 1986. See The Kaiser Family Foundation, Medicare Chart Book, 2nd ed., p. 79 (online). 58. The Kaiser Family Foundation, Medicare Chart Book, 2nd ed., p. 79 (online). 59. Joseph P. Newhouse, “Medicare Policy in the 1990s,” Working Paper 8531 (Cambridge, Mass.: National Bureau of Economic Research, October, 2001), p. 3. Online. Available: http://www.nber. org/papers/w8531. Accessed: April 15, 2004. 60. Ibid., p. 7. 61. Ibid., p. 11. 62. Oberlander, The Political Life of Medicare, p. 120. 63. Centers for Medicare and Medicaid Services, Medicare Provider Analysis and Review (MEDPAR) of Short-Stay Hospitals. Online. Available: http://www.cms.hhs.gov/statistics/medpar/default.asp. Ac- cessed: April 16, 2004. 64. Oberlander, The Political Life of Medicare, p. 125. 65. Newhouse, “Medicare Policy in the 1990s,” p. 13 (online). 66. Ibid. 67. Oberlander, The Political Life of Medicare, p. 126. 68. American Academy of Dermatology, Government Affairs: History of RBRVS. Online. Available: http://www.aadassociation.org/rbrvs.html. Accessed: March 5, 2004. 69. Oberlander, The Political Life of Medicare, p. 129. 70. Bryan E. Dowd, Roger Feldman, and Jon Christianson, Competitive Pricing for Medicare (Washing-Competitive Pricing for Medicare (Washing-Competitive Pricing for Medicare ton, DC: The AEI Press, 1996), p. 33. 71. Maxine W. Epstein and Patti Aldredge, Good But Not Perfect: A Case Study of Managed Care (Boston:Good But Not Perfect: A Case Study of Managed Care (Boston:Good But Not Perfect: A Case Study of Managed Care Allyn and Bacon, 2000), p. 6. 72. Centers for Medicare and Medicaid Services, CMS Programs: Key Legislative Milestones. Online. Available: http://www.cms.hhs.gov/about/history/milestones.asp. Accessed: April 10, 2004. 73. The Kaiser Family Foundation, Medicare Chart Book, 2nd ed., pp. 50-55 (online). 74. See, for example, Marilyn Moon, “Beneficiary Issues and Medicare + Choice,” Testimony before the United States’ House of Representatives Committee on Ways and Means Subcommittee on Health, May 1, 2001. Online. Available: http://www.urban.org/url.cfm?ID=900425. Accessed: August 12, 2005. 75. Economic studies of Medicare’s impact on the health of the elderly show ambiguous results. See Ronald J. Vogel, Medicare: Issues in Political Economy (The University of Michigan Press: Ann Arbor,Medicare: Issues in Political Economy (The University of Michigan Press: Ann Arbor,Medicare: Issues in Political Economy 1999), pp. 36-49, for an explanation of such contradictory findings. 76. Federal Interagency Forum on Health Related Statistics, 2000, cited in the National Association of Social Insurance, What is the History of Medicare? Online. Available: http://www.nasi.org/publica-What is the History of Medicare? Online. Available: http://www.nasi.org/publica-What is the History of Medicare? tions3901/publications_show.htm?slide_id=7&cat_id=76. Accessed: March 15, 2004. 77. There is debate over Medicare’s relationship with changes in the health status of older Americans. According to Sue A. Blevins in Medicare’s Midlife Crisis (Washington, D.C.: The Cato Institute,Medicare’s Midlife Crisis (Washington, D.C.: The Cato Institute,Medicare’s Midlife Crisis 2001, p. 68), Medicare’s role in improving the health of the elderly population should consider that “US life expectancy was on the rise long before Medicare was enacted, and although overall life expectancy continues to improve, our relative ranking [to other OECD countries] has declined over
  • 132. — 131 — Health Insurance for Older Americans: Assessing Medicare’s Past, Present, and Future the past 30 years.” 78. Robert L. Clark, Richard V. Burkhauser, Marilyn Moon, Joseph F. Quinn, and Timothy M. Smeed- ing, Economics of an Aging Society (Malden, Mass.: Blackwell Publishing, 2004), p. 12.Economics of an Aging Society (Malden, Mass.: Blackwell Publishing, 2004), p. 12.Economics of an Aging Society 79. U.S. Census Bureau, 2004, Table 2a: U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin. Online. Available: http://www.census.gov/ipc/www/usinterimproj/. Accessed: March 18, 2004. 80. The Kaiser Family Foundation, Medicare Chart Book, 2nd ed. (online). 81. Ibid. 82. Centers for Medicaid and Medicare Services (CMS), Medicare Current Beneficiary Survey, 2000. Online. Available: http://www.cms.hhs.gov/mcbs/PubCNP00.asp. Accessed: June 1, 2004. 83. Anatoly Zoubanov, Population Division, Department of Economic and Social Affairs, United Na- tions Secretariat, Population Ageing and Population Decline: Government Views and Policies, October 16-18, 2000. Online. Available: http://www.un.org/esa/population/publications/popdecline/INF3. pdf. Accessed: February 25, 2004. 84. Clark, Economics of an Aging Society, p. 24. 85. “Tale of Two Bellies,” The Economist, August 24, 2002. Online. Available: Lexis-Nexis Academic Universe, http://web.lexis-nexis.com/universe. Accessed: April 25, 2004. 86. Robert Friedland and Laura Summer, National Academy on an Aging Society, “Demography is not Destiny,” January 1999. Online. Available: http://www.agingsociety.org/agingsociety/publications/ demography/index.html. Accessed: April 25, 2004. 87. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 54 (online). 88. Clark, Economics of an Aging Society, p. 19. 89. Ibid. 90. Ibid., p. 25. 91. Brenda C. Spillman and James Lubitz, “The effect of longevity on spending for acute and long-term care,” New England Journal of Medicine, vol. 342, no. 19 (May 11, 2000), pp. 1409-1415. 92. Patricia Neuman, “The State of Retiree Health Benefits: Historical Trends and Future Uncertainties,” Kaiser Family Foundation, May 17, 2004. Online. Available: http://www.kff.org/medicare/7087. cfm. Accessed: June 1, 2004. 93. Frank B. McArdle, Patricia Neuman, Michelle Kitchman, Kerry Kirland, and Dale Yamamoto, “Large Firms’ Retiree Health Benefits Before Medicare Reform: 2003 Survey Results,” Health Affairs Web Exclusive, 14 January 14, 2004. Online. Available: http://content.healthaffairs.org/cgi/content/ full/hlthaff.w4.7v1/DC1. Accessed: May 31, 2004. 94. Illinois Department of Insurance, Pre-Medicare Fact Sheet. Online. Available: http://www.ins.state. il.us/spg/PreMedicareFactSheet.pdf. Accessed: March 10, 2004. 95. Neuman, “The State of Retiree Health Benefits” (online). 96. General Accounting Office, Long-Term Care: Aging Baby Boom Generation will Increase Demand and Burden on Federal and State Budgets, 2002. Online. Available: http://aging.senate.gov/public/events/ hr80dw.pdf. Accessed: June 1, 2004. 97. Ibid.
  • 133. — 132 — Big Choices: The Future of Health Insurance for Older Americans 98. Ellen O’Brien and Risa Elias, Medicaid and Long Term Care, Kaiser Commission on the Uninsured, May 2004. Online. Available: http://www.kff.org/medicaid/upload/36296_1.pdf. Accessed: June 2, 2004. 99. Judith Feder, Harriet L. Komisar, and Marlene Niefeld, “Long-Term Care in the United States: An Overview,” Health Affairs vol. 19, no. 3 (2000). pp. 40-56. Online. Available: http://content.healthaffairs.org/cgi/reprint/19/3/ 40?maxtoshow=&HITS=10&hits=10&RESULTFORMAT=&author1=feder&andorexactfulltext=and&search id=1086265489738_400&stored_search=&FIRSTINDEX=0&resourcetype=1&journalcode=healthaff. Accessed: May20,2004. 100. General Accounting Office, Long-Term Care (online). 101. Stephen Heffler, Sheila Smith, Sean Keehan, M. Kent Clemens, Mark Zezza, and Christopher Truffer, “Trends: Health Spending Projections Through 2013,” Health Affairs Web Exclusive, Febru- ary 11, 2004. Online. Available: http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.79v1/ DC1. Accessed: March 25, 2004. 102. Ibid. 103. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 2 (online). 104. Ibid. 105. Ibid, p. 7. 106. Ibid. 107. Clark, Economics of an Aging Society, p. 278. 108. Ibid., p. 279. 109. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, Table II.C21 (online). 110. Heffler, et al., “Trends: Health Spending Projections Through 2013” (online). 111. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, Table IV.C2 (online). 112. Marilyn Moon, “Growth in Medicare Spending: What Will Beneficiaries Pay?” The Urban Institute. Online. Available: http://www.cmwf.org/programs/medfutur/moon_growth_318.PDF. Accessed: April 19, 2004. 113. Center for Medicare and Medicaid Services, 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds, p. 11 (online). 114. Ibid., p. 10. 115. Ibid., p. 13. 116. Ibid., p. 15. 117. Ibid., p. 19. 118. It should be noted that the recent bill adopting prescription drug coverage does not allow the govern- ment to negotiate lower drug prices with pharmaceutical companies.
  • 134. Chapter 9 How Beneficiaries Fare under the New Medicare Drug Bill by Marilyn Moon, Ph.D., American Institutes for Research Abstract: The Medicare Prescription Drug Improvement and Modernization Act (MMA) provides the largest benefit expansion in Medicare’s history while enacting major changes to the program’s structure. Offering $410 billion in new drug benefits will certainly help many beneficiaries now struggling with the costs of prescriptions, particularly those with low incomes. It is difficult to determine, however, whether beneficiaries will be better off in the long run. The drug benefits will not grow with the needs of beneficiaries, and other changes that prove to be unworkable or that place some beneficiaries at risk will create added costs. In the meantime, favorable treatment of private plans will create new inequities. Additional legislation and care- fully crafted regulations could mitigate a number of these issues; in the meantime, they will require close scrutiny. * * * * * The Medicare Prescription Drug Improvement and Modernization Act (MMA), signed into law by President Bush on December 10, 2003, provides the largest ben- efit expansion in Medicare’s history while enacting major changes to the program’s structure. This issue brief examines the new Medicare law with respect to the follow- ing: 1) the adequacy of the drug benefit; 2) the benefit’s structure; 3) the impact of greater privatization on Medicare outlays; and 4) additional issues affecting beneficia- ries, including problems related to the benefit’s complexity, stability of plan participa- tion, and means-testing the Medicare premium. As passed, the MMA is expected to increase federal spending by $395 billion between 2004 and 2013. The drug benefit itself is expected to cost slightly more— (available at http://www.cmwf.org/publications/publications_show.htm?doc_id=227453; The Commonwealth Fund, June 2004; used with permission)
  • 135. — 134 — Big Choices: The Future of Health Insurance for Older Americans $410 billion over 10 years.1 Even at this level of spending, funding constraints have resulted in a standard benefit package that contains a gap in coverage for people whose spending on prescription drugs falls within the middle range.2 This gap will have important consequences for certain groups of beneficiaries, including those with chronic conditions and relatively high drug expenditures. And while the low-income provisions in the final legislation represent a substantial improvement over the House and Senate bills, a number of Medicare beneficiaries who need help will still lack adequate financial protection. States, meanwhile, retain the substantial burden of helping to fund benefits for low-income beneficiaries. The details of the drug benefit’s structure—including the reliance on private standalone plans, consumer protections if private drug plans don’t develop, and beneficiaries’ preclusion from buying supplemental insurance to fill in coverage gaps—will likely create problems for beneficiaries. In many cases, these different components will determine how well the new legislation operates in practice for beneficiaries. The MMA also contains provisions that, its supporters claim, will help reduce the rate of Medicare spending growth over time. In effect, the new law promotes the expansion of private plan options for providing Medicare benefits, based on the belief that competition within the private sector will achieve long-term sav- ings for the program. In addition to retaining a role for the Medicare+Choice managed care plans, the new law will encourage participation of preferred pro- vider organizations (PPOs), combining both into a new option called Medicare Advantage. Strong financial incentives are created to attract new private plans to the program. In 2010, Medicare will undertake a demonstration program in six regions in an effort to move toward a “defined contribution” approach, under which traditional Medicare will change substantially so that it operates as simply another plan option.3 Although traditional, fee-for-service Medicare (in which the government bears the financial risk and individuals are free to go to most health care providers) will basically be left as is, the implicit goal is eventually limiting, or even replacing, participation in it. Adequacy of the Drug Benefit The scope of the new prescription drug benefit was determined largely by budget constraints and by its supporters’ desire for a voluntary benefit. To attract enough Medicare beneficiaries to a voluntary program, some enticements had to be offered to those with low levels of drug spending. Another critical component was protection from catastrophic expenses for beneficiaries with high levels of spending. But limited federal funds led lawmakers to design a benefit with a “donut hole”—a gap in cover- age whereby coverage stops once beneficiaries exceed a low level of spending and does not resume until their expenses reach a very high level. Protections for individuals with low incomes also were limited by budget constraints, although nearly half of the law’s expenditures on drugs will go to lower-income beneficiaries.
  • 136. — 135 — How Beneficiaries Fare under the New Medicare Drug Bill The Donut Hole The standard prescription benefit established by the MMA creates a gap in drug coverage between $2,250 and $5,100 in a beneficiary’s total spending. This gap is reached after the beneficiary pays a $250 deductible and then 25 percent of the next $2,000 in total spending. At that point, the beneficiary will have spent $750 out-of- pocket. Before catastrophic coverage can begin, the legislation requires each individ- ual to pay $3,600 out-of-pocket. Thus, the next $2,850 in spending on prescription drugs is the sole responsibility of the beneficiary and his or her family.4 When that requirement is met, at $5,100 in total drug spending, the benefit will then cover 95 percent of any additional spending. Consequently, the average amount paid by the government will depend on beneficiaries’ total drug costs (Figure 1, Table 1). The share of spending covered by the drug benefit reaches a high point at $2,250, declines until $5,100, and then rises. Figure 2 displays the share of Medicare beneficiaries whose total spending on drugs falls into each of the spending levels that are subject to different cost-sharing rules. About 27 percent of the full Medicare population will have spending in the area of the “donut hole.” Moreover, the 15 percent with spending above $5,100 also are affected by the donut hole, since they would have no coverage between $2,251 and $5,100 in total spending.5 The donut hole will reduce protection against drug expenses just as many of those Medicare beneficiaries who are most in need are expecting financial relief. Chronic health conditions are strongly correlated to high spending on prescription drugs, with expenses ranging from $3,000 to $5,000 per year. Moreover, a large proportion of Medicare beneficiaries have two or more chronic conditions, which can require tak- ing several drugs every day, at a cost of $1,000 or more per year for each medication (Figure 3).6 The coverage gap for the basic drug benefit thus arises right at the point when the chronically ill experience growth in their drug spending. It is exactly in this spending range where better coverage of drugs could ultimately help to lower health care spending elsewhere. Ironically, the government’s share of costs for someone with $5,000 in spending is 32 percent—much lower than the share paid for someone with just $2,000 in drug expenditures (65%). Many of the discussions about the donut hole have characterized it as being much smaller than it actually is. This is because the new Medicare law’s rules for coverage are established on two different bases. Initially, the deductible and coinsurance are tied to total spending. But eligibility for catastrophic protection is linked to out-of- pocket spending. Why does this matter? Essentially, these rules restrict the ability of any health plan to fill in the benefit’s gap: only contributions from the individual, his or her family, or a state pharmaceutical assistance program are allowed to count toward the out-of-pocket spending requirement. Supplemental policies for non-drug expenses work much differently, in that Medicare does not have any stake in who pays the deductibles and copayments. While the new law will allow plans the flex- ibility to vary the deductible and copay structure, the $3,600 out-of-pocket require-
  • 137. — 136 — Big Choices: The Future of Health Insurance for Older Americans Figure1 BeneficiaryandGovernmentShareofSpendingin2006,at IndividualExpenditureLevels,UndertheNewMedicareDrugBenefit $1,000$2,000$3,000$4,000$5,000$6,000$8,000$10,000$15,000$20,000 AnIndividual’sTotalTotalTAnnualDrugExpenditures BeneficiarySharePlan/GovernmentShare $438$438 $562$562$562 $1,312 $688$688 $1,500 $1,500 $1,500 $2,500 $1,500 $3,500 $2,355 $3,645 $4,220 $3,780 $6,155 $3,845 $10,830 $4,170 $15,530 $4,470 Source:AdaptedfromCongressionalBudgetOffice.
  • 138. — 137 — How Beneficiaries Fare under the New Medicare Drug Bill Table 1 Individual Share of Basic Drug Benefit Based on Mean Spending Level in 2006 Mean spending level in 2006* $3,167 Beneficiary pays: $250 deductible $250 25% of next $2,000 in spending $500 100% of spending between $2,250 and $3,167 $917 Subtotal (as share of spending: 53%) $1,667 Plus premium $418 Total $2,085 *CBO estimate. Source: Adapted from Congressional Budget Office. Figure 2 Medicare Population by Level of Prescription Drug Spending in 2006 Source: Congressional Budget Office estimates. Note: These figures represent the spending distribution by all beneficiaries. The distribution for those who participate in the program or who receive low-income subsidies may vary. >$5,100 15% <$250 25% $251-$2,250 33% $2,251-$5,100 27%
  • 139. — 138 — Big Choices: The Future of Health Insurance for Older Americans Figure 3 Distribution of Medicare Beneficiaries, by Number of Chronic Conditions, 1999 Source: Urban Institute analysis of the 1999 Medicare Current Beneficiary Survey (MCBS). Note: Excludes beneficiaries residing in nursing homes. Zero 8.2% One 15.1% Two 21.4% Three 21.2% Four 16.4% Five or more 17.7% ment remains the same. If a private insurance plan covers spending above $2,250, the gap would not be reduced; rather, it would just begin at a higher spending level. For example, if a private insurance company sold a policy to pay 100 percent of the spending between $2,250 and $4,250, then the catastrophic protection would not begin until $7,100 in total spending—the point at which the individual would have spent $3,600 out-of-pocket. Private plans do have the flexibility to change some of the coverage features. But since the new benefit is voluntary, private plans that make coverage more generous for those who spend a lot on prescription drugs and decrease it for those who spend less would result in adverse selection. That is, such a plan would attract enrollees with high costs, raising the costs of insuring this group, and discouraging those who rely less on prescription drugs from enrolling. Until or unless the government establishes an effective riskadjustment mechanism, plans may be reluctant to experiment in this way. The government offers plans some degree of protection from risk, but only time
  • 140. — 139 — How Beneficiaries Fare under the New Medicare Drug Bill will tell whether it will be sufficient to encourage plans to take a risk by changing their basic benefit structure. Congress’s rationale for strongly discouraging beneficiaries from filling gaps in drug coverage is that if individuals purchased more comprehensive supplemental ben- efits, the cost of the catastrophic protections would rise. In other words, more people would “make it” to the catastrophic spending level ($5,100) if they had supplemental coverage. The implications can be viewed two ways: people will be discouraged from unnecessary use of drugs, or people in need of help—who limit drug use since they cannot afford it—may never spend enough out-of-pocket to reach the catastrophic level. In practice, both of these outcomes, to a certain extent, will likely occur. The new benefit’s donut hole will likely anger many beneficiaries once they un- derstand these rules. And indeed, it seems unfair to provide better protection, as a share of their spending burden, to those with $2,000 in spending than to those with $5,000 in spending. Filling the gap, however, would be very expensive—perhaps as much as $70 billion over 10 years—since over 40 percent of all beneficiaries in 2006 will have expenditures greater than $2,250. Instead, the federal government is more likely to respond to beneficiary concerns by allowing drug plans to relax the $3,600 out-of-pocket requirement. This still might not be enough, however, to encourage plans to step in and fill the gap in coverage, since insur- ance companies will likely remain fearful of adverse selection. Rather, there might need to be some further subsidy or protection for insurers who move in this direction. Low-Income Provisions For Medicare beneficiaries with low incomes, the legislation will generally result in an improvement in drug coverage. Beneficiaries with income up to 135 percent of poverty will pay no premium and be subject only to small copayments of $2 per generic drug and $5 per brand-name drug.7 These provisions will be less generous for individuals covered by Medicaid in the approximately 16 states that provide compre- hensive benefits and lower copayments or none at all. But many beneficiaries poten- tially would become newly eligible for drug benefits: the standard eligibility level for Medicaid is 74 percent of the poverty level, and only 17 states cover Medicare-eligible adults up to 100 percent of poverty.8 Between 135 and 150 percent of the poverty level, the benefits begin to phase out as a sliding-scale premium is charged, a $50 deductible is added, and copayments are increased. The Congressional Budget Office (CBO) has estimated that of the 14.7 million Medicare beneficiaries who would be eligible for the low-income subsidies, 6.4 million are “dual eligibles” (i.e., eligible for both Medicare and Medicaid) (Table 2). Thus, over half of the 14.7 million will become newly eligible for a drug benefit.9 The drug benefit is the same for everyone above 150 percent of poverty. Anyone with an income just slightly above this level will find it difficult to pay the benefit’s premium and required cost-sharing. Someone spending $3,000 on drugs, for exam- ple, would pay about 12 percent of his or her annual income out-of-pocket for drugs
  • 141. — 140 — Big Choices: The Future of Health Insurance for Older Americans Table 2 Eligibility of Medicare Beneficiaries in 2006 for Low-Income Subsidies Income (% Federal Poverty Level) 100% 101%– 136%– 151% and Below 135% 150% and Above Total Number of Eligible Beneficiaries (millions) Subsidy A Dual eligibles 4.4 1.1 0.2 0.6 6.4 All other beneficiaries 2.7 3.1 0.0 0.0 5.8 Subsidy B 0.2 0.5 1.2 0.0 1.9 Not eligible for low-income subsidies 0.4 0.9 0.5 23.7 25.4 Total Medicare beneficiaries 7.7 5.6 1.8 24.2 39.4 Note: Components may not sum to totals due to rounding. Eligibility and benefits under Subsidy A: 1. Individuals would qualify if they have incomes below 135 percent of the Federal Poverty Level and countable assets of less than $6,000 for an individual or $9,000 for a couple. Those amounts would be adjusted for inflation in later years. Dual eligibles would also qualify, regardless of their income or assets. 2. Eligible individuals would receive a full premium subsidy and pay only nominal cost- sharing up to the catastrophic level; cost-sharing for dual eligibles in nursing homes or with incomes below the Federal Poverty Level would be further reduced or eliminated. Individuals would pay no cost-sharing above the catastrophic level. Eligibility and benefits under Subsidy B: 3. Individuals who do not qualify for Subsidy A would be eligible for Subsidy B if they have incomes below 150 percent of the Federal Poverty Level and countable assets of less than $10,000 for an individual or $20,000 for a couple. Those amounts would be adjusted for inflation in later years. 4. Eligible individuals would pay a lower deductible and reduced cost-sharing for spending below the catastrophic level. They would also receive a premium subsidy that would be phased out for individuals with incomes between 135 percent and 150 percent of the Federal Poverty Level. Source: Adapted from Congressional Budget Office. even if they purchased the coverage.10 Other beneficiaries who are above the 150 percent cutoff may end up being no better off than they currently are if they decide they cannot afford the premiums. Many of the people in this group who underuse drugs they need will likely continue doing so.
  • 142. — 141 — How Beneficiaries Fare under the New Medicare Drug Bill The MMA also relies on asset tests to limit eligibility for low-income protections.11 For beneficiaries below 135 percent of poverty, the maximum total assets permitted are $6,000 per single adult and $9,000 per couple. Because of the stringency and complexity of the qualification process, many low-income beneficiaries are likely to be excluded from these programs. And while the asset limits are higher for indi- viduals living between 135 and 150 percent of the poverty level ($10,000 in assets for individuals and $20,000 for couples), even these are quite stringent—especially considering that beneficiaries expect to stretch their modest savings over many years to supplement their incomes.12 The CBO estimates that 1.8 million individuals who would be eligible for benefits based on their income would be excluded because of the asset test; and another 700,000 people would receive lower subsidies because they would not meet the lower asset test requirement (Table 3). The combination of strict income and asset tests and the reluctance of many Medicare beneficiaries to identify themselves as “poor” is expected to hold down the number of beneficiaries participating in the subsidized drug benefit. In calculating the likely costs of the legislation, the CBO assumed that only 75 percent of those with incomes below 135 percent of poverty, and just 35 percent of those with in- comes between 135 percent and 150 percent of poverty, would actually participate.13 These participation levels are similar to those found for the current Medicare Savings Programs. Will states do more to fill in these gaps in low-income protections? While states are precluded from covering the copays required in the legislation from those with incomes below 135 percent of the poverty level, they are allowed to use funds from Table 3 Annual Prescription Fills and Average Drug Spending, by Number of Chronic Conditions Average Drug Percentage with Number of Prescription Spending More than $2,000 Chronic Conditions Fills (2006 Dollars) in Drug Spending 0 8 $1,346 18% 1 12 1,819 27 2 18 2,543 43 3 24 3,426 56 4 30 4,046 66 5 or more 40 5,673 75 Total 23 $3,320 51% Note: Excludes end-stage renal disease and beneficiaries living full-time in a nursing facility. Source: Urban Institute analysis of 1999 Medicare Current Beneficiary Survey. Spending in 2006 adjusted for Congressional Budget Office estimates.
