A Framework for Medicare Reform

Studies | Health

No. 315
Friday, September 12, 2008
by John C. Goodman


Notes

1. [Note: The following National Center for Policy Analysis studies are available on-line at NCPA.org.] Peter Ferrara, John C. Goodman, Gerald Musgrave and Richard Rahn, “Solving the Problem of Medicare,” Policy Report No. 109, 1983; John C. Goodman and Gerald Musgrave; “Health Care for the Elderly: The Nightmare in our Future,” Policy Report No. 130, October 1987; NCPA staff, “Saving the Medicare System with Medical Savings Accounts,” Policy Report No. 199, September 1995; John C. Goodman and Dorman Cordell, “The Nightmare in Our Future: Elderly Entitlements,” Policy Report No. 212, January 1998; Andrew J. Rettenmaier and Thomas R. Saving, “Saving Medicare,” Policy Report No. 222, January 1999; Mark E. Litow, “Defined Contributions as an Option in Medicare,” Policy Report No. 231, February 2000; John C. Goodman, Robert Goldberg and Greg Scandlen, “Medicare Reform and Prescription Drugs: Ten Principles,” Policy Report No. 256, October 2002; Andrew J. Rettenmaier and Thomas R. Saving, “Reforming Medicare,” Policy Report No. 261, May 2003; John C. Goodman, Devon Herrick and Matt Moore, “Ten Steps to Reforming Baby Boomer Retirement,” Policy Report No. 283, March 2006; Andrew J. Rettenmaier and Thomas R. Saving, “Medicare: Past, Present and Future,” Policy Report No. 299, June 2007; Andrew J. Rettenmaier and Thomas R. Saving, “A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers,” Policy Report No. 306, December 2007.

2. Noah Meyerson et al., “The Long-Term Outlook for Health Care Spending,” Congressional Budget Office, November 2007.

3. In two separate studies for the National Center for Policy Analysis, Milliman & Robertson, Inc. estimate that Medicare spending plus Medigap premiums were sufficient to purchase insurance coverage for seniors comparable to what nonseniors typically enjoy, even without Part D (drug coverage) premiums and subsidies. Mark E. Litow (Milliman & Robertson), “Defined Contributions as an Option in Medicare,” National Center for Policy Analysis, February 4, 2000, and “Saving the Medicare System with Medical Savings Accounts,” National Center for Policy Analysis, Policy Report No. 199, September 1995.

4. Also, risk adjustment in the reformed system will be a bit more difficult because of the lack of a benchmark plan to guide the setting of subsidy payments. In the current system the benchmark plan is fee-for-service Medicare.

5. If the reformed Medicare insurance is less generous than the employer plan, the retiree may have to pay extra to join. Further, the firm may want to age- and risk-adjust the retiree’s share of the premiums to avoid younger employees subsidizing the retirees.

6. The insurer’s willingness to make a deposit will be based on expected reductions in spending as a consequence of the higher deductible.

7. “Designing Ideal Health Insurance,” in John C. Goodman, Gerald L. Musgrave and Devon M. Herrick, Lives at Risk: Single-Payer National Health Insurance around the World (Lanham, Md.: Rowman & Littlefield, 2004), pages 235-253.

8. Leslie Foster et al., “Improving The Quality Of Medicaid Personal Assistance Through Consumer Direction,” Health Affairs, Web Exclusive, March 26, 2003, pages w3-162–w3-175.

9. J.P. Newhouse, Free for All? Lessons from the Rand Health Insurance Experiment (Cambridge, Mass.: Harvard University Press, 1994).

10. Thomas A. Massaro and Yu-Ning Wong, “Medical Savings Accounts: The Singapore Experience,” National Center for Policy Analysis, Policy Report No. 203, April 1996.

11. Shaun Matisonn, “Medical Savings Accounts in South Africa,” National Center for Policy Analysis, Policy Report No. 234, June 2000.

12. Greg Scandlen, “Medical Savings Accounts: Obstacles to Their Growth and Ways to Improve Them,” National Center for Policy Analysis, Policy Report No. 216, July 1998.

13. John C. Goodman, “Health Savings Accounts Will Revolutionize American Health Care,” National Center for Policy Analysis, Brief Analysis No. 464, January 15, 2004.

14. Devon M. Herrick, “Health Reimbursement Arrangements: Making a Good Deal Better,” National Center for Policy Analysis, Brief Analysis No. 438, May 8, 2003; and Devon M. Herrick, “Choosing Independence: An Overview of the Cash & Counseling Model of Self-Directed Personal Assistance Services,” Robert Wood Johnson Foundation, Fall 2006.

15. Devon M. Herrick, “Consumer Driven Health Care: The Changing Nature of Health Insurance,” American Journal of Lifestyle Medicine, forthcoming.

16. These reforms follow the proposal developed by John Goodman and Mark McClellan. See John C. Goodman, “Markets and Medicare,” Wall Street Journal, February 23, 2008.

17. John C. Goodman, “What Is Consumer-Directed Health Care?” Health Affairs, Vol. 25, No. 6, pages w540-w543. Note that telephone and email consultations as well as electronic medical records and electronic prescribing are far more prevalent in those medical markets where patients pay out-of-pocket, including walk-in clinics in drug stores and shopping malls, concierge doctor services and telephone consultation services provided by such companies as Teladoc. See John C. Goodman (with Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal and Joe Barnett), Handbook on State Health Care Reform (Dallas, Texas: National Center for Policy Analysis, 2007).

