Chapter 6 of Donald Barr’s Introduction to U.S. Health Policy analyzes Medicare, the federal health insurance program for the elderly. The good news about Medicare is that it is “the most efficient medical payment system in the country,” costing much less in administrative costs and other non-care expenses than private insurance. The bad news is that Medicare has not succeeded in controlling the rising costs of care. The Medicare Trustees’ Report of 2009, before the passage of the Affordable Care Act, projected that the trust fund covering hospitalization would be exhausted by 2017.
Citizens 65 and over are eligible to enroll in Medicare. Medicare Part A is a service plan covering hospital care without charging a premium. After a deductible payment roughly equal to one day of hospitalization, Medicare pays the entire cost up to 60 days per illness, and part of the cost for up to an additional 90 days. Part A also covers the entire cost for up to 20 days in a skilled nursing facility following hospitalization, and part of the cost for up to an additional 80 days. It also covers the cost of hospice care for the terminally ill. Part A is financed by a 1.45% tax on employers and employees. In theory, the taxes paid by a large generation as workers can generate a trust fund surplus to help cover their benefits as retirees, but in practice, the rising cost of care has created an impending shortfall for the Baby Boom generation.
Medicare Part B is an optional, premium-based insurance plan covering physicians’ bills and other outpatient medical costs. Almost all seniors choose to participate in the plan, usually by having the premium deducted from their Social Security payment. The premiums cover only about one-fourth of the government’s cost, with the rest coming from general tax revenues. Medical providers can decide whether they will “accept Medicare assignment,” meaning that they limit their fee to Medicare’s standard rate for the particular service provided. If so, Medicare will pay them 80% of that fee, and the patient will pay the remaining 20%. If they do not accept assignment, they can charge the patient up to 115% of Medicare’s standard rate, and the patient can obtain reimbursement from Medicare for 80% of the standard rate (which may be as little as 70% of the fees charged). About half of doctors prefer not to accept assignment, since the Medicare standard rates are generally less than what they would otherwise charge. This is one reason why the Medicare system has only limited control over the cost of care.
Since Medicare covers only 70-80% of outpatient costs, about 90% of recipients have some sort of “Medigap” policy, a supplemental policy to cover the remaining costs. They get that policy in a number of different ways: purchasing from a private insurance company, receiving coverage from a former employer as a retirement benefit, being eligible for Medicaid due to income below the federal poverty level, or participating in a Medicare managed care plan. In the 1970s, the government has encouraged the participation of Medicare recipients in Health Maintenance Organizations, on the assumption that HMOs would be good at keeping people healthy and reducing medical expenses. The Balanced Budget Act of 1997 expanded managed care options through the “Medicare + Choice” program, later renamed “Medicare Advantage.”
The financing of managed care through Medicare has proven to be tricky. On the one hand, the government wanted to support managed care organizations at a high enough level to make them attractive to providers and recipients alike, but on the other hand, it wanted to contain the overall cost of the Medicare system. Before 1997, Medicare paid HMOs 95% of the average cost of caring for fee-for-service Medicare patients. But this appeared to be too generous, since HMOs tended to serve the younger and healthier Medicare population. The Balanced Budget Act of 1997 required that Medicare develop a risk-adjusted payment model, taking into account the health status of the recipient. Payments per recipient to managed care organizations dropped, with the unexpected result that many HMOs stopped covering seniors. In 2003, the Bush administration got Congress to pass the Medicare Prescription Drug, Improvement, and Modernization Act. In addition to adding costly prescription drug coverage, the act greatly increased the funding for the managed care options, now called “Medicare Advantage.” It guaranteed these plans 100% of the average cost of covering traditional Medicare patients, plus annual increases in their payment rates. Over the next few years, participation in these plans doubled to 24% of all beneficiaries, and the average cost rose to 114% of traditional Medicare. What had originally been advocated as a way of reducing costs actually ended up increasing them.
The Balanced Budget Act of 1997 also tried to control costs by establishing a formula for a “sustainable growth rate” (SGR), above which Medicare payments to providers wouldn’t be allowed to rise. What has generally happened is that medical fees go up anyway; providers threaten to stop serving Medicare patients if the SGR is enforced; and Congress gives in and authorizes higher payments. Barr concludes, “The SGR was modeled largely on the historically successful efforts in Canada to constrain the costs of physicians’ services. The difference, of course, is the political will to permit the mechanism to work.”
The Patient Protection and Affordable Care Act of 2010 affects Medicare by adding some new benefits, imposing some additional taxes, and making some new efforts to control costs. Seniors can now receive mammograms, colorectal cancer screening, and annual preventive exams with no co-payments or deductibles. Medicare payroll taxes and Part B premiums will be higher for high-income seniors, and new taxes will apply to pharmaceutical companies, medical device companies and certain health insurance companies. The act establishes an Independent Payment Advisory Board with the responsibility to devise plans for keeping Medicare spending from exceeding targets. (Such plans cannot, however, include increases in Medicare taxes or premiums, or restrictions on benefits.) The Act reduces the payments to Medicare Advantage plans so that they do not exceed those of traditional Medicare.
The Medicare Trustees reached a somewhat ambiguous conclusion regarding the future of Medicare under ACA. Based on the provisions of the law, it projected that the Part A trust fund would remain viable until 2029, instead of 2017 as earlier estimated. However, they expressed some doubt about their own projections, suggesting that the cost reductions called for by the act might prove impossible to implement in practice.
Beneath the Surface 