  • 143. — 142 — Big Choices: The Future of Health Insurance for Older Americans their pharmaceutical assistance programs to fill in the larger gaps in the basic benefit. Moreover, several of the larger state programs might continue to aid people above 150 percent of poverty, for example. But the new law also requires, through a provi- sion referred to as the “clawback,” that states continue to pay a substantial amount of the existing costs of covering dual eligibles. This provision calls for states’ contribu- tion to decline from 90 percent of what the expenses would have been without the Medicare drug benefit in 2006 to 75 percent of that level by 2015 and beyond. State contributions will also be adjusted upward to reflect increases in the number of dually eligible individuals. Indexation of the Benefit Structure The various cutoff levels for the drug benefit, including the gap, will be indexed to the annual increase in the cost of the benefit itself. As a consequence, the $3,600 gap is expected to rise to $6,400 in 2013—a 78 percent increase (Table 4). Catastrophic protection in that year will not begin until an individual has spent $9,066 on prescription drugs. At the same time, incomes of Medicare beneficiaries and their eligibility for low-income protection are expected to rise at a much smaller rate over this period—by only about half that amount. If that is indeed the case, ben- eficiaries’ share of income devoted to prescription drugs will rise over time, even for those who choose to receive the drug benefit. So, for example, someone living above 150 percent of the poverty level in 2006 who spends 12 percent of her income on the benefit premium and out-of-pocket drug spending would be spending about 18 percent of her income on drugs by 2013. The Structure of the Drug Benefit The new law allows prescription drug benefits to be offered only through private insurers (unless a fallback plan, explained below, is needed). This provision makes it more cumbersome for beneficiaries who choose to remain in the traditional, fee-for- service Medicare program to get drug coverage. Many beneficiaries would likely have Table 4 Standard Drug Benefit, 2006 and 2013 2006 2013 Annual deductible $250 $445 Coinsurance to initial limit 25% 25% Initial limit $2,250 $4,000 Out-of-pocket threshold $3,600 $6,400 Coverage gap $2,850 $5,066 Coinsurance above OOP (greater of) $2/$5 or 5% $3/$8 or 5% Source: Adapted from Congressional Budget Office.
  • 144. — 143 — How Beneficiaries Fare under the New Medicare Drug Bill to purchase two private supplemental policies—a Medigap plan and a drug plan. Those who currently have a Medigap plan that includes a drug benefit may retain their current plan if the company continues to provide such coverage, or they will need to enroll in a new plan without the drug coverage and buy a standalone drug policy. Since the new drug plans are subsidized, they will represent a better value than Medigap with drugs, although many beneficiaries will still likely be confused about exactly what to do. Each year, this group will have to make tough decisions—per- haps switching to a less comprehensive Medigap policy if the costs of drug plans rise steeply, for example. Beneficiaries also will need to compare the costs of traditional Medicare, plus various options for two supplemental plans, against the more compre- hensive, but potentially more expensive and/or restrictive, private options. Medicare beneficiaries with employer-subsidized retiree plans are also likely to be facing new decisions when employers change their plans. Fallback Plans In part because of geographic variations in spending on prescription drugs, some regions of the country may not be attractive to private drug plans. In these areas, fallback provisions will be critical to ensure that beneficiaries in traditional Medicare have access to drug coverage. The new legislation will create a federally run drug plan in areas where less than two private plans participate (only one of which must be a standalone drug benefit plan). The government will bear the insurance risk for the fallback plan and contract with a pharmacy benefit management company or another entity to process claims and administer the program. The fallback plan will remain in place only until new private plans enter the market. The fallback option, however, will not be triggered as long as a given market has one plan offering a standalone drug benefit, as well as one Medicare Advantage plan. Such a minimal requirement could lead to a number of problems for beneficiaries. Those who live in such a market but wish to remain in traditional Medicare will not have any choice of drug plan, despite what many of the legislation’s supporters have claimed. Competition among plans was intended to ensure that enrollees’ premiums and qual- ity of coverage are reasonable. But in the absence of competition, the sole standalone plan participating in a given region could set its premium substantially higher than in other areas.14 The new law does not provide for the federal oversight necessary to prevent such overcharging. Furthermore, over three years, beneficiaries potentially could be forced to participate in three different plans—the original private plan, the federal fallback option (following the original plan’s withdrawal), and a new private plan (once the market be- comes attractive again)—each with its own rules and premiums. Another shortcoming of the rules established for fallback plans is that the gov- ernment is not allowed to take advantage of the lower administrative costs it would incur compared with a standalone drug plan. In fact, the MMA explicitly requires the government to use the average private plan administrative costs when setting the fallback premium.
  • 145. — 144 — Big Choices: The Future of Health Insurance for Older Americans A better way to deal with beneficiaries remaining in traditional Medicare is to let them choose a federally run plan if they wish. Doing so would also enable the govern- ment to negotiate for lower rates on behalf of beneficiaries wanting to enroll in a gov- ernment plan.15 At a minimum, keeping the fallback option in place for several years would give beneficiaries a stable base. And if the government manages to operate the plan inexpensively, it should be allowed to pass savings on to beneficiaries. Delayed Sign-Up Beneficiaries who delay enrollment past the initial period will be assessed substantial fi- nancial penalties under the MMA, with premiums rising by at least 1 percent for each month of delay. The increase, however, could be higher if the Secretary of Health and Hu- man Services certifies that actuarial costs are greater. How actuarial costs are to be deter- mined is not clear. For example, will health status be taken into account? If so, this would be the equivalent of underwriting and could preclude people with substantial health care needs from obtaining reasonably priced coverage. In addition, if someone loses creditable coverage during the year and does not qualify for a special enrollment period, the govern- ment could assess a late penalty. For these reasons, it will be important to monitor the regulations formulated for this part of the legislation. In order to protect beneficiaries, especially in the drug benefit’s early years, plans will need to balance mechanisms used to encourage people to sign up against penal- ties for individuals who may be skeptical or confused about the benefits. The legisla- tion could be improved by creating a longer initial sign-up period before late penal- ties are assessed. Formularies Formularies, which specify the drugs covered by a plan, will likely serve as a ma- jor source of cost containment efforts. For example, for a therapeutic class of drugs aimed at meeting specific needs (such as lowering cholesterol), plans could limit the number of drugs covered to just two. Plans could also specify levels of copayments by type of drug, differentiating between those that are preferred and others within a therapeutic category. In addition, plans could promote the use of generic drugs over brand-name ones. These tools can be used to reduce the costs of drugs, which can in turn lower beneficiaries’ premiums. But they also add to beneficiaries’ confusion. Moreover, the rules can change during the course of the year, and they do not have to be disclosed before people enroll. A formulary need be disclosed only at the time of enrollment- and even then, beneficiaries may only be given a Web site address or phone number to obtain that information. This makes it very difficult to compare plans—presum- ably the reason for offering multiple plans. Generally, the way in which pharmacy benefit managers or other entities that might offer plans achieve savings is to steer patients to those drugs for which the manufacturer has offered the biggest discount. Such an approach, however, may not
  • 146. — 145 — How Beneficiaries Fare under the New Medicare Drug Bill be the best one from a health perspective. Without adequate information about the comparative effectiveness of related drugs and the presence of side effects, the for- mulary may not steer patients to the drug that would best meet their overall health needs. The Veterans Administration and a number of states have begun to modify their formularies in cases where such data are available. With the investment of ad- ditional resources, Medicare could further advance the state of knowledge with re- gard to comparative drug efficacy and safety.16 Funds were not appropriated for this purpose, however. Standalone Plans and Traditional Medicare For beneficiaries who choose to get all their benefits from private plans, the proposed drug benefit would be integrated into an overall package. But for those who opt to stay in traditional Medicare, drug benefits would be provided by a separate, stand- alone drug plan. Many experts in both the private and public sectors have expressed doubts about insurers’ ability to offer standalone benefits.17 One concern is that risk adjustment will not be as effective for a standalone benefit as it would for an inte- grated benefit package, because individuals who know that they have high drug ex- penses are likely to congregate in more comprehensive plans to a greater degree than risk adjustment models assume. Another is that standalone plans will require their own administrative structures. For these reasons, they will likely be more expensive to operate than integrated benefit plans—and could saddle beneficiaries remaining in traditional Medicare with higher costs. Greater Privatization in Medicare The new PPO option added by the MMA provides Medicare Advantage plans with special subsidies to encourage private insurers’ participation in Medicare. Privatiza- tion has been touted by its supporters as the means to achieve slower rates of growth in Medicare spending over time. These supporters also claim that traditional Medi- care will not be harmed in any way by the new law. Skepticism about both claims is at the heart of criticism leveled at the legislation. The Likelihood of Savings from Relying on Market Forces Those opposed to Medicare relying on private plans point to evidence suggesting that these plans are unlikely to slow cost growth over time. They also cite practical concerns about whether new features, such as standalone prescription drug plans, will work at all. To date, the evidence indicates that privatization will not achieve savings for Medicare.18 Certainly, the claim that privatization is essential for holding down Medicare’s costs is on shaky ground: recent experience with Medicare+Choice man- aged care plans suggests that year after year, beneficiaries are paying more and getting less value in return.19 Moreover, spending growth in Medicare over the last 30 years has been lower than that in both private insurance and the Federal Employees Health Benefits Program.20
  • 147. — 146 — Big Choices: The Future of Health Insurance for Older Americans Serving mainly healthier, and less costly, Medicare beneficiaries, private plans ap- pear more efficient than they actually are. While plans have offered enrollees ad- ditional benefits with the excess payments they receive, plans have not saved money for the federal government. It is simply difficult for private plans to compete with Medicare. While managed care has been able to hold down costs by obtaining dis- counts from hospitals, doctors, and other care providers, few plans can do as well as Medicare, with its enormous purchasing power. Furthermore, administrative costs for private plans are quite high. The only other avenue for plans to save money is to truly manage care by reducing use of goods and services or creating networks of providers with less costly practice “styles.” But most private plans have thus far not created any new or innovative care delivery systems that generate substantial savings over time while keeping consumers satisfied. Private plans have been able to succeed largely where they have attracted healthier- than-average enrollees and hence implicitly have been overpaid by Medicare. Risk adjustment has been such that the health status of enrollees of one private plan is compared only to that of enrollees of another private plan; heath status of beneficia- ries in traditional Medicare is not even taken into account. Under the MMA, payments to private plans are likely to continue to exceed the cost of providing benefits through the traditional Medicare program. The CBO esti- mated that between 2005 and 2013, private plans would add $14 billion to the cost of the legislation in bonus payments. The subsidies would be made directly, through explicitly higher payments to plans, and indirectly, since an implicit subsidy would be included in the monthly payment to plans to help support medical education and care for indigent hospital patients. These items add to traditional Medicare’s costs but are not usually an expense to private plans.21 Presumably, these higher payments are intended to jumpstart a competitive system, but it is reasonable to ask when such subsidies would pay returns, if ever. The CMS Office of the Actuary estimates that the bonus payments will enable plans to offer more benefits and attract more benefi- ciaries. Because of this, they assume greater enrollment in private plans and greater privatization will cost the program $46 billion rather than the $14 billion extra.22 Experimenting with new private plans for Medicare makes sense, but private plans should add value either through savings or through new and innovative approaches to care. Otherwise, it is difficult to justify spending scarce public dollars simply to increase the share of beneficiaries enrolling in private plans. If plans must be paid more than it costs to serve beneficiaries in traditional Medi- care, how is it possible to assume that they will save money for the program over time? In the case of PPOs, savings arise from enrolling “efficient” health care provid- ers—those who are less likely to order tests and procedures—in their networks. But savings also derive from paying very low amounts on services used outside the net- work, through higher copayments and by setting payments for such services at a very low level. This creates a conundrum for Medicare: by limiting how much beneficia- ries must pay for using out-of-network services, the legislation effectively eliminates
  • 148. — 147 — How Beneficiaries Fare under the New Medicare Drug Bill a major cost-saving tool for PPOs. There will likely be pressure on Congress to give PPOs more flexibility in paying for out-of-network services in order to keep PPOs in the program. Another limitation on plans’ ability to generate price competition, and thus in- creased savings, is the emphasis on consumer choice. If plans can vary in the benefits they offer, they may rely on marketing and benefit structure, rather than lower premi- ums, to attract customers. For this reason, some proponents of competition say that cost savings will be determined in part on the extent to which price is emphasized, which in turn will depend on minimal variance in plans’ benefits.23 Ironically, one of the selling points of private plans—that people can get precisely the benefits they want rather than being limited by a “one-size-fits-all” approach—may be at odds with holding down the costs of health coverage. Why should beneficiaries care about the rate of spending growth? First, there likely will be greater pressure to achieve savings by allowing, for example, PPO plans to limit what they pay out-of-network providers and providers, in turn, to pass on higher costs to beneficiaries. Second, lower-priced plans, even ones of questionable quality, may be promoted, putting traditional Medicare or higher priced plans at a disadvantage. Although finding new ways to pay plans is the focus of the 2010 “demonstration,” higher-than-anticipated growth rates may speed up that process and encourage supporters to skip the experimental period altogether. This approach is expected to put traditional Medicare at a disadvantage. Finally, subsidies to private plans are likely to create an unequal playing field that will penalize beneficiaries en- rolled in traditional Medicare even before 2010. A Level Playing Field for Medicare? Thanks to higher payments to private plans, Medicare Advantage insurers that provide all Medicare benefits will be able to offer improved benefits. Traditional Medicare, meanwhile, will not be allowed to improve its currently inadequate benefit package. The approach, in effect, favors the healthy over the sick. That is because individuals who remain in traditional Medicare are likely to be sicker than the average benefi- ciary and unwilling to take a chance on a new insurance option.24 According to the Centers for Medicare and Medicaid Services (CMS), traditional Medicare enrollees are more costly than Medicare+Choice enrollees because of adverse risk selection.25 But the application of risk adjustment does not take into account differences in risk between beneficiaries in traditional Medicare and those in private plans. It will only affect payment levels across private plans. Further, Medicare Advantage plans will have some additional flexibility in coordinating drug benefits with other coverage to create more generous benefits. People wishing to remain in traditional Medicare are also at a disadvantage be- cause they must purchase two separate supplemental policies to obtain comprehen- sive coverage. Doing so entails added administrative costs and complexity for these beneficiaries, further tilting the playing field in favor of private plans.
  • 149. — 148 — Big Choices: The Future of Health Insurance for Older Americans In describing the new PPO options, their supporters often suggest that these plans are just like traditional Medicare in terms of having a choice of any doctor or hospi- tal. But PPO enrollees, in truth, will incur substantially higher costs if they have to go out-of-network to get the doctors of their choosing. Nonetheless, if “educational” materials oversell these new plans, beneficiaries may enroll in them with false hopes. Large shifts of beneficiaries into the new PPO options may not be a valid test, under these conditions, of private plans versus traditional Medicare. Further Privatization in 2010 If it is eventually adopted as a permanent policy, the demonstration slated to begin in 2010 would effectively move the Medicare system toward a defined contribution approach. Federal payments to all options under Medicare, including the fee-for- service component, would be based on a share of the average of all premiums. This would place a cap on the government’s contribution toward the cost of premiums. As a result, any plan wishing to charge a higher-than-average premium would have to charge enrollees a substantially greater share—potentially dividing Medicare ben- eficiaries on the basis of ability to pay. Moreover, it will not always be the case that higher premiums reflect true differences in benefits or quality of care. Plans that at- tract a higher-than-average percentage of sick beneficiaries (which will likely include traditional Medicare) will have to charge higher premiums, unless a highly effective risk adjuster is developed by 2010 and applied across all plans, including traditional Medicare. While this undertaking is only a demonstration, individuals living within its tar- geted areas will have no choice but to take part. If they are in traditional Medicare and wish to remain there, they will likely face higher premiums over time than will beneficiaries in traditional Medicare living outside the demonstration areas. As in the past, it will likely prove very difficult to undertake this demonstration, since it will potentially harm some beneficiaries relative to others. Nevertheless, the temptation may well be to move toward full implementation of a defined contribution approach. Limiting payments to private plans, while shifting higher costs onto beneficiaries, may turn out to be the only way to ensure that privatization “saves” money. Other Issues Raised by the Legislation Problems Arising from Complexity Medicare beneficiaries who wish to shift their coverage to PPOs or remain in exist- ing Medicare HMOs may have most of their needs met in one plan, but they will still have to choose among various benefit packages. The new PPOs promoted by the MMA will create in-network and out-of-network benefits, deductibles, and cost sharing, essentially doubling the number of rules that beneficiaries must negotiate. In addition, different PPOs could have different networks of providers, which could affect beneficiaries’ ability to find health care services at a reasonable cost. Compli-
  • 150. — 149 — How Beneficiaries Fare under the New Medicare Drug Bill cated benefit packages that vary from plan to plan will make informed choice difficult for most beneficiaries. To help people make true comparisons, standardized benefit designs would be needed. However, standardization necessarily places limits on the flexibility plans will be able to offer. Information and Support for Decision-Making Even well-educated consumers currently struggle to understand Medicare. What’s more, nearly a quarter of Medicare beneficiaries have health problems, such as de- clines in sight or cognitive skills, that make it difficult to make an informed choice about their care.26 The current level of CMS funding for beneficiary information and education is insufficient to deal with the existing system, much less meet the greater needs that will arise under the new one. Yet, the MMA sets aside only $1 billion in new funding to cover all aspects of implementation. Even if half of those resources were devoted to beneficiary education, that would mean an average of only $12 per enrollee, and the amount will likely be much lower than that. Leaving the task of informing ben- eficiaries about the new system to private plans may lead to misleading advertising. Beneficiaries require independent sources of information, such as State Health In- surance Assistance Programs (SHIPs). And groups providing this assistance require substantial funding to meet the likely surge of beneficiaries needing help. Opportunities for Gaming the System The complexity of the rules, flexibility of coverage, and other details create opportu- nities for private plans and providers to game the system. For example, in the current Medicare+Choice system, HMOs have sometimes denied services to beneficiaries that clearly are covered by statute. Although knowledgeable caseworkers can straight- en out these issues, the same problem often recurs in the same HMO.27 At present, there is no way for CMS to learn about recurrent problems of this type, since most of the aid provided by SHIPs and other groups is not linked to an automatic feedback mechanism to help correct such problems. Opportunities for denial of benefits to beneficiaries, arbitrary shifting of drugs on or off the preferred list, and manipulation of payments to out-of-network providers will expand considerably under the new legislation, with its new PPOs, standalone drug plans, and bonus program. Again, substantial resources would need to be devoted to ensure that consumers are pro- tected from such activities. Disruptions over Time Private plans wishing to provide either the standalone drug benefit or the broader private options are required to participate for only one year. Such a short commit- ment may create a hardship for beneficiaries, who need a stable source of treatment to reduce confusion and ensure quality of care. If plans are permitted to enter and leave markets with such frequency, beneficiaries will be faced with problems similar
  • 151. — 150 — Big Choices: The Future of Health Insurance for Older Americans to those that have caused so much dissatisfaction with Medicare+Choice. In that pro- gram, insurers have withdrawn entirely from certain regions of the country. Benefi- ciaries frequently have to change physicians when joining a new plan, only to repeat the process if it later pulls up stakes. This can happen even if plans do not withdraw but instead raise premiums or cut benefits. Consequently, beneficiaries are forced to look for a new plan or, as evidence from California suggests, stay in inadequate, expensive plans.28 Longer terms for the government’s contracts with private plans ought to be considered, including limitations on how fast premiums can rise and how quickly details of the plan can change. And, as discussed above, improvements are needed to the fallback provisions for the drug benefit. Higher Part B Deductible in Traditional Medicare An increase in the Part B deductible (for physician services, outpatient hospital treat- ment, and home health care) has been discussed frequently as a means of saving federal dollars. The Part B deductible, currently $100, will rise to $110 in 2005 and then will increase by the same percentage as the Part B premium. Although the cur- rent deductible is low relative to employer insurance plans, other areas of cost-sharing are much higher under Medicare. The Part B deductible increase does make sense as a structural change, but it would be better to make this change while also reducing beneficiary cost-sharing where it is too high. Means-Testing the Part B Premium The MMA institutes a higher Part B premium starting with individuals whose annual incomes exceed $80,000 and couples whose incomes exceed $160,000. This require- ment keeps the income test on the revenue side—an important improvement over a requirement originally offered in the House of Representatives version of the drug bill. As a consequence, people at higher income levels will have to pay more but the principle of giving everyone the same benefit remains intact. The CBO estimates that when this provision begins in 2007, it will affect only 3 percent of beneficiaries; the share of beneficiaries subject to the income-related premium is expected to rise to 6 percent by 2013.29 The payroll taxes that make up about half of Medicare’s financing are charged on all wages, no matter how high. Individuals with very high incomes therefore already contrib- ute far more than it costs to serve them. Since the drug benefit is paid out of general rev- enues, people with substantial incomes who become Medicare beneficiaries will continue to contribute even after retirement. This new requirement builds on an existing financ- ing system that asks higher-income beneficiaries to pay more. Nonetheless, it remains a controversial provision to many supporters of social insurance, who see this as a first step toward breaking down the universality of the benefit. The issue of greatest concern, however, is whether the resources that will be ob- tained through means testing will be substantial enough to justify the considerable new administrative costs and reporting requirements the government will engender.
  • 152. — 151 — How Beneficiaries Fare under the New Medicare Drug Bill That is, the Social Security Administration will be required to obtain data from the Internal Revenue Service from the previous year’s tax filings in order to calculate what premium to charge each Medicare beneficiary. Conclusion Offering $410 billion in new drug benefits will certainly help many beneficiaries now struggling with the costs of prescriptions, particularly those with low incomes. It is difficult to determine, however, whether beneficiaries will be better off in the long run under the new legislation. The drug benefits will not grow with the needs of beneficiaries, and other changes that prove to be unworkable or that place some beneficiaries at risk will create added costs. For example, if the payment system is changed to reflect a defined contribution premium-support approach, premiums for traditional Medicare could rise disproportionately if sicker beneficiaries remain in the traditional fee-for-service plan. In the meantime, favorable treatment of private plans will create new inequities. The ability to truly compare the viability of traditional Medicare with that of private plan options has been severely compromised. Additional legislation and carefully crafted regulations could certainly mitigate a number of these issues. However, it may be difficult to engage in a constructive de- bate about the legislation’s problems following the rancor in the debate over passage. Although it will be some time before many parts of the legislation go into effect, some provisions begin this year. These will need to be closely scrutinized before creating a new set of constituencies for this new status quo.30 Notes 1. Letter from the Congressional Budget Office to Congressman Bill Thomas, Chairman, Ways and Means Committee, Nov. 20, 2003. 2. Marilyn Moon and Matthew Storeygard, Stretching Federal Dollars: Policy Trade-Offs in Designing Medicare Drug Benefit with Limited Resources (New York: The Commonwealth Fund, Aug. 2002).Medicare Drug Benefit with Limited Resources (New York: The Commonwealth Fund, Aug. 2002).Medicare Drug Benefit with Limited Resources 3. See, for example, Sally Trude and Paul Ginsburg, Are Defined Contributions a New Direction for Employer-Sponsored Coverage? (Washington, D.C.: Center for Studying Health System Change, IssueEmployer-Sponsored Coverage? (Washington, D.C.: Center for Studying Health System Change, IssueEmployer-Sponsored Coverage? Brief No. 32, Oct. 2000); Karen Davis, Cathy Schoen, Michelle Doty, and Katie Tenney, “Medicare Versus Private Insurance: Rhetoric and Reality,” Health Affairs Web Exclusive (Oct. 9, 2002):W311–Health Affairs Web Exclusive (Oct. 9, 2002):W311–Health Affairs W324; General Accounting Office,“Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits, Adding Billions to Spending” (Washington, D.C.: GAO/HEHS-00-161, Aug. 2000); and Marilyn Moon, Restructuring Medicare: Impacts on Beneficiaries (New York: The CommonwealthRestructuring Medicare: Impacts on Beneficiaries (New York: The CommonwealthRestructuring Medicare: Impacts on Beneficiaries Fund, May 1999). 4. The exception to this is that state pharmaceutical benefit programs will be allowed to fill in the gaps for people eligible for these benefits. At present, only four states have plans that provide benefits to substantial numbers of people above 150 percent of poverty. In addition, there is no penalty on employer-subsidized plans that are more comprehensive than the new benefit package. In fact, as long as the package provides coverage at least at the level of the basic plan, employers will qualify for a subsidy toward the costs of that benefit. 5. CBO private communication.
  • 153. — 152 — Big Choices: The Future of Health Insurance for Older Americans 6. Fred Teitelbaum et al., 2002 Express Scripts Drug Trend Report, Express Scripts, Inc., June 2003. 7. Institutionalized individuals face no cost-sharing requirements and those with incomes below 100 percent of poverty who are dually eligible have slightly lower cost-sharing requirements. 8. Henry J. Kaiser Family Foundation, State Health Facts Online. Available at http://www.statehealth- facts.org. 9. Some of these individuals, however, might be enrolled in state-only pharmaceutical benefit plans. This estimate is contained in a Congressional Budget Office letter to Senator Don Nickles, Nov. 20, 2003. 10. This calculation assumes an annual income in 2006 of $15,400 and includes the premium and costsharing required. 11. See Laura Summer and Robert Friedland, The Role of the Asset Test in Targeting Benefits for Medicare Savings Programs (New York: The Commonwealth Fund, Oct. 2002). 12. Marilyn Moon, Robert Friedland, and Lee Shirey, Medicare Beneficiaries and Their Assets: Implications for Low-Income Programs (Menlo Park, Calif.: Henry J. Kaiser Family Foundation, June 2002). 13. CBO letter to Senator Don Nickles, Senate Budget Committee, Nov. 20, 2003. 14. While many people believe that the $35 premium was set as the amount that all individuals would pay, in practice it could vary substantially by area. 15. In fact, such an arrangement would most likely be necessary to satisfy those who would like to allow the government to negotiate prices. Price negotiations by the government would be alternative to the arrangements made by competing private plans. 16. This is discussed in more detail in another brief in this series: Marilyn Moon, “Formularies and Their Role in Cost Containment, “The Commonwealth Fund, forthcoming. 17. See, for example, Robert Pear and Walt Bogdanich, “Some Successful Models Ignored As Congress Works on Drug Bill,” New York Times, Sept. 4, 2003, pp. A1, C6. They quote Tom Scully, adminis- trator of CMS, and Chip Kahn, formerly head of the Health Insurance Association of America, as indicating that standalone drug plans are unworkable. 18. GAO, “Medicare+Choice: Payments,” 2000. 19. See, for example, Marsha Gold and Lori Achman, Average Out-of-Pocket Health Care Costs for Medicare+Choice Enrollees Increase Substantially in 2002 (New York: The Commonwealth Fund, Nov. 2002). 20. Katharine Levit, Cynthia Smith, Cathy Cowan, Art Sensenig, Aaron Catlin, and the Health Ac- counts Team,“Health Spending Rebound Continues in 2002,” Health Affairs 23 (Jan./Feb. 2004): 147–59; Cristina Boccuti and Marilyn Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades,” Health Affairs 22 (Mar./Apr. 2003): 230–37; and Karen Davis, Barbara S. Cooper, and Rose Capasso, The Federal Employees Health Benefits Program: A Model for Workers, Not Medicare (New York: The Commonwealth Fund, Nov. 2003). 21. That is, Medicare makes direct payments to hospitals for these expenses and that amount is aver- aged over all beneficiaries as a Medicare cost. But, since private plans do not pay such subsidies to hospitals, they effectively receive an overpayment. These overpayments were taken out of payments to private plans in the Balanced Budget Act of 1997, but the current legislation will restore those amounts. 22. CMS, Office of the Actuary estimates, Feb. 2004.
