A Framework for Medicare Reform
Table of Contents
- Executive Summary
- Short-Term Reform: Demand-Side Changes
- Short-Term Reform: Supply-Side Changes
- Long-Term Reform: Health Insurance Retirement Accounts (HIRAs)
- Long-Term Reform: Uses of HIRA Funds
- Distribution of Costs and Benefits
- Comparison with a Private, Voluntary Plan
- Integration with Social Security and Medicaid Reform
- A Different Approach to Low-Income Subsidies
- Estimating the Effects of the Reforms
- APPENDIX A — Estimating Supply-Side Effects
Short-Term Reform: Demand-Side Changes
How can we control the rising cost of Medicare? Fortunately there are an enormous number of people who have answers. These include 650,000 participating doctors and 30,000 participating facilities and approximately 44 million beneficiaries. In fact, almost everyone participating in the system can produce examples of waste and inefficiency that need to be eliminated. Unlike a normal market, however, none of these people can do much about the needed improvements they perceive. And perversely, people who try to improve the system are often penalized for doing so.
Since Medicare benefits are use-it-or-lose-it, patients can economize only by forgoing care. Since doctors are typically paid fixed fees for predetermined tasks, they can economize only by reducing services and therefore reducing their income. These incentives need to change. We need to unleash the providers and encourage them to use their intelligence, their creativity and their innovative ability to make the changes needed to produce low-cost, high-quality health care. We need to unleash patients and encourage them to apply prudent shopping skills that are normal in every other market to the market for medical care.
Let’s begin with some demand-side changes. Under the current structure, seniors pay as many as three premiums to three plans (Medicare Part B premium, Medigap premium and Part D premium) and often still do not have the coverage nonseniors typically have. We propose to replace this structure with a new, simplified structure — meant to mimic the health insurance benefits the rest of Americans enjoy.3
Standard Comprehensive Plan (SCP). This is the paradigm from which all other options are points of departure. The plan has an across-the-board $2,500 deductible and comprehensive coverage above the deductible. There is only one premium needed to enroll in this plan, and it equals about 15 percent of Medicare’s total cost. All current Medicare beneficiaries will have the opportunity to enroll in a SCP as an alternative to traditional Medicare. For all future Medicare enrollees, the SCP will be the only government plan offered.
Roth-Type Health Savings Accounts. All seniors enrolled in a SCP may deposit up to $2,500 in a Roth-type Health Savings Account (HSA). These deposits are after-tax; they grow tax free; and they may be withdrawn for any purpose tax free. It is expected that most seniors who enroll in SCPs will be able to fund their HSA deposits with money that would otherwise be spent out of pocket, plus the savings on premium expenses. Those who elect some of the options described below may be able to have larger accounts — funded by third-party insurer contributions or out-of-pocket contributions. In all cases, seniors will use their HSAs to pay for expenses not paid by third-party insurance.
Private Administration. We envision that Medicare insurance will be administered by private insurers. Under the current system, Medicare is generally administered by Blue Cross — acting as a no-risk claims administrator. Under the new system, the government’s SCP plan will also be administered by Blue Cross. However, other private carriers may also offer plans, much as they do under the current Medicare Advantage Program (Part C). The government will pay these plans a risk-adjusted premium and they will be at risk, with incentives to eliminate waste and inefficiency.
Risk-Adjusted Premiums. People who are already enrolled in Medicare will continue to pay the 15 percent premium to maintain their enrollment in SCPs in future years. For those who enroll in private plans, the government will add to this amount, producing an overall premium, adjusted for health risks the senior poses. The government’s goal is to ensure that the total premium will always be sufficient to purchase the SCP package of benefits, although for private plans this premium will be determined by competition in the marketplace. (The current method of making risk-rated premium payments can serve as a guide; however, there are too many constraints imposed by special interest pressures.)4 For people yet to retire, there will be additional costs to the retiree as described below.
Other Insurance Options. Seniors will have other insurance options. Following the method described above, we will be able to fix the government’s liability. Once the government (taxpayer) contribution has been set, insurers will be able to offer different benefit packages, with higher or lower overall premiums. These options would include HMOs, PPOs, HSA plans with higher deductibles and Special Needs Plans with HSAs. Also, retirees could remain in their previous employer’s plan (if the employer is willing) by directing the government’s contribution to that plan.5
Seniors who choose one of the options may have other HSA opportunities. For example, a senior choosing a $5,000 deductible will be able to make a $5,000 annual HSA deposit, with the extra $2,500, say, covered by a $1,250 deposit by the insurer and $1,250 from the enrollee.6
New Health Savings Account Design. Private insurers offering HSA plans will not be required to have an across-the-board deductible. They will instead be allowed to reduce the deductible to zero for services they want to encourage (such as medications for schizophrenia) and maintain high deductibles for services for which patient discretion is appropriate and desirable (for example, choice of drugs for arthritis or allergies). Additionally, plans will be able to carve out whole categories of care (such as primary care or diagnostic tests), which patients will pay entirely from their HSAs without any deductible or copayment.7
Insurers will also be able to create special HSA accounts for the chronically ill, allowing them to manage more of their own health care dollars. The “Cash and Counsel” experiments — pilot projects in more than half the states — have provided one possible model to follow. In these programs, disabled Medicaid patients manage their own health care budgets and can hire and fire those who provide them with custodial and even medical services. Incredibly, the satisfaction rate in these programs is 90 percent.8 The insurer’s incentives to improve plan design will be enhanced by long-term contracts (discussed below).
Expected Changes in Behavior. Almost three decades ago, a RAND study found that when people pay a substantial amount of their health care bills out-of-pocket, they reduce their health care spending significantly, with no apparent harmful effects on their health.9 Since that time, there have been a number of experiments — both within this country and abroad — exploring ways to create greater patient cost sharing without encouraging people to forgo needed care. These include Medisave Accounts in Singapore (dating from 1984),10 Medical Savings Accounts in South Africa (dating from 1993);11 and in the United States, a Medical Savings Account pilot program (dating from 1996),12 the current Health Savings Account program (dating from 2004),13 Health Reimbursement Arrangements (dating from 2002) and even cash accounts in Medicaid.14 Many of these experiments have been subjected to considerable academic scrutiny.
The consensus seems to be that when patients are managing their own health care funds, they make prudent decisions — say, substituting generic drugs for brand name drugs, reducing unnecessary trips to physicians’ offices and hospital emergency rooms, engaging in comparison shopping, seeking second opinions on surgery, questioning the necessity of certain diagnostic tests and so forth.15
Unfortunately, most of these patient decisions are being made in the context of a market in which there is little price or quality transparency and in which there are limited support tools to help patients make wise choices. Undoubtedly, the market would work much better if providers were free to repackage and reprice their services in a way that encouraged them to compete for patients based on both price and quality of care. To that end, let us now consider some supply-side changes.