A Deal to be Done on Medicare and Health Reform

By :: March 17th, 2011

Could Congress replace the current Medicare system with a voucher program, as former Clinton budget director Alice Rivlin and House Budget Committee chairman Paul Ryan (R-WI) among others have suggested? It could if Republicans allow the 2010 health law to take effect and Democrats can bring themselves to stop defending a deeply flawed Medicare program.  

In such a voucher system (sometimes called premium support), traditional Medicare would disappear. Instead, government would give seniors a subsidy they could use to buy private insurance. But such a plan could never succeed without a robust individual insurance market. 

Get past all the nasty partisan rhetoric and it is pretty clear: The 2010 law—the Affordable Care Act—creates exactly the foundation for that market.   

For vouchers to work, insurance companies would have to sell coverage at an affordable price to all, regardless of health status. Seniors would need a way to shop for insurance. To keep premiums reasonably priced, consumers would have to be required, or at least very strongly nudged, to buy coverage before they got sick. Finally, since premiums would still be expensive for older buyers, the government would have to provide seniors with a significant subsidy to make the product affordable. 

As it happens, the first three elements are exactly the model of the ACA. The law includes insurance exchanges, a requirement that private insurers make coverage available to everyone regardless of health status, and the obligation that everyone have at least basic coverage. It even includes subsidies for some low-income buyers. Additional premium support for seniors would be the final piece of the puzzle. 

Keep in mind that when Medicare was enacted in 1965, older Americans could not purchase affordable private insurance. There was no individual market for them and few employers offered retiree coverage. Medicare made insurance available to seniors, although through a system encrusted by disincentives to quality care. 

Five decades later the market failures of pre-1965 remain. Eighty percent of those 65 and older suffer from at least one chronic disease and half suffer from two or more. Yet, there is still no functioning individual insurance market for people with pre-existing health problems. The Commonwealth Fund reports that nearly half of those with health problems reported they were either denied insurance, charged rates they could not afford, or had their illness excluded from coverage. And while some employers do sponsor retiree insurance, it is usually only for those under 65, fast disappearing, and increasingly expensive. As a result, dumping nearly 50 million Medicare recipients on to a non-existent private insurance market would be both treacherous for seniors and a political non-starter.  

But once all the elements of the ACA were pulled together, there would be no need for Medicare. Seniors would be able to buy affordable private coverage through the same sort of exchanges as tens of millions of working people. Insurance companies would compete on benefits and price and, importantly, take on the burden of cost containment.   

The idea is not as radical at it sounds. Today, in fact, millions of seniors participate in a similar model when they buy private Medicare Supplement (Medigap) insurance. Others have enrolled in Medicare Advantage plans—a private insurance alternative to traditional  Medicare (although one where subsidies are far more generous than are likely under a broad voucher system). Federal employees, including members of Congress, are also covered by subsidized private insurance they buy through an exchange-like market.   

Rivlin gets all this. But, oddly, while many Republicans support major Medicare restructuring, they are doing everything they can to destroy the very system of universal private insurance that would make vouchers feasible. The question to ask them: What private insurance structure do they imagine would replace Medicare? Somehow, I don’t think medical malpractice reform and health savings accounts will do the trick. 

So here’s the first step to a deal: Republicans call a cease-fire in their partisan war on Obamacare and Democrats stop defending a Medicare system that is not only busting the budget but is failing chronically–ill seniors.   

Building this structure will not be easy and many key details have to resolved. How big would subsidies be, especially for very poor seniors; what benefits would be offered; and how would the exchanges work for elderly buyers?  Resolving these complex issues will take the best minds of both parties working together. Any takers?

18Comments

  1. Michael Bindner  ::  2:31 pm on March 17th, 2011:

    Rivlin is using Len Burman’s plan – and so is Paul Ryan.

    The problem with the approach Howard outlines is that the ACA mandates are too weak to nudge participation, which is discouraged by pre-existing condition reforms.

    It is more likely that, barring some compromise to repeal both and provide a public option to those who cannot get private insurance, all private insurance will fail once the ACA is fully in force, leading to de facto if not de jure single payer health care as the federal government will rightly bail out the insurance industry.

    The likely next development is acceptance of single-payer with the prodding of the insurance industry, with funding for the required subsidy coming through tax reform to both expand the base and raise the rates of a single business receipts tax to fund Medicare, Medicaid, the Public Option and an expanded Child Tax Credit (replacing the home mortgage, property tax and state income tax deductions), with Medicaid fully federalized.

    While conservatives may be thown a bone in terms of a catastrophic care/health savings account option, such an option will not work for seniors or the chronically ill, who will demand the coverage they need regardless of cost. For them, health care is not a normal good for this population.