  • 154. — 153 — How Beneficiaries Fare under the New Medicare Drug Bill 23. Comments by Robert Reischauer and Jeff Lemieux at Alliance for Health Reform meeting, 2003. 24. Patients relying on multiple doctors or who are in the middle of treatments are less likely to want to face the disruption of changing plans, for example. 25. Office of the Actuary, Centers for Medicare and Medicaid Services,“Note to Medicare Advantage Organizations and Other Interested Parties,” Jan. 16, 2004. 26. Patricia Neuman et al.,“Understanding the Diverse Needs of the Medicare Population: Implications for Medicare Reform,” Journal of Aging and Social Policy 10 (4-1999): 25–50. 27. Medicare Rights Center, Systematic Problems with Medicare HMOs (New York: MRC, Sept. 1998). Available at http://www.MedicareRights.org. 28. Tom Buchmueller, “The Health Plan Choices of Retirees Under Managed Competition,” Health Services Research 35 (Dec. 2000, Pt. 1): 949-76. 29. CBO letter to Senator Max Baucus. 30. CBO letter to Senator Don Nickles, Senate Budget Committee, Nov. 20, 2003. About the Author Marilyn Moon, Ph.D., is vice president and director of the health program at the American Institutes for Research (AIR). Before joining AIR, she was a senior fellow at the Urban Institute. Dr. Moon’s primary interests are Medicare, aging issues, and health care financing. She has written extensively on drug and other reform issues in Medicare. She earned a doctorate in economics from the University of Wisconsin, Madison. The Commonwealth Fund is a private foundation supporting independent re- search on health and social issues. The views presented here are those of the author and should not be attributed to The Commonwealth Fund or its directors, officers, or staff.
  • 155. Chapter 10 Social Values and Medicare Reform by Stuart M. Butler, Ph.D., The Heritage Foundation Medicare reform is often portrayed solely as a debate over how best to provide medi- cal services to the elderly at reasonable cost. To the extent that questions of philoso- phy enter the discussion, these are often dismissed as “political” intrusions and thinly veiled excuses for self-interest. If these could be set aside, the argument often goes, men and women of good will could agree on improvements in the program that would enable it to deliver promised services more efficiently. It is true that program efficiency is an important part of the reform discussion, but at the core of the debate are fundamental differences of opinion about the form of “social contract” that should undergird Medicare. These differences center on the question of who should shoulder what responsibility for meeting the cost of the program—in turn reflecting alternative views of individual and collective obligations in a society. The design of Medicare also involves a set of responsibilities, incentives and rewards for those who provide medical services. The way in which these design characteristics play out can be in harmony or in conflict with the ethical values and sense of justice and fairness held by these individuals. One’s perception of the current Medicare program, and of proposals to reform it, thus necessarily hinge on one’s view of the social values involved, and of the proper personal obligations of those who provide medical services. Unless these subjective and philosophi- cal issues are recognized it is impossible to have a constructive debate. The Medicare Social Contract Our society recognizes certain social obligations regarding the elderly, and these have shaped the public programs and private institutions we have created to deliver health (originally published in The Ethics of Medicare Reform, Baltimore, MD: The Berman Bioethics Institute, Johns Hopkins University, 2002; used with permission)
  • 156. — 156 — Big Choices: The Future of Health Insurance for Older Americans care and other services. We can place these perceived obligations into three overlap- ping categories: 1. Individuals have an obligation, to the extent they are able when they are of work- ing age, to make provision for a reasonable level of their own health care needs during retirement. We do expect working-age people with the means to do so to save towards the costs of their retirement years, including health care costs. Dis- cretionary private savings or private insurance is one way to do that, of course, and we encourage this in a number of ways, including tax breaks for retirement sav- ings—which is of course a social subsidy to encourage private action. But in our sophisticated society we have also utilized mechanisms, such as social insurance, to require working-age people to contribute in line with their income towards their future costs. 2. Each generation has an obligation to help support the generations that preceded it. We accept that an adult child has an obligation to the welfare of his or her own parents. But we also interpret this in a wider sense of each working age generation having a collective responsibility to contribute to the welfare of the retired generation. 3. The community has an obligation to help care for its members in need. Reinforc- ing the first two perceived obligations is the notion that justice and prudence demands that collectively we take steps to help take care of those who because of inadequate means or unusual calamity face difficulty in affording a reason- able level of care. Many earlier societies developed moral codes and community laws specifying these obligations: medieval Jewish law, for instance, contains quite elaborate ethical and legal requirements regarding the provision of health care, depending on such things as need and whether the individual was a resident in the community or a traveler. In our modern society we have developed a system of legislated entitlements and benefit programs to fulfil this obligation. Generally we accept the idea of individuals in the community having an earned political right to such benefits due to their membership of the community. Medicare was designed to deliver health care to the elderly, and to the disabled, in accordance with these obligations. It does so by blending together four core elements, each leading to the relationships and value systems that characterize the program. Social insurance. The politics of the early 1960s resulted in a hybrid financing system for Medicare. But the foundation of the program, covering hospital and other services (Part A, or the Hospital Insurance [HI] program), is social insurance. Under social insurance, each working person pays a mandatory contribution into a fund in proportion to their income (typically with a limit), which makes the person eligible for health services when he or she meets the conditions to become a beneficiary—age or disability in the case of Medicare. A key feature of this social insurance relationship
  • 157. — 157 — Social Values and Medicare Reform is that eligible beneficiaries are entitled by law to specific future services (in the case ofentitled by law to specific future services (in the case ofentitled by law Medicare) or money (in, say, the case of Social Security). This is a critically important difference from the traditional view of social obligation by a community in which the amount of assistance is discretionary—a balance between the competing needs of contributor and recipient—albeit subject to social or moral prescription. The social insurance financing mechanisms broadly incorporates each element of the social contract. Working individuals must make a contribution towards their later needs—whatever their income. But the “pay-as-you-go” (or PAYGO) form of social insurance used in Medicare means that the working-age person’s contribution in the form of a payroll tax is actually paying for today’s elderly. An accounting trust fund is credited with the payroll taxes and constitutes a legal obligation on future generations to honor the contract when the working person retires. In addition, social insurance links tax contributions to income, while giving all the elderly an entitlement to the same package of benefits. So it could be said to achieve the community obligation of helping the needy by systematically transferring funds from upper-income people to those with modest means. But this is a haphaz- ard mechanism that can result in large inequities, with affluent retirees who have contributed only modestly during their lifetimes receiving the same benefits as their financially strapped neighbors. As a social insurance system matures over time, this effect is accompanied by another pattern: early enrollees obtain very large benefits relative to their contributions, while later enrollees receive a declining “return” on their contributions, so there can be large difference in the costs and benefits of social insurance for similarly situated people at different points in time. General tax support. While social insurance forms the heart of the program, po- litical conditions forced its proponents to concede a different mechanism for that part of Medicare which finances most physician services (Part B, or Supplemental Medical Insurance [SMI]). This element of Medicare is voluntary, with enrollees making a contribution during retirement towards the cost of a fairly traditional insur- ance policy (though one administered by the government with premiums unrelated to health risk). But unlike Part A, there is an explicit subsidy for this insurance pack- age from the general taxpayer, and for the most part the subsidy is unrelated to the economic condition of the beneficiary. Defined benefits. An obligation in health care or other human service is generally construed to be an obligation to provide a tangible service. One provides shelter, or enough food to survive, or a certain level of care. One doesn’t provide an amount of cash unconnected to the cost of a service (in contrast, say, to the financial obliga- tion associated with a bond or savings account). So Medicare entitles beneficiaries to certain specified medical services, originally intended to approximate the insured medical services enjoyed by the average working person. This entitlement is a legal requirement on the national community to provide certain services—in theory with- out regard to cost. Government payments and financial management. In keeping with other PAY-
  • 158. — 158 — Big Choices: The Future of Health Insurance for Older Americans GO social insurance programs (such as Social Security), the federal government is re- sponsible for the long-term financial management of the program. Because PAYGO programs do not keep revenues in a vault until needed, but use them for current spending in return for bonds promising to repay the funds, government thus has the responsibility—much like a life insurance company—of assuring that the ebb and flow of revenues and payments is such that future obligations can be met. So the long term budgeting of a program like Medicare is necessarily a part of the government’s overall budget strategy and the related political environment. In addition, under the traditional Medicare program the federal government pays hospitals, physicians and other providers for their services, according to regulations specifying what services are eligible, and payment rates specifying how much is to be paid. In recent years Medicare has also paid managed care organizations a per capita fee to provide enrollees with a package of medical services. The Contract in Practice: Social and Ethical Issues Arising from the Current Design As noted above, the core elements of Medicare operate within the framework of an en- titlement, in which the nation is legally required to provide an eligible person with certain medical services as needed. This arrangement produces some troubling results. The Politics of Social Insurance and General Revenue Funding The social insurance model may appear to be consistent with the basic values of the Medicare social contract. However the history of this and other social insurance pro- grams, such as Social Security, points to the disturbing politics contained in a mix of legal entitlement, contributions that are not linked to the insurance value (including the social insurance income protection element) of benefits received, and government management of a PAYGO funding system. For one thing, the critical balance between a reasonable obligation on the com- munity and the reasonable expectations of the beneficiary becomes murky or even disappears. So the relationship is based neither on the discretionary balance of inter- ests of the traditional idea of community obligation nor on the elegant, automatic re- lationship envisioned by the architects of social insurance. In large part this is because a widely held illusion about social insurance is that each cohort of society somehow pays for the benefits it receives. The illusion causes each generation reaching retire- ment to view their benefits not so much as an obligation on the part of the rest of society but as the repayment of contributions they have made. This will be familiar to any politician who has faced an angry town hall meeting of middle-class retirees who feel they have been somehow shortchanged by Medicare or Social Security. This illusion drives political pressure for ever-increasing benefits, chiefly from the middle class pressure fanned by organizations representing them and by industries that provide benefits. We see this very clearly in the political history of Medicare. Once the program was created, activist constituencies had the political incentive to
  • 159. — 159 — Social Values and Medicare Reform demand additional services, and health providers had the commercial incentive to do likewise. While there is resistance to succumbing to this pressure in a PAYGO social insur- ance, where payroll taxes would have to be raised, Medicare’s general revenue funding component encourages politicians to succumb to this pressure, permitting or advo- cating increases in benefits to eligible beneficiaries. But even if the cost to the next generation in hidden within the large financial pot of general revenue (and even more emphatically if payroll taxes are raised), it is still a cost that the next generation wants to be compensated for in retirement. If the cost of increased benefits today is not paid for by increased earmarked taxes, it constitutes a larger unfunded liability on future generations of taxpayers to pay for the medical benefits of future retirees. Hence the social value of each younger generation supporting its elders steadily has morphed into a politically driven and accelerating transfer over time of funds and liabilities from future generations to the current elderly. Needless to say, the prospect of rising taxes and unfunded liabilities facing each new generation of workers threatens to shatter the social obligation traditionally accepted by younger generations. The structure of social insurance also turns out to weaken the obligation of the rich to the poor. The social insurance model in Medicare seeks to provide approxi- mately equal benefits to all, while assigning different contributions to workers based on income. But that means it is politically difficult to provide greater benefits to a financially needy group without giving the same benefit to everyone else. In practice budget pressures typically make it impossible to provide lower-income beneficiaries with what society would consider adequate services because of the immediate cost and future liability of providing the same services to every other eligible person. We see this dilemma in the current debate over how to provide an outpatient drug benefit to seniors. Most middle and upper-income people either pay directly for their drugs or purchase insurance to cover the cost. Lower-income people not eligible for other assistance programs often have to go without. But covering the needy under the social insurance model would means an expensive new benefit for all. Income testing for the benefit would address this, and be consistent with the original social obliga- tions of the program, but is fiercely resisted by many as conflicting with the essence of social insurance. The Pitfalls of Defined Benefits In addition to the problems associated with Medicare’s blend of social insurance and gen- eral revenue support, the program’s defined benefit also triggers a number of concerns. The uncertain burden on future generations. A defined benefit, reinforced by the legal obligation of society to deliver the benefit, can undermine a reasonable balance of financial risk between beneficiaries and those obligated to pay. Guaranteeing a per- son a specified service means the person paying for that service is at financial risk for any unanticipated change in the cost of that service. To be sure, one of the premises of Medicare and other programs for the elderly is that the elderly have fewer years of
  • 160. — 160 — Big Choices: The Future of Health Insurance for Older Americans life to adjust to an unexpected financial blow (such as a serious illness) and so they should not be expected to shoulder as much of the financial risk as those contribut- ing to the program. Moreover, Medicare does not cover the full cost of an illness incurred by an elderly person. Consequently it could be said that the financial burden is appropriately spread. But the fact remains that the allocation of financial risk in Medicare involves a huge gamble for each succeeding generation, because there is no explicit, rational and open procedure for making basic decisions about who is obliged to shoulder what amount of risk. Instead that uncertain procedure is hidden within the political battles over taxes and spending. The politics of benefits set by a legislature. Another concern is that with the legisla- ture deciding what benefits are to be made available under Medicare, the decision is heavily influenced by organizations representing the providers of services. Indeed any discussion of benefits in Congress attracts an army of lobbyists representing various therapies. This process can lead to a benefits package that departs from the underlying objective of assuring health benefits for the elderly that are comparable with those of the working population, with benefits instead reflecting much more closely the relative political power and interests of provider groups. The harsh politics associated with establishing new benefits in a legislature often means that politicians find it dif- ficult to reach agreement. We can see this in the case of Medicare, where the program lacks very basic elements (such as catastrophic financial protections and outpatient drugs) that are routine in plans covering the non-elderly. The tendency for the quality of benefits to decline. A defined benefit that is directly paid for by a government program is in addition vulnerable to budget pressures that can “hollow out” a medical service. For example, worries about the potential cost of new technologies slow down the introduction of these devices. Budget-driven deci- sions by the government agency responsible for the program can also change the rela- tionship between physician and patient in ways that conflict with widely held values and medical ethics. In the case of Medicare, attempts to control costs while promis- ing the same benefits lead to such things as intense disputes between administrators and physicians over what is “medically necessary” for a patient. The same concerns can lead to reductions in payments to physicians and hospitals to the degree that their own financial self-interest forces them to withhold services (such as the time allocated to a patient, or a referral to a specialist) in ways that conflict with their medical judg- ment. So although the beneficiary is entitled to the service, in reality the quality or availability of the service is eroded. To be sure, when a physician is treating anyone for whom cost is a real constraint, the physician cannot provide all the services they would wish to provide (at least, not to every patient). In the real world of limited resources, every physician ends up hav- ing to ration, in the sense of being unable to prescribe every beneficial diagnostic pro- cedure or medical treatment he could in theory give the patient. But when a program defines the specific benefits it will cover, it often forces a physician into the ethically questionable position of having to prescribe a course of treatment that the physician
  • 161. — 161 — Social Values and Medicare Reform would not otherwise recommend. Precisely defining the benefit that will be paid for reduces the flexibility of physicians to provide the blend of services they feel are best for the patient. For example, a course of outpatient drugs might be a far better than surgery. But with the surgery covered by Medicare and the outpatient drug therapy not, the physician faces a difficult decision for a patient of modest means. Financial Obligations and Social Values in the Medicare Reform Debate Financial Obligations and Social Values in the Medicare Reform Debate Financial Obligations and Social Values The debate over Medicare reform thus may seem on the surface to be merely a debate about finding the money for more and better health care for seniors, or a debate about whether money should be devoted to Medicare or other desires, such as tax cuts, it is actually a much more profound debate. It is really a debate about how to assign financial and other obligations. Many of the “issues” that seem to be at the heart of the debate are actually symbols or substitutes for deeper questions where the answers turn on one’s vision of social obligation, and where reasonable people can differ on what constitutes fairness and who is being shortchanged. It would be best, of course, to resolve such issues in a calm and open national discussion, but that is unlikely to happen. How Reforms Would Alter the Financial Obligation between the Generations The struggle over how to keep the Medicare trust fund “solvent,” or whether we even need to worry about its solvency, is really a debate over how long term financial obligations should be distributed between the generations and between people of dif- fering means. As the most recent Medicare Trustees report underscores, the long run (the next 75 years) picture shows projected hospital (HI) expenditures far outstrip- ping projected revenue from the payroll tax (meaning technical insolvency for the trust fund). To be sure, there is debate about future patterns of health care costs. But it is generally accepted that rapidly increasing physician and other SMI spending will mean an ever-greater demand for general tax revenues, since the general taxpayer is responsible for 75 percent of the cost of SMI expenditures. Taxing the next generation. One way to try to bridge the gap between the entitle- ment to benefits and the revenue to pay for them is to raise more money from the non-elderly. We could do this by raising payroll taxes, which means placing a greater burden on future generations of all working people for the benefits they can expect to receive, while today’s elderly and near elderly will continue to enjoy a far better “re- turn” on the social insurance contributions they made. Today’s elderly already receive a favorable return because a general rise in contribution rates and benefits over time means those who started to pay into Medicare at its inception will have paid a com- paratively smaller amount of their income in payroll taxes than younger workers will do. This raises a fairness concern, and increasing the payroll tax also means that cur- rent and future workers have less income available to save for their retirement costs.
  • 162. — 162 — Big Choices: The Future of Health Insurance for Older Americans Rather than raising the payroll tax, we could raise the proportion of the program funded by general revenues (beyond that already obligated under current law). But while this would impose the burden on those that can most afford care, it still shifts an uncertain burden disproportionately towards future generations, and by increas- ing the general revenue element makes the intergenerational contract even murkier and potentially less stable politically. Reducing benefit costs. On the other hand, we can try to bridge part of the gap by limiting the spending on specific promised benefits. This can be done without alter- ing actual services by increasing the financial contribution of more affluent elderly to the cost of their benefits. An example would be to vary the Part B premium or hospital deductible by income. Or the insurance value of benefits could be taxable (we already subject Social Security benefits to taxation for even moderate-income retirees). This would be fairly easy to justify in the case of the Part B premium since there is no payroll tax contribution—it is simply a subsidized insurance package and it is hard to see why the same subsidy should go to rich and poor alike. Still, such is the politics of Medicare that even this proposal is frequently denounced as an outra- geous confiscation of “earned” benefits. The other way to reduce the net cost of a defined benefit is to pay less for it, by improving the efficiency of its delivery or by paying providers less. As we shall see, the way this is done not only implies changes in the way the financial obligation is distributed, but also in the way the risk associated with uncertain costs is distributed, and the relationships and ethical issues involved in the practice of medicine. Specifying the community’s financial contribution. A “third way” between shifting a growing liability to future generations and the government hollowing out benefits or directly limiting payments to providers is for a society to debate and then specify what financial contribution it will make to the health care of the elderly. This may or may not mean reducing the contribution from today’s projected levels. Nor would it be less moral or sensitive to need—consider how many sick and needy seniors today are told, “I’m sorry, but you are not entitled to that medical service.” But specifying the community’s financial contribution does mean society can balance the compet- ing obligations it has, from educating future generations to housing the homeless and protecting the nation—and providing for the health care needs of its elderly—in ways which do not give one group an automatic entitlement to resources simply be- cause of age. While such an approach may be considered a violation of the principles of social insurance, it is not a violation of the fundamental elements of the social con- tract. The reason for this is that the wider community retains its political and moral to assist the elderly to obtain an adequate level of health care, as do future genera- tions. But the elderly would no longer be entitled to an unlimited, and unspecified, level of financial support. Once an overall financial contribution is determined, how should it be provided to beneficiaries? One way is to use a form of voucher. In this mechanism the benefi- ciary receives an amount of money with which to pay for a health plan (or the plan
  • 163. — 163 — Social Values and Medicare Reform receives an equivalent payment). What this does is to place some limit on the finan- cial exposure of those obligated to support the health care needs of the elderly. In other words, in contrast to a defined benefit, where the general taxpayer and/or future generations face a potentially huge but uncertain financial obligation, a voucher can allow the financial burden to be distributed in a less open-ended way. While economists use the word “voucher” as a neutral, technical term to describe this from of financing, in the health care world there seems to be an aversion to it and other terms are coined. Today the favorite terms are “defined contribution” and “premium support.” One reason for finding other terms is that the critics of a voucher mechanism portray it as a fixed, arbitrary amount of money that may not have much relationship to the actual cost of care an individual faces. Hence, it is said, a vouch- er transfers all the financial risk associated with such things as medical inflation to Medicare beneficiaries, and so breaks the essence of the social contract. But this is not the case. A voucher amount can be linked to the year-on-year cost of a package of benefits, for instance, so that beneficiaries can be assured that its value will be automatically adjusted to cover some proportion of a specific set of services. In this way a “blended” voucher (combining features of a defined benefit and a defined contribution) can be calibrated to fit whatever the community considers to be its ap- propriate degree of financial obligation. Moreover, a voucher amount can be adjusted for such factors, such as income or health risk (at least in broad terms), making it a better tool than traditional social insurance for a community to provide most health care assistance to the most needy. How Reforms Would Affect Relationships in the Practice of Medicine How Reforms Would Affect Relationships in the Practice of Medicine How Reforms Would Affect Relationships Reforms of Medicare do not only raise questions about social values and a commu- nity’s moral obligations. They also have implications for the practice of medicine and ethical aspects of decisions that physicians and hospitals make. In every part of the economy a scarce supply of resources must be distributed among those who want a good or service. In the purely private marketplace the price system distributes services according to the means of the customer and economic value placed on them by the consumer. In turn the willingness of consumers to pay a certain price induces sup- pliers to increase or reduce the volume depending on their own costs. When a third party rather than a consumer controls the spending decision (such as government spending on social services for the poor, or an employer spending funds for the health care of his employees), some other means has to be used to keep supply and demand in balance. Most often this involves explicit rationing—the denial or delay of services to certain categories of consumer. It needs to be emphasized that there always has to be rationing in some form in health care, as in any other service, because some balance has to be struck between supply and demand, and whether they like it or not physicians cannot escape their necessary role as a rationer of care. But because Medicare involves a legal entitlement
  • 164. — 164 — Big Choices: The Future of Health Insurance for Older Americans to specified medical services, the rationing process is more complicated because a per- son cannot be denied their entitlement. So within the spending constraints they must operate under (which are the product of the financing process discussed earlier) pro- gram administrators must find creative ways to abide by spending guidelines while also delivering the entitlement. How they must do that raises troubling ethical issues for physicians and other health care providers today and for policymakers concerned with reforming the system. Price Controls. The primary tool used to regulate costs in traditional fee-for- service Medicare is price controls. The government develops a set of payments they consider “fair” as the basis for payment. In the early days of Medicare these prices were in reality set by the medical professional and based on “usual and customary” charges prevailing in the market. These charges were said to reflect the costs incurred by the provider, plus a reasonable margin for their own time and skill (often known as “cost plus” pricing). Economists well understand that cost plus pricing in any field, from building projects to brain surgery, may be attractive to providers as a way of maintaining their income but it does little to encourage the group of providers to economize on their own expenses and drives up program costs. Medicare responded to that cost pressure by imposing payment prices that were below what would otherwise prevail in the market, both for physician and other services and for the hospital costs of treating a diagnosed illness. Interestingly, at the heart of the physician payment system (the resource-based relative value scale, or RBRVS) was the no- tion that an inherent, objective value could be placed on the value of a procedure carried out by a physician, based on an objective measurement of the training, time, difficulty and similar factors. The RBRVS scale is used to assemble a sched- ule of payments under which the economic value of one service is said to have a mathematical relationship to the value of another. This theory of objective value, with its roots in the long ago abandoned Labor Theory of Value, was last seen as a foundation of Marxist economics. Ironically, the RBRVS system was put into place under the Reagan Administration. In practice this means that fees and other prices are in many instances set below what the physician himself considers fair, based on what he sees prevailing elsewhere in the market, his own goals for income, and the costs he faces in providing the service. Thus physicians face the unpleasant task of balancing their interests against those of their patients. Typically this places them in a moral dilemma if they are to protect their own family’s financial interests. One choice is to abide by the controls by reducing the quality or intensity of their services, such as spending less time with their patients. The other is to game the system of controls in order to increase the rev- enue associated with a patient, such as upcoding and unbundling diagnoses. Needless to say, honest physicians are uncomfortable with these unethical (and indeed illegal) practices, yet feel they are necessary. In fact, there is nothing unusual in such tech- niques to evade controls. The history of price controls is like a cat and mouse game,
  • 165. — 165 — Social Values and Medicare Reform in which regulations become more elaborate and comprehensive as administrators try to keep up with innovative ways of evading rules. To be sure, balancing supplier and consumer interests is an implicit part of the bargain between buyers and sellers in any economic transaction, including health care. But normally such a bargain reflects the values of those immediately involved. However in Medicare the bargaining is constrained by the prices and service terms laid down by the administrators of the program. To the extent that the administrators make decisions reflecting consumer and physician values, it occurs very indirectly via the uncertain, circuitous and glacial legislative process. Now it is true that physi- cians and hospitals encounter some of the same restrictions. But while it is certainly the case that health care transactions financed by private insurance are often also governed by third party rules and pricing, to the frustration of both physician and patient, this is really true only to the degree that the patient is restricted in their selec- tion of insurer. Surveys conducted by the Commonwealth Foundation (see “Choice matters,” Health Affairs, summer 1995) and others (see “Satisfaction and Choice,” Health Affairs, May/June 1997) show that the greater the ability of the consumer to choose between plans, the greater the satisfaction of both patient and physician thanks to the consumer’s ability to pick a plan with rules that coincide with his view of the proper relationship between physician and patient. What is the future of a Medicare system based on using controls in order to de- liver defined benefits at a reasonable cost to society? Some scholars and policymakers, such as Yale professor Theodore Marmor, seem to believe that price controls can be tightened in ways that will not lead to an unacceptable deterioration in the quality of medical services (see Health Affairs, January/February 1998). The experience of con- trols in this and other countries does not inspire confidence in that view. Often the claim hinges on comparing medical outcomes in countries. But these comparisons tend to ignore hidden costs and other features of controls. In Britain, for instance, waiting lists are routinely used to regulate access to care—even to surgical procedures for very ill patients. Even where this does not lead to measurable differences in medi- cal outcome, having to wait for treatment not only increases stress and undermines the quality of life of patients, but often also imposes costs on other social services and on the patient (such as the loss of earnings for someone who cannot work while waiting for treatment). These aspects of price controls also should reduce confidence in reform proposals that would try to correct shortcomings in the array of services available under Medi- care by simply adding a new entitlement. While it is true that the lack of outpatient drug coverage in Medicare means it is failing to cover seniors for a benefit that is a routine part of modern care, even most proponents of adding drugs to the basic package are wary. Entitlement to a therapy that is often costly and where terms like “medically necessary” are so subjective (such as drugs for certain mood abnormalities) invites an explosion in costs. Under Medicare’s system of controls the techniques to address this are price controls on prescription prices and restrictions on the right of
  • 166. — 166 — Big Choices: The Future of Health Insurance for Older Americans physicians to prescribe particular drugs. Organizational arrangements in delivering pharmaceuticals, such as bulk buying and distribution, might achieve some reduc- tion in the costs of delivery, but the underlying dynamic of an entitlement necessarily will lead to bureaucratic restrictions on physician decisions. Thus modernizing the benefits package in a defined benefit system necessarily means new rules that would further restrict the ability of a physician to treat the patient in what he or she considers the most effective way. In many instances such rules do not even lead to the most economical treatment, since the restricted set of eligible services may prevent a physician from using a therapy that may save money. This paradox is evident today. The total cost of covered inpatient care, for instance, may be far higher than the cost of treatment with outpatient drug therapy not cov- ered by Medicare. Managed Care. Medicare capitated payments to managed care plans reduce the problems associated with price controls by providing what is in effect a voucher to the plan itself in return for a contract to supply a set of benefits (and additional benefits if the plan finds that to be a competitive advantage). This arrangement still locks in a set of defined benefits, and its associated politics, but it does devolve greater discretion to administrators and physicians who are closer to the patient. And where there is effec- tive competition between plans there is added pressure as well as freedom for “front end” providers to deliver medical care in ways that are economical but which best sat- isfy patient and physician values. On the other hand, Medicare payments to managed care plans are a top-down budget control imposed on a defined benefit system. So the level and structure of payment still places strong pressures on the plans and their providers to find ways to curb benefits and avoid potentially high-cost patients—the most common criticisms of such plans. Poorly designed payment formulas exacerbate this. Nonetheless, using managed care plans in this way means there is a greater op- portunity to spend the same money in ways that are satisfactory to both provider and patient than spending the same money under a system that imposes price controls on specific medical services. Is Premium Support the Answer? Voucher mechanisms such as premium support have many similarities with capitated payments to plans but also subtle differences in their impact. Both are a form of defined contribution, in which a specific amount of money is allocated in advance for the provi- sion of medical services to eligible individuals. In both cases the payment level can be adjusted for a particular person to take account of certain characteristics, such as income, local medical costs or health cost risk factors. In both cases individuals can be permitted to add their own resources to Medicare for extra or better quality services, or they can be permitted to pocket the difference between the cost of the plan and a voucher that exceeds the cost. The main difference is that vouchers explicitly make the beneficiary, rather than the Medicare program, the customer, and can make the beneficiary more aware of the financial contribution the community is making to his care.
