Commentary

Can Medicare Ever Graduate From Reform School?

By Tom Miller
January 28, 2003

When most Republican politicians approach the Medicare reform issue, one generally is reminded of Samuel Johnson’s observation regarding a dog’s walking on his hind legs, “It is not done well; but you are surprised to find it done at all.”

Nevertheless, President Bush will move Medicare reform to the top tier of his domestic policy agenda for 2003. His State of the Union address on Jan. 28 is expected to emphasize not only his support for providing a new (and more expensive) prescription drug benefit to seniors, but also the need to begin basic restructuring of the 37-year-old health care program for seniors. If the president hopes to get Medicare out of reform school, he will need to concentrate on four key objectives:

One, get the overall program structure realigned correctly, and worry about budget savings later;

Two, structurally integrate the various portions of the antiquated Medicare program (Part A for hospital care, Part B for outpatient care, and Part C for private plan options) into a single package, instead of constructing another new financing “silo” for expanded drug benefits;

Three, spend political capital in setting Medicare payments according to indicators of market-based prices, instead of administered price controls. Some early, if limited, version of competitive bidding — to determine prices and reimbursements and set up level playing field competition between the traditional Medicare program and private plan alternatives - is essential; and

Four, provide strong economic incentives to Medicare beneficiaries who choose lower-cost private plan options. But before the president can lead the way in an improved political landscape, he will need to jettison some recent rhetorical baggage and reexamine some details of the latest draft proposal circulating at the White House.

Over the last two years, the Bush administration generally limited its activity on the Medicare reform front to a statement of broad principles in July 2001 that promised new benefits and downplayed the structural changes needed to keep the program affordable and sustainable. The president tried to offer seniors an improved Medicare program that did not appear to threaten the status quo. He promised seniors already enrolled in Medicare and those near retirement that they could keep their Medicare “exactly the way it is today.”

Last year’s unresolved Medicare drug debate will be back, in a different political context. Republicans are back in nominal control of both houses of Congress. The Bush re-election team and other GOP candidates in 2004 will find it harder to tell seniors again that the “Democratic dog ate my Medicare drug homework.” Senior voters will insist on finally redeeming some of the rhetorical commitments made again and again by top Republicans, including Bush.

However, the price tag keeps climbing higher with each new round of the Medicare prescription drug debate. The scope and scale of any new Medicare drug benefit will need to be reduced significantly to remain fiscally sustainable and politically realistic. Keeping most of the things in Medicare “the way they are” is only the way it used to be. Traditional calculations of Medicare’s trust fund solvency don’t capture the full dimensions of the imminent collision ahead between the demands of our major entitlement programs, like Medicare, and the resource-base available to sustain them. But consider the latest annual Financial Report of the U.S. Government, which uses accrual accounting under generally accepted, non-Enron-like, accounting principles. The 2001 Report estimated that the net present value of negative cash flow (the funds needed to cover projected shortfalls) over the next 75 years for Medicare under current law is $12.8 trillion. That’s $12,800,000,000,000.00, if you paid off the intergeneration balloon note today.

Taxpayers cannot and will not keep trying to fill that massive fiscal sinkhole indefinitely. Hence, renewed interest in fitting a more limited drug benefit within a reformed Medicare program that no longer remains on a collision course set by autopilot.

Further adding urgency for broader Medicare reform are growing signs that the political expedient of controlling Medicare costs through arbitrary price controls on physicians and hospitals is running out of gas and beginning to jeopardize access to quality health care. Increasing numbers of physicians who refuse to see new Medicare patients, drop out of the program entirely, or retire early are the “mine canaries” that signal even more serious threats ahead to continued access to quality care for Medicare seniors.

Yet one should remain skeptical that serious Medicare reform is imminent, given a host of traditional political obstacles that always argue to “stop thinking about tomorrow.” Other important hurdles to overcome include the legacy of past flawed reform efforts that triggered the meltdown of Medicare+Choice private plan options and the tendency for promises of new and improved benefits to drown out the need for structural changes that set limits and require tradeoffs.

At the moment, President Bush appears likely to propose a three-tiered menu of Medicare options that would limit expanded drug coverage to seniors who move to new types of private plans and are willing to pay more for better health benefits. Unfortunately, simply trying to hook seniors on private insurance plans by offering them drugs will not fly - either politically or commercially. Most current beneficiaries will remain in the traditional Medicare program even if the availability of private plans improves. Fear of change and inertia by beneficiaries, as well as the obstacles to private plan penetration in rural markets, will slow the pace of change.

A better approach would provide integrated and comprehensive benefits options that compete on a truly level playing field, as once proposed by a majority of the 1999 Bipartisan Medicare Commission. If Medicare payments to beneficiaries were linked to market prices by using the enrollment-weighted competitive bids of all plans ready to serve all comers in a given regional market, the traditional Medicare program could and should provide drug benefits - as long as its administrators could adjust the program’s other benefits and cost sharing provisions to meet market-based fiscal constraints.

Other fine-tuning of the Bush administration proposal should include providing full cash rebates (not just 75 percent) of the savings to seniors who choose plans that cost less than the price set through the regional competitive bidding process. Initial versions of basic drug benefits should focus on stop-loss protection against high drug costs, without early dollar coverage as well. Some secondary subsidies for lower-income seniors and beneficiaries with exceptionally high medical expenses would be far simpler to administer than continuing the perpetually elusive search for broader risk-adjusted reimbursement methods that could actually work in practice.

The essential long-term goal is to inject real-world price information into the entire Medicare program, so that even its dominant fee-for-service portion will need to adjust its operations to the marketplace, instead of the other way around. Standard politics, which resorts to top-down price controls and hidden benefits reductions, won’t be able to reform traditional Medicare in the decades ahead. But market pressures and beneficiary choices will.

When you listen to the president’s State of the Union address, salute him for trying to move beyond politics as usual. This year’s debate won’t be pretty. But the clearest sign that Medicare has a chance to graduate from reform school would be a credible threat by the president that he will walk away from any political deals on Capitol Hill that offer only expanded Medicare drug benefits without key structural reforms of the overall Medicare program.

Don’t just read his lips, read between the lines, too.

Tom Miller is director of health care policy at the Cato Institute.