18. John C. Goodman, “Markets and Medicare.”

19. John E. Wennberg et al., “The Care of Patients with Severe Chronic Illness: an Online Report on the Medicare Program by the Dartmouth Atlas Project,” Dartmouth Atlas of Health Care, Center for the Evaluative Clinical Sciences, Dartmouth Medical School, 2006.

20. Ibid.

21. Ibid.

22. Amy Hopson and Andrew J. Rettenmaier, “Medicare Spending Across the Map,” National Center for Policy Analysis, Policy Report No. 313, July 2008.

23. Reed Abelson, “In Bid for Better Care, Surgery with a Warranty,” New York Times, May 17, 2007.

24. Vanessa Fuhrmans, “A Novel Plan Helps Hospital Wean Itself Off Pricey Tests,” Wall Street Journal, January 12, 2007, page A1; Hoangmai H. Pham et al., “Redesigning Care Delivery In Response To A High-Performance Network: The Virginia Mason Medical Center,” Health Affairs, Vol. 26, No. 4, July 10, 2007, pages w532-w544.

25. Carole W. Cranor, Barry A. Bunting and Dale B. Christensen, “The Asheville Project: Long-Term Clinical and Economic Outcomes of a Community Pharmacy Diabetes Care Program,” Journal of the American Pharmaceutical Association, Vol. 43, No. 2, March 1, 2004, pages 173-184. Also see Angela Spivey, “Asheville Project,” Endeavors, University of North Carolina – Chapel Hill, Winter 2004.

26. An earlier Medicare prepayment proposal was presented in Andrew J. Rettenmaier and Thomas R. Saving, “Saving Medicare.” A more recent reform that combines prepayment with upfront cost sharing that is proportional to lifetime earnings is detailed in Andrew J. Rettenmaier and Thomas R. Saving, “A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers.”

27. Since the rôle of government in the reformed system is to “top up” the amount of private savings and enrollee premiums to ensure that every senior will be able to enroll in an SCP, this means that government (and therefore taxpayers) will implicitly bear the risk associated with a diversified portfolio. That is, taxpayer burdens will rise in down markets and fall in up markets.

28. Estelle James and Augusto Iglesias, “Integrated Disability and Retirement Systems in Chile,” National Center for Policy Analysis, Policy Report No. 302, September 2007.

29. Note that with programmed withdrawals, the account owner’s right to the remaining funds continues to be contingent upon survival as well as the risk-rating scheme described below.

30. See the discussion of the incentives such an option creates in Estelle James, “Private Pension Annuities in Chile,” National Center for Policy Analysis, Policy Report No. 271, December 2004.

31. See, for example, John Cochrane, “Time Consistent Health Insurance,” Journal of Political Economy, January 1995.

32. Andrew J. Rettenmaier and Zijun Wang, “Explaining the Growth of Medicare: Part II,” National Center for Policy Analysis, Brief Analysis No. 408, August 6, 2002.

33. Devon M. Herrick, “Medical Tourism: Global Competition in Health Care,” National Center for Policy Analysis, Policy Report No. 304, November 2007.

34. We put aside a discussion of how this might work.

35. Seniors in Medicare fee-for-service are especially prone to receive care based on income. See Kanika Kapur et al., “Socioeconomic Status And Medical Care Expenditures In Medicare Managed Care,” National Bureau of Economic Research, Working Paper 10757, September 2004. Available at: http://www.nber.org/papers/w10757. Accessed February 12, 2008.

36. Put differently, the “top up” contribution from the government will be risk-adjusted, and it can be negative (a tax) if HIRA accounts become sufficiently large.

37. Jan J. Barendregt, Luc Bonneux and Paul J. van der Maas, “The Health Care Costs of Smoking,” New England Journal of Medicine, Vol. 337, No. 15, October 9, 1997, pages 1,052-1,057; and Pieter H. M. van Baal et al., “Lifetime Medical Costs of Obesity: Prevention No Cure for Increasing Health Expenditure,” PLoS Medicine, Vol. 5, No. 2, February 5, 2008. Available at: http://dx.doi.org/10.1371/journal.pmed.0050029. Accessed February 22, 2008.

38. Konstantin Magin, “Why Liberals Should Enthusiastically Support Social Security Personal Accounts,” Economists’ Voice, December 2007. Available at http://www.bepress.com/ev.

39. See the discussion in Rettenmaier and Saving, “A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers,” describing the demand-side adjustments due to higher cost sharing. Supply-side responses are also estimated. Amy Finkelstein, “The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare,” Quarterly Journal of Economics, February 2007. Finkelstein finds that as much as 50 percent of the real per capita health care expenditure growth between 1950 and 1990 can be attributed to the reduction in out-of-pocket spending. This estimate is significantly higher than the estimate that relies on the RAND HIE demand-side effects alone. See Appendix for the methodology.

40. Andrew J. Rettenmaier and Thomas R. Saving, “A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers.”

41. The RAND simulation results on which the two methods are from Table 3.4, p.19, and Table G.2, pp. 104-105, of Willard G. Manning et al., Health Insurance and the Demand for Medical Care, RAND Corporation, February 1988, R-3476-HHS. Numerous caveats exist in applying the RAND results to the present case of Medicare. The demand responses among retirees due to different cost sharing arrangements may differ from the responses derived from the nonretired population on which in the RAND experiment is based. However, the RAND results provide the best available estimates.

42. Spending on Medicare covered services by age are derived from Medicare reimbursements by age using the most recent estimates of Medicare’s share of total spending on Parts A, B, and D.

43. The estimates in Rettenmaier and Saving, “A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers,” are based on the demand-side responses and do not include anticipated supply-side responses.

 


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