  • 167. — 167 — Social Values and Medicare Reform Vouchering Medicare would prompt important change in the day-to-day dynam- ics of the program as well as in the larger financial dimension. As noted earlier the approach permits greater control over the relative obligations of future generations and current retirees in the financing of Medicare services in a manner that can mean a more predictable financial contribution by the non-elderly. The degree of budget predictability depends on the type of voucher. In a “pure” voucher system spend- ing is decided and the level and quality of services is the result. In a “pure” defined benefit program the eligible services are decided and the spending level is the result. But as also noted, today’s defined benefit programs actually incorporate controls and other procedures to regulate the volume and quality of services in an attempt to limit the financial obligation of the non-elderly. In a similar way the “blended” voucher proposals under discussion—such as the premium support idea—include a feature which would limit the financial risk of the elderly. Specifically, a blended would par- tially index the voucher budget in some way to actual medical costs, in order to limit the financial obligation of seniors. By indexing the degree of financial support to a benchmark cost in this way, the level of budget uncertainty for the non-elderly population is still reduced when compared with a defined benefit program, but it is not eliminated. A voucher system implies a very different relationship between the community and the elderly than under a defined benefit/price control system. The community’s obligation becomes one of providing the elderly with the means to purchase appro-means to purchase appro-means priate health services, rather than the community having the obligation of providing specific services. Like all voucher mechanisms a crucial aspect of this is that the locus of economic control over the provider of services shifts from the community institu- tion (in this case the administrators of the Medicare program) into the hands of the beneficiary. A voucher—or capitated payment to a plan—gives far more incentive to providers to deliver the best treatments than does a set of price-controlled payment for specific services. But its effectiveness still hinges on getting the voucher amount as close in line as possible to the predicted cost of providing care. If the amount is not calculated accurately health plan administrators find it very lucrative to sign up certain benefi- ciaries while carefully avoiding others. This is not the incentive system one would want. Moreover if this happens, and the community ends up paying extra amounts to supplement the voucher for sicker individuals, spending can end up exceeding the budget for the voucher system. Thus vouchers, like capitated payments, do require the development of effective tools to adjust payments in line with the financial risk to the plan that enrolls the beneficiary. The ramifications of such an approach to the practice of medicine, and the associ- ated ethical issues, depend on the design of the specific proposal. Among the issues: How is the decisionmaking of physicians affected? With a voucher the Medicare beneficiary controls the funding of Medicare services by using his or her voucher (if necessary together with personal funds) to purchase a health plan. In a competitive
  • 168. — 168 — Big Choices: The Future of Health Insurance for Older Americans market the plan which best satisfies the beneficiary for the price paid will tend to attract that beneficiary’s selection. That level of satisfaction with a plan is likely to be influenced by the beneficiary’s satisfaction with the physicians and hospitals in the plan—the classic argument used for vouchers in education, housing and other services. Consequently the economic incentives are for the plan to give its providers the discretion to make the most cost-effective and patient-sensitive decisions possible within the budget derived from the premiums and out-of-pocket paid by its enroll- ees. The incentive is to select the therapies most likely to achieve that result. Moreover the plan has the incentive to pay its providers and suppliers at the rates it feels can best assure services that satisfy the patient. This is a more attractive set of incentives and pressures on providers than those in a system that finances only specific medical benefits at regulated prices. It would be wrong to imply that in practice everything is always quite that rosy. In areas of the country where there is little real choice and competition among plans, the traditional advantages of a voucher are by no means guaranteed. In these areas there is always a need to monitor the quality and performance of health care providers. Must we still specify some services? Should we simply hand over a voucher to each Medicare beneficiary and allow him to select whatever plan he wants? There are certainly practical arguments against such unlimited freedom if the community still retains the final responsibility of caring for a beneficiary, since there would be an incentive for the beneficiary to select a plan without coverage for the cost of ex- pensive but unlikely medical risks. Since the purpose of the voucher presumably is to help the beneficiary to afford a set of medical services that are broadly in line with what the community considers appropriate, it is reasonable to insist that the money is used for that purpose. Requiring a comprehensive package of services, on the other hand, would hamper the flexibility of both beneficiary and plan to assemble a pack- age of services that would best address the individual’s needs. It would also invite the same provider-driven political pressure we see today to include specified services. These competing considerations suggest a requirement that certain core services are included, such as protection from catastrophic medical costs, with the beneficiary having discretion to use the voucher for a selection of coverage beyond that. This ar- rangement would be similar to the arrangement federal employees face in the Federal Employees Health Benefits Program. Would the elderly be induced to avoid getting care? A related concern is that if the elderly are given a financial contribution to their care, rather than an entitlement to specific services, there would be an incentive for lower-income beneficiaries to forego care in order to save money. While this could be true in some cases it is also true today because deductibles and copayments discourage some people from seeking care. But requiring a core set of benefits reduces this problem. What about end of life decisions and other preferences? Should we permit Medi- care beneficiaries to buy plans that offer discounts to those who sign contract that include living wills and other specific limits on care? Disturbing though that might
  • 169. — 169 — Social Values and Medicare Reform sound to some, it would have the advantage of giving individuals a financial incentive to make important decisions in advance that would relieve their heirs and the com- munity of the costs of heroic but usually futile procedures at the end of life. It would also relieve physicians of many of the ethically difficult decisions they must make when faced with these situations. Conclusion It is little wonder that reforming Medicare is such a politically charged and difficult proposition. Not only are there very complicated technical issues involved—only a few of which have been touched on here—but there are profound issues of social obligation and values that have to be addressed. This latter task has been made much more difficult both because politicians today seem more comfortable avoiding such fundamental issues in favor of the rhetoric of “winners” and “losers,” and because the hybrid original design of Medicare has made it very difficult to disentangle these is- sues. But responsible politicians should insist on an open discussion of the Medicare social contract and ways to refine it. If they do not do so, Medicare will continue to be a program that does not fully live up to its mission while imposing huge liabilities on our children.
  • 170. Chapter 11 Medicare Changes That Could Affect You by AARP (originally published as an AARP Life Answers booklet, March 2004, available at http:// assets.aarp.org/www.aarp.org_/articles/legislative/prescriptiondrugs/medicare_changes- TEMP.pdf; used with permission) How Changes in Medicare Could Affect You The Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was signed into law in December 2003, makes major changes to Medicare, the nation’s health insurance program for people age 65 and over and some persons with disabilities. These changes include a new voluntary prescription drug benefit, changes to the program that deal with private health plans in Medicare (known as Medicare+Choice), new coverage, and changes in costs. Many people have questions about how these changes will affect them, how and when they will occur, and what steps people must take to get these new benefits. This booklet outlines the highlights of the Medicare law, and what these changes could mean to you. Prescription Drug Assistance The most important part of the law is a new benefit to help people in Medicare with their prescription drug costs. This assistance will go into effect in two stages. The first stage begins in May 2004 when people in Medicare can sign up for a discount card to help them with some drug costs. This is a temporary program that phases out when the second stage of assistance, a Medicare drug benefit, goes into effect on January 1, 2006. After December 2005, the discount cards will no longer be used. Discount Drug Card Starting in June 2004, discount cards will a Medicare-approved seal will save you about 10 to 15% on your total prescription drug costs. Medicare will contract
  • 171. — 172 — Big Choices: The Future of Health Insurance for Older Americans with private companies to offer these cards. The cost for a card will be no more than $30. This card is optional. If you decide to get a Medicare-approved discount card from a private company, you may pay less for your prescription drugs than you do now. Discounts will vary by card, and each plan will be slightly different. For example, some cards can only be used at certain pharmacies. You need to decide if a Medicare- approved discount card will help you. Shop around to see if there is a card that can help meet your needs. Important facts for you to consider: • You can only get one Medicare discount drug card at a time. • If you already have a different discount card, you can keep that card. You can also get a Medicare discount card. Use whichever one gives you the best deal. • If you are in a Medicare+Choice plan, your plan may decide to offer a Medicare dis- count drug card. If it does, you can only choose that card. If your Medicare+Choice plan does not offer a discount drug card, you can choose any available Medicare discount drug card. • If you are in a state Medicaid program with drug coverage, you will not be able to get the discount card. • If you have drug coverage through an employer or former employer, you may not need the discount card. • If you have a Medigap plan with drug coverage, you may get lower prices using the card. The card should not affect your drug coverage. • If you have a low income, you can get additional help. See “Low Income” section in this booklet. Medicare Prescription Drug Benefit You may see this benefit called Medicare Part D. In January 2006, Medicare’s new drug benefit will go into effect. People with Medicare will be able to join a drug plan. All the plans will be run by private companies. The first enrollment period is from November 15, 2005, to May 15, 2006. The drug benefit is voluntary. You do not have to sign up. There may be a penalty if you sign up at a later time. How It Works Here is how the standard drug benefit will work in 2006 for each person. After 2006, these amounts will go up each year.
  • 172. — 173 — Medicare Changes That Could Affect You • You will have to pay a premium each month. The premium will likely be about $35 a month. Some plans will charge more, others will charge less. • The plans will vary. Some plans may offer coverage that looks like the standard benefit. Others may look different, but are worth the same. Still others will include additional drug coverage. Premiums will vary based on what each plan offers and where it is offered. • You will have a $250 deductible each year. • After the deductible, Medicare will cover 75% of drug costs, up to $2,250. • You will pay 25% of drug costs up to $2,250. • After total drugs costs reach $2,250, you will pay an additional $2,850 in out-of- pocket drug costs before Medicare will continue coverage. This is called the cover- age gap, also known as the doughnut hole. • Once your out-of-pocket drug costs, not including premiums, reach $3,600 ($250 de- ductible + $500 co-insurance + $2,850 coverage gap) Medicare will start paying again. oNow, Medicare will cover up to 95% of drug costs (also called catastrophic ben- efit). oNow, you will pay either $2 for generic drugs and $5 for brand-name drugs or 5% of the prescription cost, whichever is greater. • Drug Choice. Drug plans may have lists of drugs they cover. These lists are called for- mularies or preferred drug lists. The drugs will be in groups. The groups are called therapeutic classes. There will be at least one drug for each therapeutic class. There will also be an appeals process to get a drug not in the formulary. • Late Enrollment Penalty. As with Medicare Part B enrollment, there will be a penalty for not enrolling in the Medicare drug benefit in the first six months that you are eligible. The penalty will be about 1% of the premium for each month you delay. This penalty does not apply if you lost drug coverage that you had from another source, which was at least as good as the Medicare drug benefit. Case Study Marie and Evan are a middle income married couple. Evan has heart disease and Marie takes medicines for arthritis. Their drugs cost $6,810 a year—$1,960 for her,
  • 173. — 174 — Big Choices: The Future of Health Insurance for Older Americans Medicare Drug Benefit 2006 At-a-Glance Prescription Drug Spending Medicare Pays Person Pays (no drug coverage other (no drug coverage other than Medicare) than Medicare) 0–$250 0 Up to $250 Deductible $250–$2,250 Up to $1,500 Up to $500 (75% of drug costs) (25% of drug costs) $2,250–$5,100 0 Up to $2,850 Coverage Gap/Hole (0% of drug costs) (100% of drug costs) Subtotal: Up to $1,500+ Up to $3,600 out-of- pocket = $5,100 total Over $5,100 95% 5% or (Castastrophic Benefit) $2 copay/generic $5 copay/brand name Note: Your premium (about $35 per month/$420 per year in 2006) is not included. } } } 5% 95% 100% 25% 75% 0% Prescription drug spending Over $5,100 $2,250-$5,100 $250-$2,250 0-$250 Coverage gap Up to $3,600 out-of-pocket spending Deductible Catastrophic benefit Out-of-pocket spending Medicare drug benefit Note: Premiums not included. $4,850 for him. In 2006, under the Medicare drug benefit, Marie would save 44%, but Evan, with higher costs, would save only 22%. That’s because he’d fall partly into the coverage gap. Remember, the coverage gap is all drug costs above $2,250 until your out-of-pocket drug costs equal $3,600. Together, the couple would pay $4,868 out-of-pocket and save $1,942.
  • 174. — 175 — Medicare Changes That Could Affect You Marie $ / Year in 2006 Total Drug Costs: $1,960.00 Total out-of-pocket spending: (with premium, which does not $1,097.50 count toward $3,600 out-of-pocket) Savings: $862.50 Out-of-Pocket Spending Counted Toward Medicare Drug Benefit: Annual premium (estimated $35/mo) $420.00 Annual deductible $250.00 25% copay on next $2,000 in total drug spending after $250 deductible $427.50 Full cost of drugs above $2,250 in total drug spending and below $0.00 $3,600 in out-of-pocket drug spending (coverage gap) 5% copay above $3,600 in out-of-pocket drug spending $ 0.00 Evan $ / Year in 2006 Total Drug Costs: $4,850.00 Total out-of-pocket spending: (with premium, which does not $3,770.00 count toward $3,600 out-of-pocket) Savings: $1,080.00 Out-of-Pocket Spending Counted Toward Medicare Drug Benefit: Annual premium (estimated $35/mo) $420.00 Annual deductible $250.00 25% copay on next $2,000 in total drug spending after $250 deductible $500.00 Full cost of drugs above $2,250 in total drug spending and below $2,600.00 $3,600 in out-of-pocket drug spending (coverage gap) 5% copay above $3,600 in out-of-pocket drug spending $0.00 Note: Total out-of-pocket spending = out-of-pocket spending on drugs + annual premium How the Medicare Drug Benefit Works with Other Coverage • Medigap Drug Coverage. If you are in a Medigap plan that does not have drug ben- efits, your coverage is not affected. If you have a Medigap plan with a drug benefit, you will have to choose between keeping your current Medigap drug benefit and enrolling in the Medicare drug benefit. 1. If you like your current Medigap plan with drug benefits, you can choose to keep it and not enroll in the Medicare drug benefit. But if you later change your mind and want to get the Medicare drug benefit, you will likely have to pay a late enrollment penalty. Also, Medigap plan premiums may go up in the future. 2. You may decide you want the Medicare drug benefit. You can either enroll in an- other Medigap plan without drug benefits or keep your current Medigap plan, but drop its drug benefit and pay a lower Medigap premium. Or you can sign up for a Medicare Advantage plan with drug coverage (see Medicare Advantage section later in this booklet).
  • 175. — 176 — Big Choices: The Future of Health Insurance for Older Americans Note: Once Medicare’s drug benefit starts in 2006, new Medigap policies with drug benefits can no longer be sold. People who do not already have a Medigap policy with drug benefits will not be able to buy one. • State Pharmacy Assistance Programs. Some states have their own programs to help people with drug costs. Each state will decide how its program will work with the Medicare drug benefit. This could affect things like the cost of premiums, copays, deductibles and coverage gaps. State pharmacy assistance programs can pay for drugs during the coverage gap. Unlike retiree benefits, these payments count towards the $2,850 out-of-pocket spending. • Retiree Health. Over the past several years, employers have begun to cut back or eliminate prescription drug coverage for their retired employees. Many people worry that the new Medicare law will cause more employers to drop re- tiree coverage. Employers who provide prescription drug benefits that are at least as good as the Medicare drug benefit will get a federal subsidy. This sub- sidy will cover some of the companies’ drug costs as long as their retirees don’t enroll in the Medicare drug benefit. It is your choice whether to enroll, even if you are now covered for drugs by a retiree health plan. Decisions your for- mer employer makes about coverage in 2006 will likely affect your choice. You can still enroll in Medicare’s drug benefit and your former employer can “wrap around” the benefit with your retiree health plan. However, in that case, the em- ployer will not get the federal subsidy. Important facts for you to consider: • The Medicare drug benefit does not start until 2006. By then, you will have more information from Medicare and your former employer that will help you decide whether or not to enroll. • Employers will make choices about whether to change their retiree drug coverage. For example, they may decide to wrap their benefit around the Medicare program to fill in gaps in coverage. Or, they may decide to only pay the Medicare drug pre- mium for retirees. However, in both cases your employer will not be eligible for the federal subsidy. • Retiree benefits can help pay for prescription drug costs during the Medicare cover- age gap. But the amounts paid will not count toward the $3,600 in your total out- of-pocket spending.
  • 176. — 177 — Medicare Changes That Could Affect You • The Medicare drug benefit is voluntary. However, if your employer chooses to pro- vide drug benefits that wrap around Medicare’s benefit, you would need to be en- rolled. Your employer will not be eligible for the federal subsidy. • If your employer cancels your retiree health benefits after your initial chance to enroll in the Medicare drug benefit, you will be able to enroll later—as long as your employer’s plan is at least as good as the Medicare Part D benefit. A late penalty may apply under certain conditions. Low Income Features For people with low incomes, Medicare drug assistance has special features. Discount Card Program If your income is less than about $12,000 a year for one person, or $16,000 for a married couple, you may get up to $600 to help pay for prescription drugs in 2004 and again in 2005. Also, you will not have to pay a fee for your discount card. While you have money on your card, you will have to pay a low copay (5% to 10% each time you use it). If you use up the $600, the card can still be used for discounts. If your drugs are covered by Medicaid, you cannot get the discount card. If you have drug coverage from an employer or the federal government, you cannot get the special low income features of the discount card. Medicare Prescription Drug Benefit Many people with low incomes will get extra help with their Medicare drug benefit. People with the lowest incomes will pay no premiums or deductibles, small or no copays, and will have no coverage gap. Those with slightly higher incomes will have a reduced deductible and some will have a sliding scale premium and small coinsur- ance. This chart shows how people with low incomes will be helped in 2006 when the benefit starts. Medicare Advantage Medicare Part C, the Medicare+Choice program, is being renamed Medicare Advan- tage. Medicare Advantage is a way to get Medicare coverage through a private health plan. These plans may be less expensive than original Medicare, and they may offer some benefits that are not covered by Medicare. Medicare Advantage plans are very similar to Medicare+Choice plans They may be a: • Health Maintenance Organization (HMO) • Point-of-Service (POS) plan
  • 177. — 178 — Big Choices: The Future of Health Insurance for Older Americans Medicare Prescription Drug Benefit People with Medicare and full Medicaid coverage (Dual Eligible). Income below $9,630 single/$13,000 married couple: •No premium •No deductible •No coverage gap •$1 copay for generic •$3 copay for brand-name •No copay if in nursing home •No copay over the catastrophic limit ($3,600 out- of-pocket) Income below $13,000 single/$17,550 married couple. Assets* below $6,000 single/$9,000 married couple: •No premium •No deductible •No coverage gap •$2 copay for generic •$5 copay for brand-name •No copay over the catastrophic limit ($3,600 out- of-pocket) Income below $13,000 single/$17,550 married couple. Assets* below $10,000 single/$20,000 married couple: •No premium •$50 deductible •No coverage gap •15% coinsurance •$2 generic or $5 brand-name copay over the catastrophic limit ($3,600 out-of- pocket) Income between $13,000-$14,450 single/$17,550- $19,500 married couple. Assets* below $10,000 single/$20,000 married couple: •Sliding scale premium •$50 deductible •No coverage gap •15% coinsurance •$2 generic or $5 brand-name copay over the catastrophic limit ($3,600 out-of- pocket) *Assets that count include savings and investments. Assets that do not count include the home you live in, your car, a burial plot and/or a life insurance policy up to $1,500 each. You can also keep $1,500 for burial funds. Note: The income amounts in this chart are estimates for 2006. Real amounts are not yet set. • Private Fee-for-Service (PFFS) plan • Local Preferred Provider Organization (PPO) Although each type of Medicare Advantage plan differs, they have certain features in common: • The plan is run by a private company. • The amount of money that the company gets from the government for your care is set, no matter how many or how few services you use. • The private company decides the rules for covering your benefits and payments. Each year, it can change benefits, premiums and other costs to you.
  • 178. — 179 — Medicare Changes That Could Affect You • Each year, the private company decides whether or not to offer a Medicare Advan- tage plan. • Each year, you can decide whether to stay in your plan, switch to another, or return to traditional Medicare. • Starting January 1, 2006, all companies offering Medicare Advantage plans except Private Fee-for-Service plans must offer a least one plan with drug coverage. If you select a Private Fee-for-Service plan or another Medicare Advantage plan without drug coverage, you may select a Medicare drug benefit plan in your area. There are some differences among Medicare Advantage plans, and the plans may vary widely. In some plans, you can pick your doctors only from the plan’s network. In others, you can either choose doctors from in-network, or you can go outside the network. Some of the plans pay only for in-network care, while others will pay for care both in- and out-of-network. Generally, going out-of-network costs more. Remember, no one has to enroll in a Medicare Advantage plan. You can stay in the traditional Medicare program. Other Changes in Medicare In addition to the changes that were outlined in the first part of this booklet, there are other important changes to Medicare that may affect you. Part B Deductible Starting in January 2005, the yearly deductible for Medicare Part B—the part of Medicare that helps you pay for doctor bills—will increase from $100 to $110. After 2005, there will be yearly increases in the deductible based on increases in Medicare Part B costs. Part B Premiums Starting in 2007, people with Medicare who have higher incomes will pay higher pre- miums for Medicare Part B coverage. Currently, the premium for everyone is about 25% of the actual costs of Part B coverage. Income-related premiums will be phased in over five years, from 2007 to 2011. Additional Preventive Services Starting in January 2005, Medicare will expand coverage for preventive services. These will include an initial physical exam after enrolling in Medicare and screening tests for heart disease and diabetes. Chronic Care Improvement Program The Chronic Care Improvement Program will be evaluated over the next several years.