  2. Michael Bindner  ::  2:36 pm on March 17th, 2011:

    One more thing, the capitalist desire to constantly expand profitability will push more and more people into the government pool until only the healthy and thin can get insurance – and they will eventually drop it or else society will realize that such insurance is a scam and shift everyone to single payer.

    There is a libertarian alternative to single-payer, however – but it is only possible after it has been implemented. Allow firms to opt out of part of the Business Receipts Tax funding the program by actually hiring doctors and pre-paying hospital and specialist care for their employees (essentially a localized HMO). This third alternative is likely the cheapest one possible, provided that firms are big enough.

  3. Milton Recht  ::  5:44 pm on March 17th, 2011:

    ACA does little, if any to help seniors or most Americans with medical care.

    The report you cite on the number of seniors with at least one chronic disease states:

    “Unfortunately, America’s health care workforce lacks the training to provide appropriate care at the present time, and it is wholly unprepared for the coming senior boom. There are far too few health care providers specifically trained in geriatrics; moreover, there is a gap between what many primary care providers know, and what they need to know, to optimally treat older patients.”

    The ACA, its insurance exchange and mandates for insurance coverage do not address the underlying US medical care problems with the provision, availability and value of the care provided. What good is extending coverage to everyone, if doctors are not available or if their level of patient care is inadequate.

    The basic premise of Obama and Congress, that the fundamental medical care problem in the US is a health insurance problem, is false. Medical insurance cost, coverage and availability reflect problems with the underlying medical service that they insure.

    Imagine if we have a breakout of arson in a city and insurance coverage become unavailable or too expensive. Improving the fire insurance market does not solve the underlying problem of arson. ACA attempts to fix medical insurance costs without dealing with the many problems with basic medical care. Many reliable studies of health insurance companies showed that they have a lower profit margin than most other businesses. Our medical insurance problems are a reflection of the market they insure. The problems are not reflections, as ACA and Obama believe, with the insurance companies.

    ACA needs modification to fix the medical care market. There is a need to increase the number of physicians, to allow many more foreign-trained doctors to immigrate into the US, and to increase the licensing of foreign doctors. There is a need to relax state law restrictions to allow experienced nurses to take on more patient medical responsibility, to allow doctors to practice medicine simultaneously in more than one state, and to require doctors to release diagnostic information or reissue a prescription to a patient without an office visit. All the other inefficient, cost increasing measures, including the employer health insurance deduction, which removed the patient as a medical cost monitor and negotiator, need modification. The problems with availability and consequently medical insurance will continue to exist in the US despite the passage of ACA until restrictions on efficiency and the number of healthcare providers are removed.

    ACA attempts to fix a symptom but not the disease. The law needs a major overhaul to improve medical care and its availability in the US. A structure built on a weak foundation will eventually crumble from its own weight.

  4. Sid F  ::  8:28 pm on March 17th, 2011:

    The proposal to marry Medicare coverage into the insurance exchanges of the ACA demonstrates a profound lack of understanding of the principles of insurance in general and the concepts of group vs individual coverage specifically.

    Insurance works when two factors are present.

    1. The probability of the insured event is very small.
    2. The cost of the event is very high.

    When health insurance was first introduced, these two factors were present. However, they have not been present for many decades which is why the health care insurance has failed and has turned into a health payments system instead.

    Medicare works, to the extent it does work because it pools all individuals over the age of 65 into a single system, with a premium independent of health condition combined with subsidies from the Federal government. With this large pool the high costs of treatment for a small portion of the population are spread over the large portion of the population that does not incur high costs. All group insurance plans work this way.

    With individual coverage, the individual does not have the benefit of the large pool. Instead the premium is set by underwriting based on the specific characteristics of the insured. As a result young healthy people with a good history can get affordable individual coverage. People with a poor health history, and the elderly (because future poor health is expected) cannot get individual coverage, or if they can, the cost is prohibitive. This is why there is no individual health care coverage for those over 65, and why Medicare was necessary.

    The idea that affordable individual coverage will be available under ACA is ludicrous. What exactly does anyone think the premium will be on a 70 year old with a history of cancer and heart disease? Who exactly is going to provide such insurance? Given this individual a voucher for say $500/ a month or even $1,000 a month will do nothing. And if vouchers are to be based on health history, doesn’t this create a huge beau racy necessary to review and judge health conditions of millions?

