A Framework for Medicare Reform

Studies | Health

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

Long-Term Reform: Uses of HIRA Funds

HIRA Options. Owners of HIRA accounts will be given these options: (1) they can cede their HIRA funds to the government and enroll in a conventional Medicare SCP plan, (2) they can purchase an annuity — a stream of cash for their remaining years to be used to pay private health insurance premiums and to purchase health care directly, or (3) they can keep the account and withdraw an amount each year for the payment of premiums — with the withdrawal percentage determined by the government.29

Timing of HIRA Options. Workers will be able to make an election at any time within 10 years of the age of eligibility for Medicare.30

Using HIRA Funds to Purchase Private Health Insurance. As with current Medicare enrollees, the point of departure for future beneficiaries will be enrollment in a SCP plan. Individuals will pay a risk-adjusted premium made up of three parts: (1) their 15 percent Medicare premium (2) the annual annuity or programmed HIRA withdrawal amount and (3) a contribution from the government. The government’s contribution is calibrated so that the risk-adjusted premium is sufficient to pay the enrollment premium.

The base insurance plan is one with a $2,500 deductible that is indexed to Medicare per capita cost growth. Once the government’s contribution is calculated in this way, seniors may use those same dollars to enroll in the other plan options described above.

Long-Term Insurance Contracts. Unlike the current Medicare advantage program, this program will be based on a long-term relationship between seniors and their insurers rather than a system that encourages annual plan switching. A long-term relationship with an insurer typically also makes possible a long-term relationship with providers of care. In addition, if insurers know they will be responsible for care in the future, they will have incentives to make investments today that have future health consequences. Hence, the insurance contract should be at least five years in duration, and perhaps even longer.

Opportunities to Switch Plans. Even though most seniors will have long-term relationships with their insurers, that does not preclude the opportunity to switch plans. Certainly, seniors should be able to make another choice if their plan is abusive or fails to honor its contracts.

More generally, we want to encourage health plans to specialize if there are advantages to doing so. For example, one plan might become the best at cancer care and try to solicit cancer patients from other plans. In order to make such a switch, all three parties (patient, original insurer, new insurer) must agree; and achieving agreement may involve severance payments between the insurers. In this way, the new system will encourage a “market for sick people” in which health plans will find it in their financial self-interest to attract patients by providing efficient, high-quality care.31

End of Life Care. Under the current system, the only way terminally ill patients can get benefits from Medicare is by spending more on health care. This may be one reason why one-third of all Medicare spending is on patients in the last year of life.32 These incentives need to be changed. A patient who forgoes expensive treatment and enrolls in a hospice or who simply goes home is saving the system money. Clearly it is in the taxpayers’ interest to financially reward people who reduce taxpayer obligations. At a minimum, terminally ill patients who forgo care should get to keep some or all of their remaining HIRA funds rather than continue to pay premiums.

Encouraging Efficient Choices. Patients can also reduce overall spending by making other decisions. In the international marketplace, hospitals are competing for patients based on price and quality. Many of these facilities have affiliations with centers of excellence in the United States, including, for example, the Mayo Clinic. In general, surgery in Europe costs one half of the typical U.S. charge and procedures in India and Thailand costs as little as one-third, one-fourth or one-fifth of the expected U.S. charge.33 In the current system, Medicare doesn’t pay for care outside the United States. But why not? Patients in private plans should be able to get a rebate of some or all, of their HIRA balances if they save even more money for their insurer (and, therefore, for Medicare).

Encouraging More Efficient Insurance. Closely related to the idea of spending less on care is the idea of choosing less expensive insurance. What if a senior chooses a plan with a $10,000 deductible? What if the plan does not cover “heroic medicine”? What if it excludes organ transplants and implantable devices? Surely people who make these elections and avoid costs should financially benefit from them. Presumably, there is some minimum insurance we want everyone to have. For choosing insurance that covers the minimum, but avoids many expensive options, people should get rebates of some or all of their HIRA balances.

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