  • 179. — 180 — Big Choices: The Future of Health Insurance for Older Americans Changes in Medicare Part B Premiums Annual Income in 2007* Part B Part B Part B Premium Premium Premium in 2004 in 2007 in 2011 (percent of (percent of (percent of actual cost) actual cost) actual cost) Below $80,000 (individual) 25% 25% 25% Below $160,000 (married couple) $80,000-$100,000 (individual) 25% 27% 35% $160,000-$200,000 (married couple) $100,000-$150,000 (individual) 25% 30% 50% $200,000-$300,000 (married couple) $150,000-$200,000 (individual) 25% 33% 65% $300,000-$400,000 (married couple) Above $200,000 (individual) 25% 36% 80% Above $400,000 (married couple) *Income amounts will go up each year with inflation. This program will be created for people with Medicare who have certain chronic con- ditions. It will include education for patients and their caregivers, coordination of health care services and new technologies to monitor health. Need More Information? Medicare will give you more information as the benefits start. Each November, new information will be available. Fifteen days before the annual sign-up period, people with Medicare will get a list of plans in their area and a comparison of the coverage options of each plan. Use this information to decide which plan best meets your needs. Medicare has a web site (www.medicare.gov) and a toll-free telephone num- ber (800-MEDICARE or 800-633-4227 or TTY 877-486-2408). For those who prefer to get help in person, there are counseling programs that can provide direct assistance. AARP has a web site (www.aarp.org) and a phone number (888-OUR-AARP or 888-687-2277) to give you information to help you understand your Medicare and prescription drug choices. Also, AARP Bulletin on-line has a Medicare Drug Benefit Calculator.
  • 180. — 181 — Medicare Changes That Could Affect You What Happens When? Timeline for Medicare Changes December 2003 -Act signed into law May 2004 -Sign up for the discount card June 2004 -Discount card program starts -$600 credit on discount card for low income January 2005 -Another $600 credit on discount card for low income -Medicare Part B annual deductible goes up from $100 to $110 (It goes up each year after 2005) -Additional Preventive Services covered by Medicare November 15, 2005 -Initial Medicare Drug Benefit (Part B) enrollment starts January 2006 -Discount card program phases out -Medicare Drug Benefit starts -Medicare Advantage changes begin May 15, 2006 -Initial Medicare Drug Benefit enrollment ends 2007 -Income-related Part B premiums start
  • 181. Chapter 12 Issue Summary: Medicare Modernization Act of 2003 by Jeff Lemieux, Centrists.org (originally published by Centrists.org, available at http://www.centrists.org/issue_summa- ries/health_mma.html, accessed August 4, 2004; used with permission) Detailed Issue Summaries contain a quick reference to Centrists.Org policy ideas and explanations. They will be revised and updated periodically for clarity and usefulness, and as events and policy ideas change. Questions or comments? Please contact us at information@centrists.org. The Big Uncertainties—Workability and Cost: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) may be the least understood major piece of health care legislation Congress has ever passed. The bill contains dozens of controversial provisions, and there is a great deal of uncertainty about how those provisions will play out over time. MMA certainly has the potential to be the most far-reaching Medicare legislation since the program was created in 1964. But there is also a good chance the bill’s more ambitious initiatives will fall short of expectations. In that case, the bill might not ultimately transform Medicare’s essential workings very much. There is also great uncertainty about the bill’s cost. The Congressional Budget Office (CBO) estimated that the drug benefit will cost about $400 billion within the original 10-year Congressional budgeting period from 2004-2013. The Bush Administration estimates the benefit will cost $535 billion during that period. According to CBO director Douglas Holtz-Eakin, the cost could swell to $1-2 trillion over the following 10 years. However, other provisions of the bill create at least the potential for significant long-term cost savings. There are five main sources of uncertainty:
  • 182. — 184 — Big Choices: The Future of Health Insurance for Older Americans 1. The participation of private health plans in Medicare. Will private health plans— both comprehensive plans and new stand-alone drug plans—dramatically expand their participation in Medicare? Or will private plans be more cautious, forcing the government to run the new drug benefit and leaving most beneficiaries en- rolled in the traditional government-run fee-for-service program? 2. The reaction of seniors to the drug benefit. Will beneficiaries flock to the new benefit’s insurance features, regardless of their actual or expected drug costs? Or will seniors make a more individualistic decision, calculating their drug costs and enrolling only if the likely benefit they would receive justifies the premium? Will the late-enrollment penalty and the confusion over the future of employer-spon- sored retiree benefits cause a political backlash? 3. Medicare’s overall budgetary cost and the impact payments to health providers and suppliers. Will the cost of the drug benefit swell over time, creating an untenable budget situation when the baby boom generation enrolls in Medicare after 2010? Will reimbursement levels to health providers and health plans be slashed in an inevitable budgetary crunch? Will incentives for private plans to provide the drug benefit be replaced by government price controls? 4. The reaction of employers and states. Will employers drop or modify drug coverage offered to their retirees? Will states decide that coordinating with Medicare’s new low-income benefits and asset tests is too difficult and that the “clawback” provi- sion (to ensure states don’t receive a financial windfall) is too onerous? Would either reaction cause a political backlash? 5. The impact of “conceptual” provisions, which could have important transforming or political impacts over time. Will the extra benefits for low-income seniors and the extra premium for high-income retirees drain political support from Medi- care? Will the chronic care demonstrations begin to transform Medicare from its current emphasis on hospitalization and surgery toward home-based chronic care? Will the e-prescribing initiative be a catalyst for a larger movement toward portable electronic medical records throughout the U.S. health system? Will the bill’s Health Savings Accounts (HSAs)—which apply to the non-Medicare popu- lation—spark a broad shift toward consumer-directed health care or fizzle like medical savings accounts? Will the procedural cost-control provisions be a harm- less “red-flag” meant to warn the public about high Medicare spending, or are they the first step toward turning Medicare into a defined contribution program, with beneficiaries put on the hook for excessive cost increases? Many observers believe the bill will spark a surge of participation by private com- prehensive health plans, like HMOs and Preferred Provider Organizations (PPOs)
  • 183. — 185 — Issue Summary: Medicare Modernization Act of 2003 which could come to dominate the Medicare program over time. They hope (or fear) the bill will be a springboard to competition and market forces in Medicare, which would eventually lead to significant privatization of a previously government-run entitlement program. Others believe the greatest impact of the bill would be to accelerate a govern- ment takeover of the drug industry, essentially socializing a large sector of the U.S. economy. Under this scenario, private health plans will not join Medicare in large numbers, and the new drug benefit would become a government-run system that sets pharmaceutical prices nationally. Both possibilities have important implications for Medicare’s long-term costs and for the shape of the larger U.S. health system. The degree of privatization in Medicare could lead to greater cost control over time if the program eventually shifted toward the so-called “premium support” or federal employees’ system, with more competitive reimbursement and premium formulas. The degree of socialization of the prescription drug sector could have important implications for drug costs, as well for innovation and the creation of new medical treatments. Federal drug prices would probably be lower than current market prices for many drugs, and drug manufacturers would likely reduce their research and in- vestment levels. Medicare’s payment decisions will affect the whole health sector. If future pay- ments to hospitals or physicians are slashed to keep Medicare’s overall spending under control, the impact would be felt throughout the health sector. Medicare beneficia- ries could face limitations in their access to health providers. Finally, there may be less to MMA than meets the eye. It is possible that the main impact of the bill was political—creating a temporary working alliance between Re- publican lawmakers and AARP, the largest senior citizens’ advocacy group—and that the Medicare program itself won’t be dramatically changed. MMA is sufficiently complicated that it will be difficult to implement all of its provisions effectively and on time. Likewise, subsequent legislation may be needed to smooth over the bill’s rougher edges. In the end, Medicare might just muddle through an extended process of implementation and subsequent legislation without dramatic change. Of course, it is impossible to know how private health plans, Medicare adminis- trators, health providers, beneficiaries, Congress and the public will react to unfore- seen issues and circumstances many years from now. Main Components of the Medicare Modernization Act: The MMA can be bro- ken down into two main elements: 1. The drug benefit, private health plan system, and low-income benefits. This in- cludes the various options for drug coverage, incentives and initiatives for private health plans, low-income benefits, and the interim discount card program. Al- though the drug benefit, private plan system and low-income benefits are
  • 184. — 186 — Big Choices: The Future of Health Insurance for Older Americans very complicated, they are best described as an interrelated whole, whose parts are difficult to evaluate in isolation. 2. “Conceptual” reforms or initiatives. These include income-related premiums and benefits within Medicare, the chronic care demonstration programs, HSAs, proce- dural cost control provisions, and the 2010 “premium support” competition dem- onstration. At one extreme, these provisions have the potential to fundamentally change Medicare and, in some cases, the U.S. health system. On the other hand, their impacts are not guaranteed. The various conceptual provisions also have the potential to fade into obscurity with little transforming impact. These main elements are explained in detail below. MMA also contains a myriad of changes in Medicare’s detailed system of pay- ments to health providers. These payment changes are not the main focus of this analysis. However, they are important to understanding MMA in the following way. Congress has switched its method of legislating payment changes. Before 1997, Congress had scheduled more or less “normal” payment increases or updates into Medicare law. Occasionally, when the budgetary need arose, Congress would trim those payment increases. But in most years, no change in Medicare law was needed to keep payments flowing to health providers at the expected pace. However, beginning in Balanced Budget Act of 1997, Congress has switched to a different system. Now, Congress routinely schedules deep payment cuts or very slow increases in payments within the permanent Medicare law. That means legislators must pass frequent (almost annual) Medicare payment bills to rescue health providers from the ultra-low rates that would otherwise have been implemented automatically. The cuts in current law are sometimes so onerous that some health providers do- ing business with Medicare (and members of Congress concerned with their finan- cial well-being) were forced to subordinate their positions on MMA’s drug benefit complex and its conceptual reforms in the interest of ensuring appropriate payment increases. The Drug Benefit, Private Health Plan System, and Low-Income Benefits. MMA’s main drug and low-income benefits are scheduled to begin in 2006. Prior to that time, Medicare will offer discount cards, which also include an interim low-income benefit program. In general, the main prescription drug benefit would be provided by stand-alone prescription drug plans (PDPs), by private comprehensive health plans like HMOs or PPOs, or by employers with retiree benefits. MMA changes the name of Medicare’s program for private comprehensive health plans from Medicare+Choice to Medicare Advantage (MA). Medicare Advantage plans that include the prescription drug ben- efit would be called Medicare Advantage-Prescription Drug (MA-PD) plans. Low-income benefits would be provided by PDPs or MA-PD plans. Eligibility determinations would be made by state welfare offices or federal Social Security of-
  • 185. — 187 — Issue Summary: Medicare Modernization Act of 2003 fices. Medicare would subsidize PDPs or MA-PD plans to account for low-income benefits provided. The federal government would require that seniors eligible for full Medicaid ben- efits in their state get their drug benefits via Medicare. This would save some money for state budgets, although most of the savings would be returned to the federal gov- ernment via a “claw-back” provision, which would essentially cut federal matching funds owed to states. Employers providing drug benefits to the Medicare eligible retirees would have a choice. They could apply for status as a PDP and receive subsidies, or they could receive a special subsidy payment (provided that had benefits at least as good as a PDP), or they could require their enrollees to sign up for the Medicare drug benefit (and possibly “wrap around” Medicare’s coverage with additional benefits). The Interim Discount Cards and Low-Income Assistance. The discount card pro- gram is targeted to begin in June of 2004, and expires when the main drug benefit begins on January 1, 2006. The discount cards would be offered by a wide variety of health plans, drug compa- nies, pharmacies, pharmaceutical benefit managers (PBMs), or other qualified firms. Firms could charge a nominal annual fee for the cards. Seniors could continue to use other non-Medicare discount cards or programs offered by drug companies, but they could enroll in only one official Medicare card. Beneficiaries with low-incomes (and no other drug coverage) would qualify for up to $600 in annual subsidies for drugs purchased via their discount cards. For beneficiaries with incomes below 100 percent of poverty, the card would provide a 95 percent subsidy drug purchases up to the limit of $600. Beneficiaries with incomes between 100 and 135 percent of poverty could use the card for a 90 percent subsidy up to $600. The discount card plans would determine eligibility for the low-income benefits, based on beneficiaries’ self-attested levels of income. Medicare would reimburse card plans that provided low-income assistance on their cards. In a departure from usual insurance practice, unused low-income benefits from 2004 could be rolled over to 2005. However, unused benefits could not be converted into cash in 2006, even if a beneficiary chose not to enroll in the main drug benefit. The 2006 Drug Benefit. MMA’s primary drug benefit is very complicated. Be- ginning in 2006, beneficiaries would be entitled to enroll in a drug coverage plan. The benefit is divided into two parts: an “up-front” benefit consisting of 75 percent coverage for annual drug costs between $250 and $2,250, and a “catastrophic” ben- efit, which would pay 95 percent of drug costs after a beneficiary had paid $3,600 in a year in out-of-pocket drug costs. There is no coverage between the up-front and catastrophic coverage—this coverage gap is commonly referred to as the “doughnut hole.” Beneficiaries would be eligible for discounted prices through their plan for applicable drug purchases, whether they are covered or not. The spending thresholds for both the up-front and catastrophic benefits would
  • 186. — 188 — Big Choices: The Future of Health Insurance for Older Americans be indexed higher after 2006 by the rate of increase in per-capita drug spending (es- timated to be about 8 percent a year). Therefore, the up-front benefit would apply for drug spending between $445 and $4,000 in the year 2013, and the catastrophic benefit would begin after a beneficiary’s out-of-pocket spending exceeded $6,400. (See Congressional Budget Office Letter to Sen. Don Nickles, November 20, 2003, Table 1, Table 2, Table 3, Table 4, available at http://www.centristpolicynetwork. org/legislative_updates/files/More_info_on_hr1.pdf.) CBO estimates that beneficiaries’ premiums for this coverage would average about $35 a month, starting in 2006. However, the premium could vary higher or lower than the average depending on which drug plan the beneficiary chose. Beneficiary premiums would be determined by drug coverage plans. Over time, the premiums would be roughly equal to the difference between a drug plan’s costs and the amount of government subsidy to the plan. CBO expects beneficiary premi- ums to grow by about 8 percent a year. Therefore, CBO estimates that the average premium would be about $58 in 2013. Beneficiaries who didn’t enroll in a drug plan at the first opportunity would be charged an extra premium penalty for late enrollment. “PDP” Stand-Alone Drug Plans. For most beneficiaries in the traditional fee-for- service Medicare plan, drug benefits would be provided through a separate prescrip- tion drug plan, a new drug-only policy provided by private health insurance compa- nies in cooperation with PBMs, pharmacies, or drug companies. PDPs could have national or regional coverage areas. Generally, the minimum coverage area would be a state. PDPs could offer standard coverage, with the coinsurance and benefit levels specified in the law. Alternatively, they could offer coverage with alternative but financially equivalent coinsurance levels or methods of cost containment, including formularies with specific lists of covered drugs and varying coinsurance amounts for preferred and non-preferred drugs. PDPs could offer extra drug benefits, but those benefits would not be accompanied by extra government subsidies. PDPs could not offer non-drug benefits. PDPs would submit bids to Medicare, including the specifics of their coverage policies, formularies, and costs. Medicare would require detailed information on dis- counts arranged by PDPs, and would prod plans to make those discounts available to enrollees. Most of the basic rules for PDP plans would also apply to MA-PD plans. Risk Assumption, Payments to PDP Plans, and Government “Fall-Back” Cover- age. PDP plans would be required to accept some of the financial risk of offering the stand-alone drug benefit according to formulas specified in the law. However, the government would be instructed to accept PDP plans with more limited risk expo- sure to ensure that at least two plans were available in each area. (The available plans could be one PDP plan and one MA-PD plan). In the event that no PDP plans were available in an area, even with limited risk exposure, Medicare would offer a govern- ment-run “fall-back” option.
  • 187. — 189 — Issue Summary: Medicare Modernization Act of 2003 In general, Medicare would subsidize 74 percent of the cost of the standard drug cov- erage. Subsidies would consist of direct per-enrollee subsidies payments to PDP or MA- PD plans, as well as “reinsurance” for 80 percent of the cost of coverage after an enrollee had reached the out-of-pocket limit and triggered the catastrophic coverage. Finally, PDP plans would enter into to a risk-corridor arrangement with Medi- care. In general, risk corridor arrangements limit the potential losses and profits associated with entering or serving a health insurance market. In this case, Medicare would absorb unexpectedly large losses (but also accrue unforeseen profits) in an at- tempt to encourage PDP plans to enter the Medicare market. Medicare Advantage (MA) Health Plans. MMA would attempt to resuscitate Medicare’s HMO program and expand its fledgling PPO program. The first step would be to increase payments to HMOs back toward parity with fee-for-service costs in a service area, beginning in 2004. This will probably halt the downward trend in HMO coverage in Medicare. Beginning in 2006, insurance companies offering MA plans would be required to have at least one option that included standard drug benefits or the equivalent, under the same basic rules as PDPs. Government subsidies for drug coverage would also be the same as those for PDPs. In 2006, Medicare Advantage would switch toward a rudimentary bidding sys- tem. Medicare’s fee-for-service program would not be part of the bidding system, and its regular premium—the so-called Part B premium—would not be affected by the bids submitted by MA plans. Under the bidding system, beneficiary premiums would be based on how a MA plan’s costs compared with a benchmark amount. Enrollees in low-cost plans could get partial rebates of their Medicare Part B premium. Enrollees in high-cost plans would pay the difference between the cost of those plans and the average. Beginning in 2006, PPOs entering the Medicare program would be required to include all counties in a region in their service areas. However, HMOs and PPOs operating on a county-by-county basis prior to 2006 would be allowed to continue operating as before. In 2006 and 2007, new regional PPO plans would be eligible for a risk corridor arrangement with Medicare. This would help plans avoid large losses as they entered a regional Medicare market—it would also mean that any large profits would accrue to the government, not the plan. In addition, a “stabilization fund” totaling approximately $10 billion between 2007 and 2013 would be available to encourage regional PPOs to serve to rural areas. Many rural health providers either natural monopolies, or they don’t charge much in the first place. Natural monopolies aren’t dependant on health plans to steer patients their way, and therefore don’t have to bargain with PPOs and accept lower rates. Rural health providers that don’t charge much anyway don’t give PPOs a competitive advantage either, because any insurer—including Medicare’s traditional program—no matter how efficient or lenient, will not be overcharged.
  • 188. — 190 — Big Choices: The Future of Health Insurance for Older Americans Coordination with Employer, Medigap, Medicaid, and State Pharmaceutical As- sistance Coverage. MMA’a catastrophic drug benefit is based on drug spending paid directly out of an enrollee’s pocket. Therefore, third-party coverage of the deduct- ible, coinsurance, or doughnut hole generally does not “count” toward Medicare’s catastrophic benefit. Employer plans. Employers with retiree drug benefits would face a choice. They could apply for qualification as a PDP and receive the relevant subsidies, or they could receive a subsidy from Medicare equal to 28 percent of their drug benefits paid between $250 and $5,000 per enrollee in 2006 if their benefits were equivalent to the standard drug benefit. (Those dollar amounts would be indexed higher at roughly 10 percent a year.) Importantly, the law allows companies to receive the 28 percent subsidy regardless of size of the premium they charge retirees for coverage. So some employers may ex- pand their drug coverage, charge a correspondingly higher premium, and still collect the 28 percent government subsidy. (Medicare officials have stated that this situation would not be allowed, but it would be very difficult to monitor and prevent.) Alternatively, firms could drop their retiree coverage, and (possibly) subsidize their retirees’ purchase of Medicare’s drug benefit by paying the premium. It would make less financial sense for employers to “wrap-around” Medicare’s drug coverage. (In that case, the employer would cover the deductible and fill the dough- nut hole in Medicare’s drug coverage.) Such wrap-around coverage would not count toward Medicare’s catastrophic drug benefit for an enrollee with high drug costs—in- stead, it would simply postpone Medicare’s catastrophic benefit. Finally, the legal ramifications of providing special wrap-around coverage for Medicare eligible retirees remain murky. A court decision that saying that providing different drug benefits to retirees who are above and below the age of Medicare eligibility is age discrimination was not repealed (as many employers had hoped) in MMA. Medigap. Enrollees in PDP plans would not be allowed to hold Medigap coverage that included drug benefits. In fact, Medigap plans offering drug benefits would be prohibited. Medicare would be given enforcement authority to ensure that seniors did not hold illegal gap coverage. Medicaid and the “Clawback” Provision. Seniors eligible for full Medicaid benefits would receive their drug benefits through the new Medicare program instead. A so- called “clawback” provision would require that states pay the federal government 90 percent of the amount they spent for drug benefits to Medicaid-eligible seniors in a base year (2003), indexed higher each year by the national rate of increase in drug spending, beginning in 2006. (That percentage falls to 75 percent by 2015.) The clawback provision is intended to prevent states from getting a financial windfall as drug benefits are shifted from the joint federal-state Medicaid program to all-federal Medicare program. However, since it is based on a forecast or extrapolation of what states otherwise would have spent on Medicaid drug benefits, the amounts states are required to pay will become very uncertain and contentious by the end of the decade.
  • 189. — 191 — Issue Summary: Medicare Modernization Act of 2003 State Pharmaceutical Assistance Programs. State pharmaceutical assistance programs would be exempt from the out-of-pocket rule. Therefore, drug benefits provided by state programs would count toward Medicare’s catastrophic drug coverage, just as if it had been out-of-pocket spending. This means that state programs would not have an incentive to stop providing coverage, and could wrap-around the Medicare benefit without penalty. However, low-income seniors who had limited assets would be eligible for extra Medicare benefits, including reduced premiums and coinsurance, and no doughnut hole in the coverage. Therefore, the state programs might be con- sidered duplicative, or even unnecessary, at least for seniors with few assets. Low-Income Subsidies and Asset Tests. Beneficiaries with incomes below certain percentages of poverty and asset levels would qualify for improved benefits and re- duced premiums. There are two tiers of eligibility: 1. Tier 1 subsidies for beneficiaries with incomes below 135 percent of poverty and assets worth less than $6,000 ($9,000 for a couple applying jointly), or who are dually eligible for Medicaid and Medicare. 2. Tier 2 subsidies for beneficiaries with incomes below 150 percent of poverty and assets less than $10,000 ($20,000 for couples applying jointly). Beneficiaries qualifying for Tier 1 subsidies are eligible for full coverage without an up-front deductible or doughnut hole. Premiums would be reduced to zero for beneficiaries choosing a drug plan with average or lower-than-average costs in an area. For plans with higher-than-average premiums, beneficiaries would pay only the amount by which the plan’s premium exceeded the average cost in a region. Coinsur- ance would be limited to $2 for a generic prescription or preferred drug and $5 for any other drug. (Institutionalized or dual Medicare-Medicaid enrollees qualifying for full Medicaid benefits would be eligible for further reductions in coinsurance.) Tier 2 benefits would include a $50 deductible but no doughnut hole in the coverage. The coinsurance rate would be 15 percent. Premium reductions would phase out on a sliding scale for beneficiaries between 135 and 150 percent of poverty. Therefore a Tier 2 beneficiary with an income below 135 percent of poverty would receive the full premium reduction available toTier 1 enrollees. But that subsidy would be zero for aTier 2 benefi- ciary with an income approaching 150 percent of poverty. Eligibility determinations would be made by states (through Medicaid offices) or by Medicare (through local Social Security offices). Asset tests would be handled either using current state systems or federal system for supplemental security income (SSI) enrollees. The Medicare program would be allowed to design a simplified, universal asset testing form. Low-income benefits would be provided by PDPs and MA-PD plans. Medicare would notify those plans when their enrollees qualified for low-income benefits, and would reimburse the plans for the extra benefits provided.
  • 190. — 192 — Big Choices: The Future of Health Insurance for Older Americans “Conceptual” Reform Provisions and Their Likelihood of Transforming Medi- care: MMA contains several provisions that have the potential to transform Medi- care. However, many of them step up to the edge of the reform precipice, but don’t necessarily jump. This makes sense, because some of these provisions are highly con- troversial, and prudence dictates a careful, studied approach. However, by not actu- ally requiring the Medicare take a leap into the unknown, it begs the question: Did Congress really want Medicare to take these steps at all? Competitive “Premium Support” Demonstration Program in 2010. The bidding system that begins in 2006 would make if easier for Medicare Advantage plans to offer premium rebates, which could effectively reduce Medicare’s Part B premium toward zero for plans with very low costs. However, it is a step short of competition that could really transform Medicare, because the bidding and premium computa- tion system does not include the traditional fee-for-service program, which currently enrolls almost 90 percent of Medicare beneficiaries. In 2010, Medicare would initiate a larger competitive demonstration program. This demonstration would be a local version of the national “premium support” idea developed by the 1998-1999 Bipartisan Medicare Commission.(see medicare.com- mission.gov). However, MMA does not use the term premium support, but instead changes the name to “comparative cost adjustment.” There are several problems with this demonstration. First, localities generally do not want to host demonstration programs based in austerity, where the local health plans and health providers may be paid less than neighboring areas because of the demonstration. Second, the comparative cost adjustment demonstration does not make provide for the fee-for-service program to escape Congressional micromanagement and ac- tively compete like a private health plan. Third, this version of localized premium support is largely unstudied, and might not be very stable. Beneficiary premiums could fluctuate considerably from year to year if the fee-for-service program’s “bid” (or the bid of a dominant local MA plan) jumped or dropped by a large amount. (By contrast, a national premium support system would probably be more stable and have more predictable beneficiary premi- ums.) On balance, it seems very unlikely that the comparative cost adjustment demon- stration will greatly affect Medicare spending in the long run. The larger question is whether or not the payment improvements for MA plans, and the bidding system set to begin in 2006 encourage sufficient private plan enrollment to make a larger competitive system feasible. Income Related Premium and Low-Income Benefits. Traditionally Medicare has provided equivalent benefits to all seniors, regardless of their incomes. MMA would break that longstanding custom. First, Medicare’s Part B premium (currently $67 a month) would be increased for beneficiaries whose incomes were above $80,000 a year ($160,000 for couples).
