The Medicare Reform Plan: A Good Deal For The Elderly

Commentary by Pete du Pont

The House Republicans have proposed a major revision to Medicare that, if enacted, will provide greatly improved health care for America's senior citizens.

The proposal accomplishes this by shifting power and control over Medicare and its funds away from the government, the hospitals, and the doctors to the elderly themselves. As a result of this power to the people approach, the elderly will now enjoy the same freedom others have to choose a broad range of private health care plans instead of being forced to participate in the government Medicare system.

Under the House Republicans' plan, the elderly would each have the freedom to take their share of funds out of Medicare and use it to buy any of the full range of private alternatives for their health coverage. HMOs or managed care will be one option; others include Medical Savings Accounts (MSAs), traditional fee-for-service insurers, preferred provider networks, provider service networks (where doctors and hospitals in an area organize to provide health coverage directly), and plans offered by associations such as AARP, or unions, or employers. The elderly would each be perfectly free to stay in the current Medicare system if they prefer, foregoing the private options entirely.

The amounts that can be withdrawn from Medicare for these private options would average about $5,000 per year to start and would be allowed to grow no faster than specified in the federal budget.

Both experience and actuarial studies show that for these amounts many plans can provide better benefits than Medicare. For example, Milliman & Robertson, the nation's top actuarial firm, recently completed a study for the National Center for Policy Analysis in Dallas showing that with these funds retirees could buy an MSA with full fee-for-service insurance covering all expenses over $3,000 per year, with $1,500 left in the MSA to pay for expenses below the deductible. Or they could buy an MSA that provides managed care for all expenses over $3,000, with $2,100 left in the MSA.

Such MSA plans would provide better benefits than Medicare in at least five ways:

First, the MSA provides complete catastrophic coverage for all expenses over $3,000, while Medicare does not. Medicare coverage runs out after various caps and limitations.

Second, the fee-for-service MSA provides a cap on out-of-pocket spending for covered medical expenses of $1,500 per year (the difference between the $3,000 deductible and the $1,500 in the MSA) or $900 if the managed care option is chosen. Medicare has no cap on out-of-pocket expenses; the elderly can be liable for thousands of dollars in medical expenses. That is why 70% of the elderly will pay almost $1,200 next year on average for private insurance to supplement Medicare. With the MSA, the elderly can keep that $1,200 per year or use it to reduce out-of-pocket medical expenses.

Third, the funds in the MSA can be used for health care expenses not covered by Medicare, such as prescription drugs or eyeglasses.

Fourth, unspent funds in the MSA at the end of the year would belong to the retiree, and could be saved for future expenses, or withdrawn for any purpose, subject to certain minimum balance requirements in the House Republicans' bill. This allows the elderly to share directly in the reward for controlling health costs.

Finally, MSAs would not be subject to the payment and reimbursement limitations of Medicare, or the outdated limitations on what new services and treatments the program covers. These limitations and controls are reducing access to care and quality of care under Medicare, effectively rationing health care for the elderly.

HMOs and other managed care options will be able to provide better benefits than Medicare as well. They will likely add catastrophic coverage and prescription drugs to the package offered to the elderly for the funds they can withdraw from Medicare each year.

Furthermore, the House Republicans' proposal does not increase costs appreciably for most older Americans. There is no increase in Medicare deductibles and co-payments, and Medicare premiums (except for the very wealthiest Americans) would actually remain at their current level of about 31% of the costs of Part B.

Best of all, the House Republicans' reform plan actually increases the freedom of the elderly to choose their own doctors. Since private plan doctors would not be subject to the Medicare payment limitations, doctors would not be discouraged from providing services to the elderly, and so there would be a wider choice of physicians.

Millions of elderly Americans are worried about the future of Medicare. This new approach not only lays those fears to rest, it opens vast new health care options for all senior citizens.