Commentary

Debate: Medicare reform is market-based in name only

By Tom Miller
This article originally appeared in The Hill on June 18, 2003.

This month, Congress is again attempting to climb the slippery mountain of “Medicare reform.” If past efforts and current proposals are any guide to this year’s results, we’re most likely to see members re-enacting the Greek myth of Sisyphus: to ceaselessly roll a rock to the top of a mountain, only to have it fall back downhill of its weight.

We’re told, “This time, it’s for real.” Indeed, there are signs of bipartisan progress toward compromise. By summer’s end, however, we may realize we should have left this legislative “child” behind instead of promoting it out of political expediency. AFP PHOTO Miller: Bush, Congress have a long way to go — the revised Medicare proposal avoids significant reforms to the program.

The substantive reasons for reforming Medicare are as strong as ever. The program’s long-term claims on our society’s resources outstrip the ability of younger workers and future generations of taxpayers to pay for them. For example, the net present value of the cash flow deficit for 75-year actuarial projections for Medicare is approximately $13.3 trillion, as calculated by the 2002 Financial Report of the federal government. Medicare’s burden on future generations and its declining net rates of return for beneficiaries only worsen as one looks further into the future.

Besides crowding out the rest of the federal budget and commanding an ever-expanding share of resources from the private sector, the traditional Medicare program also adds insult to injury in the form of its gaps in benefits coverage, lags in technology approval, complex regulatory burdens, and Kafkaesque price controls.

Medicare must change, and opening up its coverage options to emphasize a greater role for private sector health plans could offer some market-based help. Traditional Medicare is plagued by its value-subtracted inefficiencies — for example, incentives to over-consume and over-provide, regional disparities, uncoordinated care, any-willing-provider contracting, and administered prices that are always either too low or too high but never right. Private-sector delivery of Medicare health benefits could offer quality-enhancing choices, provide better incentives and tradeoffs, produce desired consumer information, and expedite access to innovative services and valuable technology.

At the same time, it’s important to recognize that “better” may not necessarily be cheaper. This is true when smaller private plans must compete against traditional Medicare — an entrenched incumbent with a dominant market share that can impose arbitrary price controls with the force of law. Private plans could offer greater responsiveness to consumer demands and the ability to both contract and expand their health services. That would preserve the most valuable core of current benefits and trim less valuable healthcare on the margins of Medicare coverage.

With that in mind, we still need to reconcile the direction of our overall healthcare system with the appropriate role of government. Will health care over the next 25 years look more like the bureaucratic and sclerotic Medicare program or more like the better versions of consumer-driven private sector health care options?

Unfortunately, the various congressional and Bush administration efforts give us more of the same. For instance, the revised Bush “framework” for Medicare reform resembles a Potemkin village. It avoids any significant reforms of the traditional fee-for-service Medicare program, miscalculates the political market for using enhanced drug benefits to bribe seniors to switch to private health plans, and offers only a sketchy version of a Federal Employee Health Benefits-like structure for private plan competition.

In the absence of stronger presidential leadership, the congressional gatekeepers have returned to their path-dependent reliance on a policy cocktail: stand-alone drug benefits, complex cross-subsidies and early-dollar benefits appetizers followed by doughnut holes and narrow risk corridors of taxpayer-funded reinsurance for risk-averse insurers. With no enhanced drug benefit to induce seniors to leave traditional fee-for-service plans, private-plan advocates have resorted to unsubstantiated claims about the virtues of coordinated care, disease management and “we promise they’re not HMOs” preferred-provider organization options.

What’s missing from the Bush and congressional plans are several key items:

• First, if private management and delivery of health care is superior to command-and-control micromanagement of other people’s money, advocates of market-based choice should not concede the issue by insisting on special subsidies and protections. Restoring level-playing-field competition between private plans and traditional fee-for-service Medicare, initially along the lines of the 1999 bipartisan Medicare commission’s majority recommendations, would provide a better starting place. Of course, that would require more transparent competitive bidding mechanisms to set taxpayer subsidy levels than those offered in the current Senate Finance Committee’s plan — a step that many GOP senators are reluctant to take.

• Second, acknowledging that it’s ridiculous to fail to include outpatient prescription drugs in Medicare benefits is not the same as also deciding to increase overall taxpayer subsidies to Medicare seniors by another $400-plus billion over the next decade. We could provide benefits flexibility instead by providing risk-adjusted defined contribution payments to Medicare seniors, loosening up cost-sharing limits within traditional Medicare, and/or simply removing balance billing ceilings for Medicare services.

Instead, this year’s Medicare debate promises us only the appearance of “MINO” reform, that is, Market-based In Name Only. It tastes bad, and it’s certainly not filling.

Tom Miller is director of healthcare studies at the Cato Institute.