  • 191. — 193 — Issue Summary: Medicare Modernization Act of 2003 Second, Medicare would create separate tiers of benefits for beneficiaries with low incomes. There is some question whether these changes will improve or detract from Medi- care’s political support. Liberals generally believe in uniform benefits for all, fearing that reduced benefits for high-income seniors would gradually weaken their political support and turn Medicare into more of a welfare program. However, there is also considerable public fear that the long-term costs of Medi- care and Medicaid will overwhelm the future budget, forcing large tax increases or spending cuts in other government programs. (See, for example, Congressional Bud- get Office, The Long-Term Budget Outlook, December 2003.) Therefore, attempts to reduce Medicare’s costs through means testing could actu- ally improve public confidence that the program is being run efficiently, without “wasting” too much funding on affluent seniors. Chronic Care Initiatives and Demonstrations. A very high percentage of annual Medicare costs stem from a small percentage of beneficiaries who are very sick. Some- time these costs stem from intensive end-of-life care. But often the high costs stem from avoidable complications of long-term or chronic illnesses. The best chronic care takes place between hospitalizations of physician visits, and helps patients man- age their illnesses in a way that prevents sudden, and expensive, flare-ups or crises. MMA creates several new initiatives and demonstrations intended to improve chronic care. First, disease management firms would be invited to contract with Medicare on an on-going basis. Second, Medicare would launch demonstration pro- grams on quality improvement and payments to individual health providers provid- ing in-home or specialized chronic care services. However, these demonstrations will probably fall well short of transforming Medi- care’s traditional acute care focus. In fact, the new stand-alone PDP drug plans could actually thwart coordinated chronic care by further fragmenting seniors’ sources of insurance coverage. Electronic Prescribing. MMA instructs the Medicare program to develop stan- dards for electronic prescribing. Ideally, the standards would encourage all prescrip- tion drug benefit plans and health care providers to use technology to reduce tran- scription and dispensing errors, and to prevent adverse drug interactions. Ultimately, a national e-prescribing system could be a first step toward widespread electronic medical records, which have the potential to greatly improve health qual- ity, especially for patients with severe or multiple chronic illnesses. However, there is no guarantee that Medicare’s modest e-prescribing initiative will take hold among PDPs and MA plans, let alone across the U.S. health system. And even if e-prescribing becomes the norm, we don’t know that would be a sufficient catalyst for full electronic medical records. Procedural Funding or Cost Control Measures. MMA sets in place expedited legisla- tive procedures for Medicare funding or cost control proposals if the overall general rev- enue subsidy to Medicare is estimated to exceed 45 percent of the program’s total costs.
  • 192. — 194 — Big Choices: The Future of Health Insurance for Older Americans Without going into the details of the legislative procedures, this measure is sure to cause controversy. On the one hand, Congress could simply ignore the various warnings, Presidential submissions of funding or cost control ideas, and expedited legislative processes. On the other hand, these procedures will no doubt escalate political rhetoric re- garding Medicare’s sustainability. A cynic would say these procedures—like the pre- mium support demonstration—were intended as a palliative for conservatives who wanted to be able to claim some fealty to cost control while voting for a very expen- sive Medicare bill. Health Savings Accounts. Intended for the under-65 population, health savings accounts (HSAs) would give consumers a tax incentive to purchase high-deductible health insurance. Unused funds in the account would accumulate tax free. HSAs are really a broad expansion of the medical savings account (MSA) provi- sion in current law. HSAs would be allowed to accompany coverage with lower deductibles than the MSA law, and would be available for purchase by more people. The purpose of HSAs is to satisfy a conservative belief that to the extent possible, patients should spend their own money—not that of their third-party insurer—when making routine or less intensive health care purchases. In theory, this would reduce health costs, because people will be more prudent purchasers at the doctor’s office or pharmacy. However, in practice MSAs did not prove to very popular. Although HSAs are more attractive, and there is a movement among businesses to entice employees to join high-deductible health plans with spending accounts, there is little indication that people are willing or able to negotiate prices for individual health items with their clinicians. Given the complexity of the health system and its often-crazy prices, consumers seem hesitant to venture out of the security zone of fixed co-payments, at least if they can help it. To entice them, HSA plans will probably have to assume considerable agency and managed care responsibilities, so that enrollees will be as- sure someone is helping them get fair prices and will offer specialized or chronic care services if needed. Political Evolution of the Drug Benefit: Congressional leaders didn’t intend for people to know very much about the new Medicare drug and reform law before it passed. It is clear that policymakers were worried that overmuch analysis could hurt the bill’s prospects, especially in the House of Representatives. Many of the details of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 were closely held by top negotiators, right up until its final passage. Cost estimates were delayed or suppressed. This lesson was learned during the health reform debate of the early 1990s, when Congress, the Administration and many outside experts produced volumes of analy- sis of the proposals by President Clinton and various members of Congress, long before any Congressional action. Of course, these analyses showed that any major health reform proposal creates winners and losers, and could upset the health insur-
  • 193. — 195 — Issue Summary: Medicare Modernization Act of 2003 ance arrangements of many people. Rightly or wrongly, these analyses were assumed to have slowed the Clinton bill’s progress, which allowed alternative proposals to gain favor and stymie the legislative process. MMA was crafted with a very close eye on the budget. Congress voted not to exceed $400 billion in additional Medicare spending (net of premiums) over the 10- year budget period between 2004 and 2013. There was no possibility of exceeding that budget and also securing the required number of votes for the bill. (Most mem- bers of Congress did not know the Administration was contemporaneously estimat- ing that the cost of the bill would be $100-$150 billion higher.) The second legislative imperative was private sector participation in the benefit. Most liberals thought the $400 billion budget was insufficient to the task of creating a Medicare drug benefit, and therefore resisted the legislative effort from the start. As a result, the bill’s passage required mostly conservative votes, and conservatives were not interested in a government-run drug benefit and direct government price setting for drugs. Congress also needed AARP’s endorsement. AARP’s main concern was expand- ability. AARP’s leaders were willing to support an initial benefit—even if it was less generous than they had hoped—as long as there was a good chance the benefit would be expanded in subsequent years. AARP didn’t particularly care whether the benefit was provided by the govern- ment or private health plans, as long as it was available in full to seniors enrolled in Medicare’s traditional fee-for-service program. Conservatives would not agree to simply adding a drug benefit to the fee-for-service program, because that would imply government price controls right from the start. Therefore, Congress had to design a drug benefit to stand alongside the fee-for-service program, but it had to be delivered by private health plans. The MMA solution was to invent a generous sounding, stand-alone, private-sec- tor drug benefit, which had sufficient gaps or conditions to keep the apparent cost within the budget. Here is how the various gaps and constraints came together. Once the decision was made to provide a generous sounding drug benefit on a limited budget, Congress had to find some savings. First, beneficiaries would have to pay a substantial premium. But anytime ben- eficiaries have a choice on whether or not to purchase coverage at a premium, insur- ers run the risk of “adverse selection”—that is, beneficiaries with higher-than-aver- age drug needs would enroll, but seniors with low drug spending would not. Less healthy beneficiaries, who know they are likely to receive substantial benefits from the drug coverage, would get a bargain. On the other hand, healthy seniors, who are less likely to need drug benefits, may not see the value of the coverage. Adverse selection can drive up premiums and make insurance markets unstable or even untenable. Once the decision was made to require a beneficiary premium, Congress had to find ways to reduce adverse selection. Here, there were two solutions: up-front ben-
  • 194. — 196 — Big Choices: The Future of Health Insurance for Older Americans efits and late enrollment penalties. The up-front coverage will be the “carrot”—it will attract healthy seniors to the drug benefit. The inevitable “stick” is the late-enroll- ment penalty. Seniors may know they don’t need a drug benefit now, but they can’t forecast their future drug spending with much precision. Therefore, the late enroll- ment penalty will compel many seniors to sign up right away, even if they would not otherwise need the drug benefit. Despite these provisions, private health plans made it clear that the risk of ad- verse selection remained high, and that Medicare would have to provide substantial additional incentives for both beneficiaries and plans. That is why the MMA drug benefit includes risk corridors and reinsurance subsidies. Risk corridors and reinsur- ance reduce the risk for health plans; reinsurance subsidies also reduce the premium for beneficiaries. Second, Congress saved money through the design of the catastrophic drug ben- efit. The main reason for basing the catastrophic benefit on out-of-pocket spending (rather than total drug spending, regardless of the source) was budgetary. Congress decided to subsidize employers for keeping their drug coverage, rather than structur- ing the catastrophic benefit so that retiree coverage “counted” and employers had no extra incentive to drop coverage in the first place. The clawback provision is a third money saving feature. Once the decision was made to use a generous sounding drug benefit, and to include Medicaid beneficiaries in the benefit, Congress could not afford to create any financial windfalls for the states. The asset test for low-income beneficiaries creates incentives for seniors to divest themselves of assets (or fail to save in the first place) in order to qualify for govern- ment benefits. This sort of incentive is usually associated with pre-reform welfare programs, which most conservatives loath. Nevertheless, the asset test was included in MMA to help satisfy the budget constraint. No one can really predict whether or the MMA drug benefit will be plagued by adverse selection. If adverse selection is not a problem, then the MMA drug benefit will probably proceed as envisioned in the law, with private plans providing the ben- efit without undue difficulty. However, if adverse selection becomes a problem, then the government has a choice. Congress could pour money into the drug benefit to bolster the coverage and keep premiums down, thus keeping the benefit attractive to seniors with low drug costs. Or, if selection problems were severe and private plans could not feasibly provide the benefit, then Medicare could take over, holding down drug costs and beneficiary premiums by imposing strict price controls on drugs. Alternatively, Congress may decide to modify the drug benefit in 2005. One rea- sonable approach would be to extend and expand the “interim” discount card benefit and delay the main drug benefit (perhaps indefinitely). Since the discount cards have only nominal premiums, universal enrollment could be assured. (The restrictions on enrollment in the MMA could be lifted.) This would eliminate adverse selection worries and the need for late enrollment penalties. The
  • 195. — 197 — Issue Summary: Medicare Modernization Act of 2003 discount cards could be made to synch with employer-sponsored retiree coverage in a less confusing way. The advantages and disadvantages of modifying the MMA drug benefit prior to its full implementation will be the subject of future Centrists.Org research. Links Centrist Policy Network, “Medicare and Rx Drug Resource Page,” available at http://www.centristpoli- cynetwork.org/legislative_updates/medicareresource_2003.html. Congressional Research Service, Report to Congress, “Overview of the Medicare Prescription Drug and Reform Conference Agreement, H.R. 1” (updated December 4, 2003), available at http://www. centristpolicynetwork.org/legislative_updates/files/CRS_Medicare.pdf. Congressional Budget Office (CBO) estimates of the House- and Senate-passed bills, “H.R. 1 as passed by the House on June 27, 2003 and S.1 as passed by the Senate on June 17, 2003” (July 22, 2003), available at http://www.cbo.gov/showdoc.cfm?index=4438&sequence=0. Congressional Budget Office, Testimony on Estimating the Cost of the Medicare Modernization Act (in- cludes final estimates of the Medicare drug bill, and comparisons with the Administration’s esti- mates, March 24, 2004), available at http://www.cbo.gov/showdoc.cfm?index=5252&sequence=0. Centrists.Org, “Private Health Plans in Medicare—Cost Trends and Ideological Battles” (April 21, 2004), available at http://www.centrists.org/pages/2004/04/21_lemieux_health.html. Centrists.Org, “Explaining Premium Support: How Medicare Reform Could Work” (November 6, 2003), available at http://www.centrists.org/pages/2003/10/26_lemieux_health.html.
  • 196. Chapter 13 The New Medicare Law by the National Committee to Preserve Social Security and Medicare (available at http://www.ncpssm.org/news/archive/vp_newmedicare, updated April 2005; used with permission) On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. For more than 38 years, Medicare has successfully provided basic, nearly universal health coverage to America’s older and disabled citizens. Because older Americans generally have higher health care costs than any other segment of our population, they are mostly shunned by private health plans. Before Medicare was enacted, about half of all seniors had no health insurance, and nearly 35 percent lived in poverty. Medicare changed all that. By creating a universal insurance pool, Medicare al- lowed the previously uninsurable senior population to share their risks and resources, providing affordable coverage where little had existed before. But the Medicare pro- gram had one major shortcoming—it did not provide seniors with out-patient pre- scription drug coverage. The National Committee to Preserve Social Security and Medicare has spent years advocating for a comprehensive, affordable prescription drug benefit. What we now have instead is a complicated program that places the interests of the drug manufacturers and private health insurers before the interests of seniors. While the law will help subsidize the cost of medications for some, its glaring flaws erode the value of what seniors are receiving, and could undermine the Medicare program itself. We believe Congress must revisit this law before it is fully implemented in 2006 to allow for an affordable drug benefit offered to all through the traditional Medicare program.
  • 197. — 200 — Big Choices: The Future of Health Insurance for Older Americans Key Issues Drug Discount Card Beginning in June 2004, seniors can buy a Medicare-endorsed prescription drug dis- count card. This card can be helpful to those seniors with low incomes who qualify for the $600 benefit the law provides. But many seniors will be no better off than they are with the many private discount cards already available. The Prescription Drug Benefit In January 2006, the discount card will be replaced by a permanent prescription drug benefit. It will be provided by private companies rather than directly by Medicare, ex- cept in areas so unprofitable no private companies will serve them. Signing up for the new benefit is voluntary, but seniors who wait will be penalized by paying premiums that increase by 1% for each month the senior postpones enrollment. The structure of the benefit is complicated because proponents were trying to minimize its cost. Participating seniors will pay monthly premiums and be subject to a deductible, as well as a gap in coverage during which seniors get no help with the cost of their drugs, while still paying 100% of the premiums. Once a senior has reached $5,100 in covered drug expenditures, a catastrophic benefit begins, and the government picks up 95% of covered drug costs above that amount for the rest of the year. Unfortunately, after the first year the thresholds in the law are scheduled to in- crease based on increases in health care costs. In the year 2014, a senior will need to have about $8,900 in covered drug costs, in order to trigger the catastrophic benefit. And of course, these numbers only count the costs of drugs covered by the sponsor. Seniors get no credit for any expenses for drugs not included in the company’s for- mulary, or purchased outside the United States. Low-income seniors without significant assets who have no other prescription drug coverage could receive significant benefits from the new program because their premiums, deductibles and co-payments will either be eliminated or significantly reduced. Seniors without other coverage who have extremely high drug costs could also benefit. But for other seniors, particularly those with drug coverage from previ- ous employers, it’s not clear the new law will be much help. Cost Containment In one of its greatest failings, the legislation is woefully lacking in any meaningful containment of the skyrocketing price of either prescription drugs or health care. Proponents claim the drive to compete for seniors will encourage private companies participating in Medicare to bargain for the lowest possible prices. So instead of being encouraged to use the purchasing power of America’s 41 million seniors to negotiate for lower prescription drug costs like the Veterans Administration does, Medicare is specifically prohibited from negotiating drug prices. The law also fails to make it any
  • 198. — 201 — The New Medicare Law easier to reimport drugs from Canada or other countries, despite the fact that many of those drugs were originally manufactured in the United States and are significantly cheaper abroad. Some claim this law is a good first step toward providing a meaningful prescrip- tion drug benefit that they will build upon in time. Yet their goal will continually get further out of reach because virtually every provision in the new Medicare law is tied to health care inflation, so the gaps will get more expensive to fill with every passing year. And many seniors will still find themselves in a race they cannot win because their incomes will continue to lag well behind their increasing health care costs. Many seniors depend on Social Security as their primary source of income, with COLAs that are based on general inflation, not health inflation. Few other types of retirement income have any COLAs at all. In addition to the expected premium increases and the inflation fueled changes in the drug benefit thresholds, the Medicare law also increased the deductible for Medicare Part B. In 2005, the deductible is slated to increase by 10%, with annual increases in subsequent years tied to inflation in health care. This increased deduct- ible will apply to all Medicare beneficiaries, whether or not they sign up for the new prescription drug benefit. The Privatization of Medicare Proponents of the new Medicare law claim that injection of competition between pri- vate providers will result in better benefits to seniors at lower cost. But it is clear that private companies simply cannot match Medicare for its low administrative costs and efficiency, and they’ll only participate in the program if they are given more money than it costs Medicare to provide the same benefit. The 2004 Medicare Trustees re- port bore this out as it projects the Trust Funds have lost two full years of solvency due in large part to the extra costs of privatization in the new Medicare law. The truth is that most proponents of the new law don’t support a national social insurance program, and want to transform Medicare to individual “risk pools of one.” Healthier seniors may do better in such a system for a time, while older, sicker seniors are left with fewer choices and higher costs. Ultimately, dismantling the national insurance risk pool will likely cause the entire system to collapse, taking us full-circle back to the days before Medicare began providing universal, affordable insurance coverage to all of America’s seniors. For more information about the National Committee’s views on the new prescription drug law, please call Member Relations at 1-800-966-1935 or see the webpage at www. ncpssm.org.
  • 199. Chapter 14 Understanding the Options: Big Choices and Medicare Reform by Pamela Herd Introduction As Chapter 1 stated, Medicare has been one of the nation’s most successful social policies. First and foremost, it has ensured universal access to health insurance for people aged 65 and over. Before 1965, about three-quarters of older Americans had inadequate coverage and half had no coverage whatsoever. Health care was unafford- able to millions of elders; getting needed care was a luxury, not a right. Medicare changed all of this. Now all older Americans are guaranteed affordable health insur- ance and consequent access to medical care. As a result, Medicare is an enormously popular policy. Indeed, most polls show approval ratings for the program at almost 90 percent among the elderly who rely on it. But Medicare is not without its issues. Though there has been considerable media attention devoted to Social Security’s fiscal problems, Medicare’s dilemma is far more serious. The hospital insurance trust fund will be exhausted in 2019. Furthermore, while the program currently comprises 2.7 percent of GDP, by 2030 it will more than double, comprising 7 percent of GDP.1 It is these fiscal problems in particular that have made reform a necessity. Thus, this chapter details the three main approaches that have been proposed to address Medicare’s fiscal problems. The analysis in this chapter will center on two key ques- tions. First, will the proposed reforms produce significant cost savings? Second, how will the proposed reforms affect beneficiaries’ health care in terms of cost, access, and quality? The main differences between these approaches, particularly the first two, is to what extent the Medicare program in its current form, with the government acting as the primary health insurance provider for elderly Americans, should be altered. As will be detailed, none of these approaches are without flaws and none will be popular with all Americans. In essence, reform will involve very difficult choices, and in many
  • 200. — 204 — Big Choices: The Future of Health Insurance for Older Americans cases, uncertain outcomes. Similar to Social Security, politicians making big changes to the program inevitably risk the wrath of elderly voters if those changes run awry or contrary to the best interests of the program. One thing that is important to keep in mind when considering options for re- forming Medicare, however, is that its financial problems are rooted in the larger problems of the United State’s health care system. Overall, health care spending is ex- pected to rise from 15.3 percent of GDP to 25 percent of GDP from 2004 to 2030. The United States truly stands out in this regard. While other countries are dealing with health care inflation, their problems do not approach the magnitude of the America’s problems. Comparable levels of health care spending as a portion of GDP in most European countries are about half of the United States’ level.2 Ironically, the United States is not only the most expensive health care system in the industrialized world, it also only country in the industrialized world without guaranteed access to health insurance for all of its citizens and residents. Option One: Restructure within the Current Program The most straightforward way to deal with Medicare’s financial problems is an ap- proach employed by Medicare in the past. Specifically, the government would need to reduce the price and use of health care services. Medicare, as the primary health insurer for older Americans, can act unilaterally to impose these kinds of changes. It should be noted, however, that cutting the price and use of health care is an ap- proach to dealing with ever burgeoning health care costs that is shared by the private sector. This is precisely how private health insurance companies cut their costs. They pay hospitals, doctors and health care suppliers lower fees and they encourage their customers to use fewer health care services. There is one large difference, however, between the government and the private sector in regards to this cost-cutting approach. One of the main advantages of the current Medicare system, where the government acts as an enormous health insur- ance company for the elderly, is its size.3 The sheer number of people that Medicare covers gives it significant leverage to negotiate lower prices with health care provid- ers and suppliers. Providers and suppliers can refuse to cover Medicare beneficiaries if they do not agree with the pricing, but the large number of beneficiaries makes this an option of last resort. Comparatively, individual health insurance companies, which cover much smaller numbers of beneficiaries, do not have this kind of leverage. It is much more difficult for them to negotiate lower prices. Reducing Payments to Providers How, specifically, would Medicare reduce its payments to health care providers and suppliers? First and foremost, the government would reduce the amount it pays phy- sicians, hospitals, nursing homes, and home health care agencies. This technique has been successfully employed throughout Medicare’s history. For example, in the early 1980s Medicare changed the way it reimbursed hospitals for the
  • 201. — 205 — Understanding the Options: Big Choices and Medicare Reform care they provided as a means to reduce payments to providers. Previous to reforms in the early 1980s, Medicare reimbursed hospitals for each service it provided. The concern was that the reimbursement strategy provided hospitals with incentives to provide more services than were actually necessary as a means to increase their profits. Indeed, from the early 1970s to the early 1980s Medicare’s costs accelerated rapidly.4 Medicare was paying more than twice as much per enrollee by the early 1980s as compared to the early 1970s. Given that Medicare costs were growing much more rapidly than other govern- ment programs, Congress looked to control these costs. The primary way it chose to do this was to alter the way it reimbursed hospitals. Instead of reimbursing for an individual’s services, it reimburses hospitals a lump sum based on the Medicare beneficiary’s illness or disease. Thus, instead of paying for an x-ray, blood testing, an EKG, and surgery for a beneficiary who went into cardiac arrest, Medicare pays a single lump sum for the average amount it costs in total to treat such a patient. If the actual care costs more, the hospital absorbs the cost. If the care costs less, the hospital keeps the extra money. The result of this change was a dramatic drop in Medicare’s costs. From 1967 to 1984 the average rate of increase in Medicare spending was 16.5 percent. After the implementation of these new payment procedures, annual spend- ing increases dropped to 9.2 percent between 1984 and 1991.5 Of course, there are advantages and disadvantages to this cost reduction approach. The main advantage to reducing prices is that beneficiaries would not have to pay more for their care. Currently, the average Medicare beneficiary pays almost 20 per- cent of their medical care out-of-pocket. Future estimates indicate that this could rise to 30 percent on average by 2025. Further, it will rise to as much as 70 percent for the sickest and poorest beneficiaries.6 Given that one-quarter of the elderly live below 150 percent of the poverty level ($12,741 a year for a single person), high medical costs impose great challenges. There are disadvantages to this approach, however. The first concern is that the quality of care may decline if physicians and hospitals do not receive enough com- pensation for the services they provide. For example, while the implementation of payment changes in the early 1980s substantially reduced Medicare’s costs, some claim that it also led to poor quality of care for beneficiaries. In particular, many claim the reimbursement change led hospitals to discharge patients “quicker and sicker” to improve their profit margin.7 Indeed, hospital stays shortened after the implementation of the new payment system. Between 1981 and 1987, the average length of stay dropped from 10.2 days to 8.5 days, about a 15 percent drop.8 And the length of hospital stays has been continuing to shrink. Throughout the 1990s hospital length of stay dropped by more than 10 percent.9 To compensate for these shorter stays, there was an increase in hospital patients re- ceiving post-acute care. As length of stay continued to shrink throughout the 1990s, spending on home health care and skilled nursing facilities exploded.10 Thus, once again responding to these rapidly rising costs, in 1997 Congress decided to imple-
  • 202. — 206 — Big Choices: The Future of Health Insurance for Older Americans ment the same kind of payment system it had put in hospitals into skilled nursing fa- cilities and home care. Once more, this restructuring dramatically altered the patient experience. While this has already dramatically reduced Medicare home care spend- ing, many are concerned about the ramifications of these changes on the quality of care. Between 1996 and 2000 the number of beneficiaries receiving home health care dropped by almost one-third.11 Ultimately, as Medicare continues to tighten its payment policies, beneficiaries may find it more and more difficult to access care. Their care is shifted from hospi- tals to skilled nursing facilities and home care. But where will it be shifted to next? Ultimately, if Medicare reduces payments enough, health care providers and physi- cians may simply refuse to treat beneficiaries. Medicaid, the public health insurance program for poor Americans, has tremendous difficulty in many states getting health care providers to participate because the reimbursement rates are so low. In some cases their reimbursement rates are just 20 percent of what Medicare pays. The end result is that is very difficult for Medicaid beneficiaries to receive care, particularly from primary care physicians.12 Proponents for this approach, however, argue that, on balance, limiting provider payments have been effective. First and foremost it produced clear, and rather large, costs savings. Secondly, most studies have not found significantly negative ramifica- tions on the quality of care patients receive in hospitals, skilled nursing facilities, and home care due to changes the reimbursement policies.13 Reducing Payments for Products The alternative to paying providers less is that the government can negotiate lower prices for the medical care products it covers. Medicare pays for “medically necessary” equipment including artificial limbs, braces, wheelchairs, canes, patient lifts, hospital beds, commode chairs, and diabetes supplies, among other things. Reducing the rates it pays for these products can produce substantial cost savings. This will be particular- ly true over the coming decades as new medical care products are created for a rapidly expanding elderly population. Most economists believe that rising health care costs are almost solely due to new technologies.14 If the government can better control the cost of these new technologies, there is considerable savings to be achieved. The government, however, cannot currently negotiate lower prices for one of the most expensive medical products, prescription drugs. The addition of a prescription drug plan in 2004 was the largest expansion of the program since its inception. But part of the legislation included a provision that disallowed the government from negotiating lower drug prices with pharmaceutical companies. This is the only product or service for which Medicare cannot negotiate prices. Initial evidence indicates, however, that this new cover- age will rather dramatically expand Medicare’s costs. The most recent estimate is that cost of the new plan will be $534 billion over the next 10 years. This limitation in the legislation is concerning given the rapid rise in prescription drug prices. Overall, prescription drugs are the fastest increasing medical expense.
  • 203. — 207 — Understanding the Options: Big Choices and Medicare Reform Prescription drug spending grew by 13 percent between 1993 and 2000.15 Between 1998 and 2000, this spending grew at triple the rate of inflation.16 The inability for the government to negotiate lower prices for prescription drugs is particularly prob- lematic because prescription drug costs are quite high in the United States relative to other countries. Conservative estimates are that Americans pay as much as 30 percent more for their prescription drugs.17 These high relative costs have led many older Americans to seek out lower prices. Many older Americans in the north have taken to buying their drugs in Canada, while those in the south have taken to buying them in Mexico Thus, one way to put a control on Medicare prescription drug spending is to reform the legislation to allow the government to negotiate lower prices. But this solution is not without its opponents. The main critique of this approach is that government price controls may reduce the incentive for companies to develop new and better treatments, services, and supplies.18 This concern has been most explicitly discussed surrounding whether or not Medicare should be allowed to negotiate the price of drugs with pharmaceutical companies. Many claim that if the government places extensive controls on drug prices and generally lowers payments, this will re- duce the incentive for pharmaceutical companies to develop new drugs.19 Ultimately, this could reduce the overall quality of medical care. Reducing Service Use The alternative approach to reducing Medicare costs is to reduce the amount of health care services beneficiaries use. For example, if beneficiaries spend less time with their doctors and receive fewer tests and exams, Medicare’s costs will go down. Nonethe- less, reducing service use is more complicated than reducing prices. Differentiating between what is unnecessary and necessary use of medical services is challenging. One of the most often proposed approaches is to control the use of untested and experimental treatments and services. If medical technology is a primary source of rapidly rising health care costs, Medicare could reduce access to experimental and unproven new treatments. If there is not solid evidence that they work, Medicare would not cover them. Alternatively, reducing service use can entail improving care. One of the most commonly proposed approaches to reducing health care costs is to cover and en- courage the use of preventive care. When Medicare was created in the mid-1960s it was mainly intended to cover acute care in hospitals. In many respects, this was a reflection of an entire medical care system that was largely centered on acute care. But today it quite clear that it is less expensive to stop poor health before, as opposed to after, it occurs. To some extent Medicare has already shifted to respond to this approach. For example, it has expanded its coverage of preventive care services to include things such as mammograms and annual physicians’ visits. Another key approach to saving money by improving care is focusing on the sick- est Medicare beneficiaries. In fact, about 10 percent of beneficiaries account for 70
  • 204. — 208 — Big Choices: The Future of Health Insurance for Older Americans percent of payments.20 There is concern that the care for these beneficiaries is not well coordinated. If individuals are seeing multiple physicians and these physicians are not interacting and discussing the patients’ care they may receive overlapping services. Moreover, in the case of prescription drugs, this can prove quite dangerous to their health if different physicians prescribe drugs that interact poorly with each other. Ul- timately, Medicare could better coordinate care for the sickest beneficiaries who use the most services and are at the greatest risk of overusing those services due to poorly coordinated care. Another significant advantage to emphasizing preventative care and better care coordination is that both of these measures could actually improve the quality of Medicare and the health and quality of life for older Americans. Reducing service use does come with its own problems, however. Measures such as improving preventative care and better coordinating care for the sickest beneficiaries may cost more in the short term and there is no guarantee of long-term cost savings. And restricting access to experimental treatments may be difficult for sick beneficia- ries for whom traditional treatment options have failed. People are generally not fond of being told they cannot obtain specific kinds of care. The Short of It On the whole, these reform approaches would leave the general structure of Medicare untouched. The government would remain the primary health insurance provider for older Americans. In essence, the government would fall back on longstanding strate- gies for controlling programmatic costs: reducing provider and supplier payments and service use. Option Two: Restructure the Current Program As opposed to tweaking the cost and use of products and services within traditional Medicare, Congress could dramatically restructure the current program by decreasing the role of government and increasing the role of the private sector in the Medicare program. The most oft-proposed approach is to doing this is by shifting Medicare from a defined benefit to a defined contribution. In the current system, Medicare beneficiaries pay the same premiums, deductibles, and co-payments to their primary health insurance provider: the federal government. Beneficiaries are guaranteed coverage of certain medical services and medical prod- ucts. Regardless of how much an individual uses those services and products, the government will pay. It is a defined benefit. Consequently, Medicare pays the most money for the sickest beneficiaries because they use the most medical services and products. The alternative option is to make Medicare more akin to a defined contribution than a defined benefit program. The critical difference with a defined contribution approach is that the government would guarantee a set amount of money it contrib- utes towards an individual’s health care, instead of guaranteeing access to a defined set of services and products.
  • 205. — 209 — Understanding the Options: Big Choices and Medicare Reform There are numerous ways a defined contribution approach could be implemented. It could be as extreme as the government sending a $2,000 check to each elderly person to spend as they chose on their health care. In this scenario the government would essentially have no role in the coverage and provision of health care for older Americans. Most proposals, however, are more moderate in nature and tend to pro- vide a continued role for the government, albeit a smaller role. The most common proposal to date is called a premium support plan.21 Premium support proposals would basically entail the government providing older Americans with a voucher with which they would buy their health insurance coverage from traditional Medicare or a host of private insurance providers. Most proposals actually have the government providing direct subsidies to health insurance companies, as op- posed to beneficiaries receiving a voucher, however. The companies would receive the exact same amount (a defined contribution) for each beneficiary it enrolled. In essence, premium support would shift Medicare towards a defined contribu- tion system. Instead of being guaranteed certain health care services regardless of what they cost, individuals would be guaranteed a certain amount of money to be put towards whatever health insurance they wanted. In the process, the private sector role in providing health care for the elderly would be expanded. In terms of how a premium support plan would practically affect elderly benefi- ciaries’ health insurance coverage, there are three key questions: 1) What would the value of the voucher be? Most proposals are based on the voucher1) What would the value of the voucher be? Most proposals are based on the voucher1) What would the value of the voucher be? being enough to generally cover the costs for the same basic services currently offered by Medicare. Older individuals would then have the choice of using that voucher to remain in the current Medicare system or signing up with a number of different Health Maintenance Organizations (HMOs) and health insurance com- panies. The more moderate proposals would pay somewhere around 90 percent of the average premium cost.22 2) How would this change affect elderly beneficiaries’ health care coverage? These plans wouldHow would this change affect elderly beneficiaries’ health care coverage? These plans wouldHow would this change affect elderly beneficiaries’ health care coverage? have a dramatic impact on the options elderly beneficiaries have in terms of how lim- ited or how broad they desired their coverage to be. Moreover, there would be exten- sive options in regards to what that package of health care benefits looked like. Most proposals would require that all health insurance providers, including the government, offer a basic package of services similar to what Medicare currently covers. But the package of services could be expanded to cover things Medicare does not currently cover. For example, a company may offer a plan that includes dental insurance or a plan that would cover catastrophic health care costs. In the current Medicare program there is no cap on beneficiaries’ total out-of-pocket expenses. In the end, the elderly could choose from potentially hundreds of different plans offered by numerous health insurance providers. Unlike the current program, there would be no consistent pack- age of health insurance coverage.
  • 206. — 210 — Big Choices: The Future of Health Insurance for Older Americans 3) How would this change affect elderly beneficiaries’ health care costs? In some ways it is3) How would this change affect elderly beneficiaries’ health care costs? In some ways it is3) How would this change affect elderly beneficiaries’ health care costs? unclear how a premium support plan would affect beneficiaries’ overall health care costs. What is clear, however, is that the size of the premiums, deductibles, and co-payments would vary widely. They would differ based on four factors. First, the cost of health care varies depending upon where one lives. Health care is more ex- pensive in New York than in Kansas. Thus, the premiums would vary depending on location. Second, the premiums would depend upon the benefits included in the chosen plan. The more benefits one wanted, the higher the likely cost. Third, the cost of the premium would vary depending upon the pool of beneficiaries covered by the company and plan. The sicker the pool of beneficiaries, the more costly the premium would be. Finally, the premium cost would be dependent on the specific health insurance company. How efficient are they? Do they have high administrative costs? How do they balance their profit margins with their costs? Are they effective at negotiating lower prices from health care providers and sup- pliers? These kinds of issues would determine how the health insurance company itself affected the beneficiaries’ premiums. Cost Savings and Quality The basic premise of this proposal is that a dramatically reduced role for the federal government combined with increased competition will reduce costs and improve the program. How would this work? In terms of cost reduction, premium support proponents argue that the addition of many new private health insurance providers would increase competition and con- sequently reduce program costs.23 Older Americans would choose from among po- tentially hundreds of different health insurance options, instead of just one primary health insurance provider for the elderly (Medicare—the government). More choices will allow Americans to switch among varying health care plans, choosing ones that offer the most benefits for the lowest prices. This process would force health insur- ance companies to be more efficient and lower their prices to attract beneficiaries. Thus, the resulting competition generated by older Americans switching plans would lead to lower prices. Ultimately, proponents argue that the increased competition that results from introducing premium support into Medicare is the best way to save and improve the program without resorting to painful solutions like cutting provider reimbursements, reducing older peoples’ service use, implementing benefit cuts, or introducing tax increases.24 Opponents to these proposals argue that there is no evidence that increased competition will reduce costs. First, the larger number of companies involved will increase administrative costs. Second, for competition to reduce costs elderly people would have to switch plans on an almost yearly basis, but there is signifi- cant evidence that older adults do not switch plans. Finally, it will be very dif- ficult for seniors to sort out which plans will give them the most for their money.
  • 207. — 211 — Understanding the Options: Big Choices and Medicare Reform It is difficult to compare plans benefits and costs, because plans vary so widely within and between health insurance companies.25 Furthermore, they argue that the evidence actually shows that Medicare has been more effective at controlling health care costs than has been the private sector.26 From 1972 to 2002, average annual cost increases have been 9.6 percent in Medicare com- pared to 11.1 percent in the private sector. This adds up to a significant cost differ- ence over time. Per enrollee costs were 40 percent higher for private health insurance companies than for Medicare when calculated between 1970 and 2000.27 There are two reasons for the government’s success at holding prices down. First, the large pool of beneficiaries (almost all older Americans) makes it easy to negotiate low prices with health care providers and suppliers. Second, it has much lower ad- ministrative costs; 3 percent compared to the private sector’s 12.8 percent.28 Critics ultimately point out that if competition does not produce enough cost savings policymakers will have to resort to traditional cost cutting approaches.29 First, beneficiaries’ private health insurers would attempt to pay lower prices for services and products and restrict access to services. Second, the government would reduce the amount it contributes towards older peoples’ health insurance policies. Currently, it is difficult for the government to estimate how much money it would save by re- ducing the services it covers as a defined benefit program. If the program, however, moves closer to a defined contribution approach, the government can simply reduce X number of dollars it contributes towards beneficiaries’ health care. Proponents also consistently point out that one of the largest advantages to premium support, in addition to potential cost savings, is the degree to which this proposal would expand older peoples’ options.30 Proponents argue that older Americans deserve more choices in regards to their health insurance provider, how much their health insurance will cost, and what it will cover. At the moment, older Americans have very few choices outside of traditional Medicare coverage. Multiple health insurance providers would en- sure beneficiaries that if they do not like how the benefit package was altered, they could switch to another plan. Current Medicare beneficiaries generally do not have that choice when the government makes programmatic changes. Opponents to these proposals argue that older people do not want more choices in terms of health insurance providers. Specifically, a common mantra, and one heard often at the conference, was that the older people wanted to choose their physicians, not their health insurance providers. They want to be able to see whatever doctors they choose. Switching to premium support would force more elderly people into HMOs where they would not be able to choose their physicians. How Will Premium Support Plans Affect Redistribution within Medicare? The central concern for opponents to premium support is how this programmatic change would affect Medicare’s progressiveness.31 Before addressing how this reform will affect Medicare’s redistributive elements, it is necessary to discuss how Medicare redistributes. The key progressive feature of Medicare is that, regardless of how sick
  • 208. — 212 — Big Choices: The Future of Health Insurance for Older Americans or poor, individuals are guaranteed access to the same basic coverage at the same costs as wealthier and healthier individuals. This is most certainly not the case for younger Americans who may not be able to access health insurance, or often have to pay considerably more for it depending on their employment status, health status, and where they live. Again, the long-term goal of premium support proponents is to dramatically re- duce the role of Medicare-fee-for-service, or rather limit the government’s current role as the primary health insurance provider for older Americans. The government would just be one of hundreds of providers. The problem for poorer and sicker beneficiaries is that these changes could in- crease their health care costs. Critical to these proposals is that there would be many, perhaps hundreds, of insurance pools, as opposed to one, which is currently the case. The premiums, co-payments, and deductibles that beneficiaries paid would vary depending upon the HMO or health insurance company that covered them. The government-run fee-for-service Medicare would continue to act as an insurer, but if it failed to effectively compete with private sector companies it would be eliminated. So how is the reducing the role of the federal government as the primary health insurance provider potentially problematic for poor and sick Americans? In short, the multiple insurance pools that will be created, with more health insurance companies participating, make it much harder to spread and redistribute the costs of health care from the sickest and poorest beneficiaries to the healthiest and wealthiest. In the cur- rent system everyone is in the same insurance pool so it is easy to evenly spread costs. The more pools there are, however, the harder it is to spread the risk. The problem is that HMOs and health insurance companies are very skilled at attracting the healthiest individuals who bring them the highest profits. Generally, they do this by designing insurance plans that are most attractive to people who are not sick. Countless studies show that sicker individuals end up concentrated in cer- tain plans when people have multiple options.32 Under the premium support plan, the sickest and most expensive beneficiaries would likely end up concentrated in traditional Medicare, leaving them with extraordinarily high premiums, deductibles, and co-payments. Ultimately, the sickest would end up paying much more for their health care than they do in the current system where sick and healthy beneficiaries alike are in the same pool. A more general concern, one that would disproportionately affect the sickest and poorest beneficiaries, is that older individuals, as opposed to the government, would increasingly have to absorb rising health care costs with decreasing help from the government. Currently, older people are guaranteed certain health care services, re- gardless of cost. The risk with premium support is that because beneficiaries will essentially be guaranteed a certain amount of money to pay for their health care (a defined contribution), as opposed to a guaranteed package of health care services (a defined benefit), it will become increasingly tempting for the government to limit the percentage of its contribution.
  • 209. — 213 — Understanding the Options: Big Choices and Medicare Reform The Result of Increased Competition in Medicare Thus Far One way to think about the implications of introducing this kind of a change to Medicare, on both program costs and its ability to redistribute, is to examine parts of the current program that extended the involvement of the private sector, expanded choices, and increased competition. Thus far, these changes have not produced the desired effects in terms of cost reduction. The best example of expanded competition within Medicare is the addition of Medicare HMOs or what is referred to as Medicare+Choice. Millions of older Ameri- cans have participated in an HMO as opposed to traditional Medicare fee-for-service. In many cases, those beneficiaries received expanded benefits without having to pay additional costs. But the reason HMOs were able to afford more benefits was because healthier beneficiaries were signing up with the HMOs, while the sickest beneficia- ries were staying within the traditional Medicare program. Though beneficiaries in HMOs were healthy on average, Medicare was reimbursing HMOs based on the average cost of all Medicare beneficiaries, including the sickest ones. Thus, the gov- ernment was paying HMOs too much.33 Ultimately, beneficiary premiums remained the same, but for years the elderly in HMOs, who are the healthiest and wealthiest, received better benefits than the average participant in Medicare fee-for-service. HMOs generally paid individuals’ deductibles and co-payments. Moreover, they offered additional preventative care coverage and in many cases prescription drug coverage. When the government did correct these payments many HMOs chose to stop participating in Medicare because their profit margins were substantially reduced. In 1998, 17 percent of beneficiaries participated in an HMO, but by 2004 that had fall- en to 11 percent, and the number of plans fell from 346 to 145 over the same period. But in the 2004 Prescription Drug Bill, Congress once again significantly increased reimbursements to HMOs to further encourage their participation. The most recent estimate is that the government pays an extra $552 per enrollee in Medicare HMOs as compared to fee-for-service, even though the sickest and poorest beneficiaries are in Medicare fee-for-service.34 The Short of It Premium support would radically alter the traditional Medicare program by sig- nificantly reducing the role of government and significantly increasing the role of the private sector. The government would no longer be the primary provider of health insurance for the elderly. Moreover, if the worst-case predictions came true and the sickest beneficiaries remain in the traditional program, it is very likely traditional Medicare would go bankrupt and the government would no longer have any role in the provision of health insurance for the elderly. If proponents are correct, however, cost savings would be achieved without cutting benefits or increasing taxpayer or beneficiary costs. In the end, we cannot be certain of the impact these changes would have on the program’s costs and the cost, access, and
  • 210. — 214 — Big Choices: The Future of Health Insurance for Older Americans quality of older person’s health care. It is very difficult to predict the ramifications of such dramatic program change. Option Three: Raise Revenues Aside from cutting service use and prices and increasing competition, there are other ways to address Medicare’s long term fiscal problems, all of which would directly increase the cost burden on beneficiaries and/or taxpayers. These options may have to be used in addition to the possible reforms already detailed. If paying medical care providers and suppliers less, reducing service use, and expanded competition do not produce the needed savings, the following options would be necessary. Increase Beneficiary Costs The first way to receive guaranteed cost savings is to charge beneficiaries higher pre- miums, co-payments, and deductibles. This could produce cost savings in two ways. First, a direct cost savings clearly would result from the increased revenue. Second, increasing beneficiary costs may make them less likely to use unnecessary medical services or to search out less costly care options. For example, having to pay more for prescription drugs would likely lead individuals to use cheaper generics instead of more expensive brand-name drugs. The major concern with this approach is that Medicare beneficiaries are already heavily burdened with health care costs.35 Beneficiaries currently devote 20 percent of their income to out-of-pocket health care costs. Further, out-of-pocket health care costs are particularly high among groups that have fewest resources. Those without high school degrees have out-of-pocket health care costs that are almost twice that of those with college degrees.36 And those in the bottom income quartile have out- of-pocket costs that consume 30 percent of their income, compared to 8 percent of income for the wealthiest individuals in the top income quartile.37 Projections for the future, without any changes to the current program, show that the situation will only deteriorate further. By 2025, beneficiaries’ average out-of-pocket health care costs will rise to 30 percent.38 And vulnerable groups will face the harshest repercussions. Those in poor health and with no additional supplemental insurance outside of Medicare will devote 63 percent of their in- come to health care. Even more striking is the estimate that a low-income single woman who is over age 85 and in poor health will spend 72 percent of her in- come on health care. The reason for rising out-of-pocket costs among the elderly is because Congress already shifted more of the costs of Medicare onto the backs of beneficiaries. In 1997, they passed the Balanced Budget Amendment (BBA). The BBA had enormous rami- fications for Medicare costs, and premiums increased significantly. Between 1997 and 2007 the premiums will have doubled, rising from 5 percent of income for beneficia- ries with a $10,000 income to 10 percent of their income.39 The reason for this rise is that the Part B premium was set at 25 percent of the cost of Part B services. The
  • 211. — 215 — Understanding the Options: Big Choices and Medicare Reform increase in the percentage of the Part B premium meant that elderly beneficiaries will increasingly absorb the rising costs of health care. These changes, however, significantly improved Medicare’s fiscal health. They re- duced the rate of growth in Medicare spending by almost 25 percent.40 Though Con- gress softened many of the provisions in 1999, for example increasing payments to physicians that had been slashed in the 1997 BBA, the shift in costs to beneficiaries was not altered. Raise the Eligibility Age An alternative option that would also primarily affect older beneficiaries would in- volve raising Medicare’s eligibility age from 65 to 66, 67 or even higher. Recent esti- mates indicate this would reduce overall program costs by 8.7 percent.41 Moreover, the incentives this change creates would likely increase employment rates among the near elderly, thus increasing tax revenues for both Social Security and Medicare. The primary justification for this change is that elderly health has improved significantly over the last half-century. Older Americans are far more capable of staying the labor force until later ages than ever before. Moreover, the eligibility age for Social Security will be age 67 by 2010. Delaying eligibility, however, could very problematic for Americans approaching retirement. Current estimates show that increasing the age of eligibility to 67 would leave 1 in 5 people between the ages of 65 and 67 without any health insurance cover- age. The lack of health insurance coverage could have severe ramifications for health. There is evidence that those uninsured just previous to retirement are more likely to die than those consistently insured.42 Moreover, when one considers the impact on beneficiaries, the cost savings from this approach would not be very high; beneficia- ries of this age are the healthiest and least costly. Raise Taxes The last revenue generating option would fall on working age Americans. Policy changes could increase the 1.45 percent tax employers and employees each pay for Medicare. Payroll taxes for Medicare have not been increased since 1983, while over- all health spending over the same period has increased dramatically. Increasing costs for working age Americans by raising the payroll tax would pro- duce its own disadvantages. The main criticism of this approach is two-fold. One, working age adults already pay a significant amount of taxes (7.65 percent shared between employers and employees) for Medicare and Social Security. Economists worry that further raising these taxes would have a negative effect on employment. Employers may be less willing to hire workers the higher payroll taxes rise. This effect would obviously be problematic for working-age adults, but it would also be prob- lematic for Social Security and Medicare. The fewer workers there are, the smaller the revenues are coming into the program. Others argue, however, that payroll taxes in the United States are quite low rela-
  • 212. — 216 — Big Choices: The Future of Health Insurance for Older Americans tive to many other western democracies and increasing them slightly would not cause significant harm.43 Payroll taxes in Europe are as high as 30 percent in countries like Sweden, France, Belgium, and Italy. The second argument against raising payroll taxes is that working-age Americans will already be overstressed from a rapidly expanding elderly population. As the population ages, working-age adults may face a significant burden supporting older Americans. By 2050, the dependency rate (the ratio of people aged 65 and over to the number aged 15 to 64) will be 30 percent.44 This prospect raises the possibility that payroll taxes would have to be raised far too dramatically for it to be a realistic option.The counterargument to the aging of the U.S. population as a reason not to raise payroll taxes is that those same western democracies that already have high payroll taxes have more rapidly aging populations than the U.S. The corresponding dependency rates in Japan and Germany will be almost 50 percent. Moreover, Social Security as a portion of GDP is just 5 percent compared to double that in European countries.45 Regardless of the advantages and disadvantages of each of these approaches, none of these revenue-generating options are popular. But in totality they have their ad- vantages. They all would produce immediate and guaranteed cost savings for the program. When faced with the choice of paying more or losing Medicare altogether, these options may appear less painful. Moreover, these approaches, unlike options that would significantly cut payments to doctors and hospitals, would not force ben- eficiaries to compromise on the quality of their health care. The Overall Impact on Medicare These reforms could be used in conjunction with either of the two preceding ap- proaches. Whether the program is tweaked with traditional cost-cutting measures or dramatically altered through premium support, it is always an option to increase beneficiary costs, raise taxes, or do some combination of both approaches. Ultimate- ly, however, the major concern with these kinds of reforms is how it may affect the program’s popularity. Dramatically increasing costs may take a toll on the program’s public support. Conclusion The coming years will require the U.S. to make big and difficult choices about how to reform Medicare. These options are not easy or painless, but they are necessary. Medicare’s costs, as well as overall health care costs, are rising far too rapidly to not address the implications of this for Medicare, its beneficiaries, and the working-age Americans who pay for the program. The most significant decision to be made is whether to contract, maintain, or ex- pand the government’s role as the primary insurer for elderly Americans. Those who support a reduction of the government’s role believe that the expansion of the private sector and the increase in the number of health insurance providers will lead to in-
  • 213. — 217 — Understanding the Options: Big Choices and Medicare Reform creased competition and decreased costs. Those who oppose this approach argue that Medicare, or rather the government, has been more successful than the private sector at controlling health care costs over the past 30 years. The reason is because when the government insures all older Americans it makes it easier for them to control provider prices and beneficiaries’ service use. The options discussed in this chapter are, of course, not the only possibilities for reform. In fact, a number of the participants at the conference offered a far more radi- cal proposal: a single-payer universal health care system. They argued that Medicare’s problem was really the overall United States’ health care system. Health care inflation has been rapidly rising and causing problems not just for older Americans through Medicare, but for working Americans whose employers no longer feel they can ab- sorb the rising costs of their workers’ health care. It was pointed out by more than one audience member at the conference that the world’s most expensive health care system (the U.S.’s) was also the only one where the government is not the primary health insurer for all of its citizens. Thus, the logic behind their proposal was that massively increasing government involvement in the entire health care system would reduce costs. One massive insurance pool, with all Americans included, would allow the government to reduce administrative health care costs and better control the cost of health care services and products. Ultimately, whatever the solution to Medicare’s problems, be it more or less gov- ernment involvement, reformers should keep in mind why we have Medicare in the first place; millions of older Americans lacked health insurance and access to health care prior to its creation. Medicare’s fundamental goal to provide health insurance for all older Americas should always remain at the center of any reform agenda. Notes 1. Social Security Administration, 2004 OASDI Trustees Annual Report, 2004. 2. OECD, Health at a Glance 2003, 2003. 3. Boccutti and Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades,” 2003. 4. Ibid. 5. Davis and Burner, “Three Decades of Medicare: What the Numbers Tell Us,” 1995. 6. Maxwell, Moon, and Segal, “Growth in Medicare and Out-of-Pocket Spending: Impact on Vulner- able Beneficiaries,” 2000. 7. Estes, The Long Term Care Crisis, 1993. 8. Kominski and Witsberger, “Trends in the Length of Stay for Medicare Patients,” 1993. 9. Medpac, Report to the Congress: Medicare Payment Policy, 2003. 10. Murtaugh et al., “Trends: Trends in Medicare Home Health Care Use: 1997-2001,” 2003; and Wilensky and Newhouse, “Medicare: What’s right? What’s wrong? What’s next?” 1999.
  • 214. — 218 — Big Choices: The Future of Health Insurance for Older Americans 11. MedPAC, Report to the Congress: Medicare Payment Policy, 2004. 12. Sloan, Mitchell and Cromwell, “Physician Participation in State Medicaid Programs,” 1978; Mitch- ell, “Participation in Medicaid Revisited,” 1991; Fossett et al., “Medicaid and Access to Child Health Care in Chicago,” 1992; and Newacheck at al., “The Role of Medicaid in Ensuring Children’s Access to Care,” 1998. 13. Angelelli et al., “Access to Postacute Nursing Home Care Before and After the BBA,” 2002; Liu and Manton, Effect of Medicare’s Hospital Prospective Payment System on Disabled Medicare Beneficiaries, 1988; Murtaugh et al., “Trends: Trends in Medicare Home Health Care Use: 1997-2001,” 2003; and RAND, Effects of Medicare’s Prospective Payment System on the Quality of Hospital Care, 1998. 14. Cutler and McClellan, “Is Technological Change in Medicine Worth It?” 2001. 15. AARP, “Medicare Beneficiaries and Prescription Drugs,” 2002. 16. Ibid. 17. Danzon and Furukawa, “Prices and Availability of Pharmaceuticals: Evidence from Nine Countries,” 2003. 18. Aaron and Reischauer, “Perspective: ‘Rethinking Medicare Reform’ Needs Rethinking,” 1998. 19. Cockburn, “The Changing Structure of the Pharmaceutical Industry,” 2004. 20. Davis and Burner, “Three Decades of Medicare: What the Numbers Tell Us,” 1995. 21. Rice and Desmond, “An Analysis of Reforming Medicare through a Premium Support Program,” 2002. 22. Lemieux, “Explaining Premium Support: How Medicare Reform Could Work,” 2003. 23. Ibid. 24. Butler, Moffit, and Riedl, “Cost Control in the Medicare Drug Bill Needs Premium Support, Not a ‘Trigger,’” 2003. 25. Moon and Herd, A Place at the Table: Women’s Needs and Medicare Reform, 2003. 26. Boccutti and Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades,” 2003. 27. Ibid. 28. Davis, “Making Health Care Affordable for All Americans,” 2004. 29. Moon, “Getting it Right: Issues for Medicare Reform,” 2003. 30. Lemieux, “Explaining Premium Support: How Medicare Reform Could Work,” 2003. 31. Moon, “Getting it Right: Issues for Medicare Reform,” 2003. 32. Cutler and Zeckhauser, “Adverse Selection in Health Insurance,” 1997. 33. Moon and Herd, A Place at the Table: Women’s Needs and Medicare Reform, 2003. 34. Biles, Nicholas, and Cooper, “The Cost of Privatization: Extra Payments to Medicare Advantage Plans,” 2004. 35. Moon and Herd, A Place at the Table: Women’s Needs and Medicare Reform, 2003. 36. Crystal et al., “Out-of-Pocket Health Care Costs among Older Americans,” 2000.
  • 215. — 219 — Understanding the Options: Big Choices and Medicare Reform 37. Ibid. 38. Maxwell, Moon, and Segal, “Growth in Medicare and Out-of-Pocket Spending: Impact on Vulner- able Beneficiaries,” 2000. 39. Moon, Gage, and Evans, “An Examination of Key Medicare Provisions in the Balanced Budget Act of 1997,” 1997. 40. Ibid. 41. Waidmann, “Potential Effects of Medicare’s Eligibility Age,” 1998. 42. McWilliams, Zaslavsky, Meara, and Ayanian, “Health Insurance Coverage and Mortality among the Near-Elderly,” 2004. 43. Herd and Kingson, “Reframing Social Security: Cures Worse than the Disease,” 2005. 44. Bosworth and Burtless, “Budget Crunch: Population Aging in Rich Countries,” 1997. 45. Ibid. Chapter 14 References Aaron, Henry J., and Robert D. Reischauer. “Perspective: ‘Rethinking Medicare Reform’ Needs Rethink- ing.” Health Affairs, vol. 17, no. 1 (1998), pp. 69-72. AARP. “Medicare Beneficiaries and Prescription Drugs.” Public Policy Institute, Data Digest, September 2002. Online. Available: http://research.aarp.org/health/dd77_rx.pdf. Accessed: August 15, 2004. Angelelli, Joseph, David Gifford, Orna Intrator, and Pedro Gozalo. “Access to Postacute Nursing Home Care Before and After the BBA.” Health Affairs, vol. 21, no. 5 (2002), p. 254. Biles, Brian, Lauren Hersch Nicholas, and Barbara Cooper. “The Cost of Privatization: Extra Payments to Medicare Advantage Plans.” Commonwealth Fund, Issue Brief, May 2004. Online. Available: http:// www.cmwf.org/usr_doc/biles_extrapayments_ib_750.pdf. Accessed: August 20, 2004. Boccuti, Cristina, and Marilyn Moon. “Comparing Medicare and Private Insurers: Growth Rates in Spending over Three Decades.” Health Affairs, vol. 22, no. 2 (2003), p. 230. Bosworth, Barry, and Gary Burtless. “Budget Crunch: Population Aging in Rich Countries.” The Brookings Review, vol. 15, no. 3 (1997), pp. 10-15. Butler, Stuart M., Robert E. Moffit, and Brian M. Riedl. “Cost Control in the Medicare Drug Bill Needs Premium Support, Not a ‘Trigger.’” Backgrounder #1704. Washington, D.C.: The Heritage Founda- tion, 2003. Cockburn, Iain M. “The Changing Structure of the Pharmaceutical Industry.” Health Affairs, vol. 23, no. 1 (2004), p. 10. Crystal, Stephen, Richard W. Johnson, and Jeffrey Harman. “Out-of-Pocket Health Care Costs among Older Americans.” Journal of Gerontology: Social Sciences, vol. 55B (2000), pp. S51-S62. Cutler, David M., and Mark McClellan. “Is Technological Change in Medicine Worth It?” Health Affairs, vol. 20, no. 5 (2001), pp. 11-30. Cutler, David M., and Richard J. Zeckhauser. “Adverse Selection in Health Insurance.” NBER Working Paper No. 6107. Cambridge, Mass.: National Bureau of Economic Research, 1997.
  • 216. — 220 — Big Choices: The Future of Health Insurance for Older Americans Danzon, P.M., and M.F. Furukawa. “Prices and Availability of Pharmaceuticals: Evidence from Nine Countries.” Health Affairs Web Exclusive (October 29, 2003). Online. Available: http://content.Health Affairs Web Exclusive (October 29, 2003). Online. Available: http://content.Health Affairs healthaffairs.org/cgi/content/full/hlthaff.w3.521v1/DC1. Accessed: July 15, 2004. Davis, Margaret H., and Sally T. Burner. “Three Decades of Medicare: What the Numbers Tell Us.” Health Affairs, vol. 14, no. 4 (1995), pp. 231-244. Davis, Karen. “Making Health Care Affordable for All Americans.” Congressional Testimony. Senate Committee on Health, Education, Labor, and Pensions. January 23, 2004. Estes, Caroll. The Long Term Care Crisis. Newbury Park, CA: Sage, 1993. Fossett et al. “Medicaid and Access to Child Health Care in Chicago.” Journal of Health Politics, Policy and Law, vol. 17, no. 2 (1992), pp. 273-298. Herd, Pamela, and Eric Kingson. “Reframing Social Security: Cures Worse than the Disease.” In The New Politics of Old Age Policy, ed. Robert B. Hudson. Baltimore: Johns Hopkins University Press, 2005. Kominski, Gerald F., and Christine Witsberger. “Trends in the Length of Stay for Medicare Patients.” Health Care Financing Review, vol. 15, no. 2 (1993). pp.121-135. Lemieux, Jeff. “Explaining Premium Support: How Medicare Reform Could Work.” 2003. Online. Avail- able: http://www.centrists.org. Accessed: June 10, 2004. Liu, Corbin, and Kenneth Manton. Effect of Medicare’s Hospital Prospective Payment System on Disabled Medicare Beneficiaries. U.S. Department of Health and Human Services. 1988. Online. Available: http://aspe.hhs.gov/daltcp/reports/pps.htm. Accessed: June 10, 2004. Maxwell, Stephanie, Marilyn Moon, and Misha Segal. “Growth in Medicare and Out-of-Pocket Spending: Impact on Vulnerable Beneficiaries.” New York: Commonwealth Fund, 2000. McWilliams, J. Michael, Alan M Zaslavsky, Ellen Meara, and John Z. Ayanian. “Health Insurance Cover- age and Mortality among the Near-Elderly.” Health Affairs, vol. 23, no. 4 (2004), p. 223. Medpac. Report to the Congress: Medicare Payment Policy. Medicare Payment Advisory Commission. 2003. Online. Available: http://www.mepac.gov. Accessed: July 15, 2004. Medpac. Report to the Congress: Medicare Payment Policy. Medicare Payment Advisory Commission. 2004. Online. Available: http://www.mepac.gov. Accessed: July 15, 2004. Mitchell, J. “Participation in Medicaid Revisited.” Medical Care (1991), pp. 645-653.Medical Care (1991), pp. 645-653.Medical Care Moon, Marilyn. “Getting it Right: Issues for Medicare Reform.” Testimony prepared for the Senate Fi- nance Committee, June 6, 2003. Moon, Marilyn, with Pamela Herd. A Place at the Table: Women’s Needs and Medicare Reform. New York: Century Foundation, 2003. Moon, Marilyn, Barbara Gage, and Alison Evans. “An Examination of Key Medicare Provisions in the Balanced Budget Act of 1997.” Washington, D.C.: Urban Institute, 1997. Murtaugh, Christopher M., Nelda McCall, Stanley Moore, and Ann Meadow. “Trends: Trends in Medi- care Home Health Care Use: 1997-2001.” Health Affairs, vol. 22, no. 5 (2003), p. 146. Newacheck, Paul W., Michelle Pearl, Dana C. Hughes, and Neal Halfon. “The Role of Medicaid in Ensur- ing Children’s Access to Care.” Journal of the American Medical Association, vol. 280, no. 20 (1998), pp. 1789-1793. OECD. Health at a Glance 2003—OECD Countries Struggle with Rising Demand for Health Spending.Health at a Glance 2003—OECD Countries Struggle with Rising Demand for Health Spending.Health at a Glance 2003—OECD Countries Struggle with Rising Demand for Health Spending Paris, France: OECD, 2003.
  • 217. — 221 — Understanding the Options: Big Choices and Medicare Reform RAND. Effects of Medicare’s Prospective Payment System on the Quality of Hospital Care. Research Highlights, 1998. Online. Available: http://www.rand.org./publications/RB/RB4519. Accessed: July 15, 2004. Rice, Thomas, and Katherine Desmond. “An Analysis of Reforming Medicare through a Premium Sup- port Program.” Kaiser Family Foundation, 2002. Online. Available: http://www.kff.org. Accessed: July 15, 2004. Social Security Administration. 2004 OASDI Trustees Annual Report, March 2004. Online. Available: http://www.ssa.gov/OACT/TR/TR04/tr04.pdf. Accessed: July 20, 2005. Sloan, F., R. Mitchell, and J. Cromwell. “Physician Participation in State Medicaid Programs.” Journal of Human Resources (1978), pp. 211-245.Human Resources (1978), pp. 211-245.Human Resources Waidmann, Timothy A. “Potential Effects of Medicare’s Eligibility Age.” Health Affairs, vol. 17, no. 2 (1998), pp. 156-165. Wilensky, Gail R., and Joseph P. Newhouse. “Medicare: What’s right? What’s wrong? What’s next?” Health Affairs, vol. 18, no. 1 (1999), pp. 92-107.
  • 218. Contributors Biographies for Speakers, Panelists, and Moderators Kenneth S. Apfel Sid Richardson Chair in Public Affairs; former U.S. Social Security Commissioner Kenneth S. Apfel joined the faculty of the LBJ School of Public Affairs at the Univer- sity of Texas at Austin in January 2001. His major teaching and research interests are in the areas of social policy and public leadership and management, with a particular focus on aging, health care and retirement issues. Prior to his academic appointment, Apfel served as Commissioner of the Social Security Administration (SSA) from 1997 until his term ended in January 2001. He was the first Senate-confirmed Commissioner of Social Security after SSA became an independent agency and the Cabinet-level position was authorized by Congress. During his tenure as Commissioner, Apfel was deeply involved in efforts to strengthen the long term solvency of Social Security. He significantly strengthened the policy, planning and public education activities at the Social Security Adminis- tration. He also played a leadership role in efforts to strengthen childhood disability programs, to expand retirement planning activities and to enable persons with dis- abilities to return to work. In addition, he served from 1997 to 1999 as a member of the President’s Management Council. Before becoming Social Security Commissioner, Apfel worked in the Office of Management and Budget (OMB) in the Executive Office of the President, where he served from 1995 to 1997 as the Associate Director for Human Resource Programs. Prior to that appointment he served from 1993 to 1995 as Assistant Secretary for Management and Budget at the U.S. Department of Health and Human Services. From 1983 to 1993, Apfel worked for Senator Bill Bradley, as Bradley’s Legislative Director and his chief staff person for federal social and budget policy, with a par- ticular focus on the Social Security, Medicare, Medicaid and welfare programs under the jurisdiction of the Senate Finance Committee. Between 1980 and 1982, Apfel was committee staff for human resource programs for the U.S. Senate Budget Com- mittee. From 1978 to 1980, he held a Presidential Management Internship at the U.S. Department of Labor. He was a college administrator from 1973 to 1976 at Newbury College in Massachusetts. Apfel received his bachelor’s degree from the University of Massachusetts, Am- herst, in 1970; a Master’s degree in rehabilitation counseling from Northeastern Uni- versity in 1973; and a Master’s degree in public affairs from the LBJ School of Public Affairs in 1978. He is a Principal of the Council for Excellence in Government and
  • 219. — 224 — Big Choices: The Future of Health Insurance for Older Americans an elected Fellow of the National Academy of Public Administration and the Na- tional Academy of Social Insurance. Stuart Butler, Ph.D. Vice President of Domestic and Economic Policy Studies, The Heritage Foundation Stuart Butler is Vice-President for Domestic and Economic Policy Studies at The Heritage Foundation in Washington, D.C. He plans and oversees the Foundation’s research and publications on all domestic issues. He is an expert on health, welfare, and Social Security policy. He is also an Adjunct Professor at Georgetown University Graduate School, and in 2002 he was a Fellow at Harvard University’s Institute of Politics. Stuart Butler has authored books and articles on a wide range of issues. In 1981, he wrote Enterprise Zones: Greenlining the Inner Cities (New York, Universe Books),Enterprise Zones: Greenlining the Inner Cities (New York, Universe Books),Enterprise Zones: Greenlining the Inner Cities and in 1985, his book Privatizing Federal Spending (Universe) developed a politicalPrivatizing Federal Spending (Universe) developed a politicalPrivatizing Federal Spending strategy for reducing the size of government. His book, Out of the Poverty Trap (New York, Free Press, 1987), co-authored with Anna Kondratas, laid out a comprehensive conservative “war on poverty.” A National Health System for America, co-authored with Edmund Haislmaier and published in 1989 by the Heritage Foundation, laid out a blueprint for a national health system based on free market principles. Butler has played a prominent role in the debate over Medicare, health care for working Americans, and Social Security reform, arguing for solutions based on indi- vidual choice and market competition. He has written extensively on these issues and has testified frequently before Congress on a broad range of issues. Stuart Butler was born in Shrewsbury, England, in 1947 and emigrated to the United States in 1975. He became an American citizen in 1995. He was educated at St. Andrews University in Scotland, where he received a Bachelor of Science degree in physics and mathematics in 1968, a master’s degree in economics and history in 1971, and a Ph.D. in American economic history in 1978. He is married with two daughters, and resides in Washington, D.C. David Certner, J.D. Director of Federal Affairs, AARP David Certner is the Director of the Federal Affairs Department of AARP, and is a member of AARP’s Senior Leadership team. He has been with AARP since 1982, and directs the Association’s lobbying efforts at the federal level before Congress, the Administration and the federal agencies. Mr. Certner also served as Chairman of the 1994 ERISA Advisory Council of the Department of Labor and was appointed as a delegate to the 1998 and 2002 National Summits on Retirement Savings. Mr. Certner, an attorney, received his law degree from the National Law Center at George Washington University.
  • 220. — 225 — Contributors Priscilla Chatman, J.D. Counsel and Director of Government Relations and Policy, the National Committee to Preserve Social Security and Medicare Priscilla Chatman is Counsel and Director of Government Relations and Policy for the National Committee to Preserve Social Security and Medicare. The National Committee is a grassroots education and advocacy membership organization for se- niors. Ms. Chatman develops the organization’s lobbying plan and formulates the strategy to implement it. She speaks nationally on Medicare and Medicaid, particu- larly the issue of prescription drug coverage for seniors. For the second consecutive year, Ms. Chatman is chair of the Health Committee of the Leadership Council of Aging Organizations, a national coalition of over 50 nationwide organizations that address senior’s issues. She is an attorney who has worked extensively in public policy. Before going to the National Committee she was Senior Policy Analyst for the University of Maryland School of Medicine. There she was the advisor to the Institutional Review Board, working on issues of informed consent and clinical trials. She developed an expertise in rural, inner city and under-served populations. Ms. Chatman was Special Assistant to then United States Senator Harris Wofford (D-PA) who put the issue of universal health care on the national agenda. She also served as Vice President for External Affairs at Cheyney University in Pennsylvania. After attending Swarthmore College and Temple University, she received her Ju- rist Doctorate degree from Delaware Law School of Widener University where she graduated Order of the Barrister. Betty Sue Flowers, Ph.D. Director, LBJ Library and Museum Betty Sue Flowers, appointed Director of the Lyndon Baines Johnson Library in 2002, was Kelleher Professor of English and member of the Distinguished Teachers Academy at the University of Texas at Austin. She is also a poet, editor, and business consultant, with publications ranging from poetry therapy to the economic myth, including four television tie-in books in collaboration with Bill Moyers, among them Joseph Campbell and the Power of Myth. She hosted “Conversations with Betty Sue Flowers” on the Austin PBS-affiliate, KLRU, and has served as a moderator for execu- tive seminars at the Aspen Institute for Humanistic Studies, consultant for NASA, member of the Envisioning Network for General Motors, Visiting Advisor to the Secretary of the Navy, and editor of Global Scenarios for Shell International in Lon- don and the World Business Council in Geneva (on global sustainable development and, most recently, on the future of biotechnology).
  • 221. — 226 — Big Choices: The Future of Health Insurance for Older Americans Pamela Herd, Ph.D. Robert Wood Johnson Foundation Research Fellow, School of Public Health, Health Management, and Policy, the University of Michigan-Ann Arbor Pamela Herd is currently a Robert Wood Johnson Scholar in Health and Health Policy at the University of Michigan, Ann Arbor. She will be joining the LBJ School of Public Affairs in the fall of 2004 as an assistant professor. She received her Ph.D. in Sociology at Syracuse University in the Maxwell School of Citizenship and Public Affairs in 2002. She received dissertation awards from Syracuse University and the National Academy for Social Insurance. Her research interests are old age policy, health, and inequality. She is currently working on a book with Madonna Har- rington Meyer entitled Retrenching Welfare, Entrenching Inequality: Gender, Race and Old Age in the U.S. to be published as a part of the American Sociological Associa- tion’s Rose Series in Sociology. Jeff Lemieux Executive Director, Centrists.Org Jeff Lemieux is the founder and executive director of Centrists.Org. An economist specializing in health care and public finance, he is the author of centrist proposals for health coverage, Medicare reform, and balanced budgets, and creator of long- term projections of entitlement spending and federal budgets used by Congress and the policymaking community. As senior economist for the Progressive Policy Institute (PPI) through 2003, he was responsible for studies of overall economic and federal budget, tax, and entitlement issues, as well as health care. His modeling for PPI included 30-year budget projections, as well as the impact of tax cuts on various classes of taxpay- ers, and comprehensive budget proposals. He has testified before the Ways and Means, Finance, and other committees of Congress on Medicare reform and tax-based proposals to expand health coverage. He is the author of dozens of PPI publications, and is an issue editor of Blueprint magazine, published by theBlueprint magazine, published by theBlueprint Democratic Leadership Council. Prior to joining PPI, Lemieux was the staff economist for the National Biparti- san Commission on the Future of Medicare, which was co-chaired by Senator John Breaux (D-La) and Bill Thomas (R-Ca). He was responsible for the long-term base- lines for Medicare spending used by the Commission and the budgetary estimates of the Commission’s proposals. He ran the Commission’s modeling tax force. From 1992 through 1998, Lemieux was principal analyst at the Congressional Budget Office (CBO). At CBO, he estimated the cost of national health reform plans and, later, the impact of Medicare reforms enacted in the Balanced Budget Act of 1997 and other laws. He created CBO’s projections of national health expendi- tures in 1992. Those projections were updated in a series of CBO publications be- tween 1992 and 1998. Between 1990 and 1992 he was with the Office of the Actuary
  • 222. — 227 — Contributors at the Health Care Financing Administration (HCFA), and prior to HCFA worked for DRI/McGraw-Hill, an economic forecasting firm. Jeff holds a Master’s degree in economics from the University of Maryland, and he remains a Maryland resident. A native Midwesterner, he has undergraduate degrees in history and economics from St. Louis University. Marilyn Moon, Ph.D. Vice President and Director of the Health Program, the American Institutes for Research Dr. Marilyn Moon serves as Vice President and Director of the Health Program at the American Institutes for Research. From 1993 to 2000, she wrote a periodic column for the Health section of the Washington Post on health reform and healthWashington Post on health reform and healthWashington Post coverage issues. She has recently completed her term as a public trustee for the So- cial Security and Medicare trust funds. She testifies frequently before Congress and is regularly quoted in the media. Recent publications include, “Medicare Matters: Building on a Record of Accomplishments” and “Targeting Medicare Drug Benefits: Costs and Issues.” Dr. Moon holds a Ph.D. in economics from the University of Wisconsin-Madison. She has served as a Senior Fellow at the Urban Institute, an associate professor of economics at the University of Wisconsin-Milwaukee, a senior analyst at the Congressional Budget Office, and the founding Director of the Public Policy Institute of the American Association of Retired Persons. She is on the Board of Directors of the Medicare Rights Center. David C. Warner, Ph.D. Professor of Public Affairs, LBJ School of Public Affairs David C. Warner is the Wilbur J. Cohen Fellow in Health and Social Policy at the LBJ School of Public Affairs at The University of Texas at Austin. His major teaching and research interests are in economics, health policy, and health finance. A graduate of Princeton University and Syracuse University (Ph.D. in economics), he formerly taught at Wayne State University and Yale University and was Deputy Director of the Office of Program Analysis of the New York City Health and Hospitals Corpora- tion. Professor Warner has served as a consultant to a number of organizations in the health sector, and for six years was a member of the Board of Directors of Austin’s Brackenridge Municipal Hospital. In addition, he was Chairman of the Texas Dia- betes Council from January 1985 to December 1989. He has also served on several editorial and advisory boards and been appointed to other state level advisory com- mittees. At the LBJ School, Professor Warner has directed policy research projects on a variety of health and mental health topics. Among his publications are Toward New Human Rights, more than forty articles and book chapters, and sixteen books, mono- graphs, and policy research project reports. He is currently working on projects relat-
  • 223. — 228 — Big Choices: The Future of Health Insurance for Older Americans ed to improving health insurance coverage, the integration of the U.S. and Mexican health care systems, diabetes policy, public health funding, and U.S.-Mexico border health. Taylor Willingham Director, Texas Forums Taylor Willingham is the project coordinator for Texas Forums, a member of the LBJ Family of Organizations. She is research associate for the Kettering Foundation and a former board member for the National Issues Forums Institute. Current projects include a national dialogue to determine how Americans view Russia in partnership with colleagues in Russia, and an online community collaborative research project in- volving organizations that promote deliberation. She also teaches distance education courses for two graduate library schools: University of Illinois at Urbana-Champaign and San Jose State University. Taylor has moderated over 200 public forums in person and online, and has trained over 1,000 moderators across the United States as well as citizens from countries such as Croatia, Tajikistan, Russia, and Colombia. At the invitation of the State Department, she conducted introductory workshops on the role of libraries in emerging democracies in Vologda and Petrozavodsk and helped librarians from Lithuania, Russia, Latvia, and Kyrgystan develop a public forum framework for a discussion about youth.
  • 224. ISBN-10: 0-89940-121-X ISBN-13: 978-0-89940-121-8 www.utexas.edu/lbj/pubs/

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