    Take the case of John McCain. Because his father was career military, McCain has had continually provided government health insurance since before he was born. Given McCain’s health history, not even his wife’s millions would allow him access to an individual policy. (Ironic, isn’t it, that McCain who has had great government insurance all of his life is one of the leading opponents to government provision of health care or health insurance).

    The only way in which the insurance exchanges under ACA would work is if they operate as a pool, with the same rates for all participants regardless of health history, and they would have to have a large pool many of whom would have a good health history. Wait a minute, that’s what we have today in Medicare.

  5. Vivian Darkbloom  ::  2:52 am on March 18th, 2011:

    Good post and great idea. PPACA was marketed in large part based on the idea that it closely resembled successful European health insurance policies in such countries as Netherlands, Germany and Switzerland. However, none of these European countries have separate government-run insurance programs for seniors. Sid F is not thinking very creatively about the issue. The US could eliminate Medicare and the bureaucracy associated with it if it were to emulate some of the successful European models. While premiums for the 65 plus group for individual coverage are certainly bound to be high, the proposed model would compensate for that by providing subsidies to seniors who could not otherwise afford those high premiums (this is in itself a form of risk sharing). Also, many European programs incorporate risk shifting among pools by requiring insurers with lower risk pools to make cross payments to those with higher risk pools. This also has the effect of evening out the risk among pools. This can, and often is, done by successful programs in Europe. Medicare payroll tax could be eliminated by assessing a surcharge on insurance premiums that would be used to pay for the high risk pool premiums. Since this is not employment related, the current system that is funded only by employers and employees (with only the residucal cost picked up by general revenues), such a system would more sensibly be funded by all citizens, employed or not.

    Now that Gleckman has identified the Republican obstacles, he should go one further and elaborate on the progressive obstacles that have been set up to destroy market-based health insurance.

  6. Wonkbook: the federal government gets a three-week reprieve | DC-ON.us  ::  8:02 am on March 18th, 2011:

    […] plan for Medicare looks a lot like the Affordable Care Act, writes Howard Gleckman: “For vouchers to work, insurance companies would have to sell coverage at an […]

  7. Sid F  ::  10:14 am on March 18th, 2011:

    Those who believe that a European style health insurance program like Germany’s can be grafted onto ACA and introduced in the U. S. either don’t understand the German model or don’t understand the economics of health care or don’t understand political realities in the U. S. or most likely, don’t understand all three.

    There is insufficient space here to describe the German model, but it should be noted it relies on substantial payroll taxes, near universal coverage in a near single non-profit system, negotiated reimbursement rates, mandatory participation, and the cross fund subsidies as stated in another post of this site. The key elements are a single system, with total risk pooling and substantial limits on provider compensation. So for those who propose a German type system for the U. S., we already have close to it in the current version of Medicare.

    In the U. S. there is the belief, prominent among Conservatives and others who lack understanding of health care economics that market competition will provide for affordable individual plans. This is absurd. Exactly what profit making insurance firms are going to compete for the premiums to insure an elderly person? The idea that a U. S. government agency can make risk evaluations of insurance pools and subsidize individual premiums or payments to higher risk pools would only result in a huge ineffective government operation that would have to also set premiums and reimbursement rates and co-pays etc.

    Medicare is expensive and facing unsustainable cost increases, but the administrative costs are low, and it accomplishes its mission of providing universal health care for everyone over the age of 65. What it lacks is effective cost control, (as does the ACA, which is its fatal flaw). This is the fault of the pay for procedure system. As long as the U.S. health care system is characterized by pay for procedure, costs will rise at an out of control rate. (yes, Germany has PFP, but it is highly regulated and negotiated, and take a look at physician income). Here is the basic equation of the system.

    Payments for Reasonable Procedures + Payments for Waste, Fraud and Abuse (Cost) = Funds to Providers and Health Care Organizations (Income)

    As long as this structure exists, the incentives by providers will be to raise Cost so they can make more Income (see Econ 101). True health care reform will only come when providers and health care organizations are paid a fix amount to provide coverage, and hence their incentives are to become lower cost and more efficient, rather than higher cost and less efficient. This equation is

    Profit = Fixed Revenue Per Participant – Costs to Treat Participant

    (see also Econ 101) and requires Providers to be salaried employees, not entrepreneurs. Then competition will work.

    However, since only a small portion of the health care industry and health care economists and commentators and politicians understand this the necessary changes will probably only come when the problem reaches crisis level.

  8. The conservative case for the Affordable Care Act, Part II | Charleenhandal's Blog  ::  7:12 am on March 19th, 2011:

    […] reform ? mimicked the Affordable Care Act?s structure almost exactly. The Tax Policy Center noticed the same thing. And Alice Rivlin ? who has lent her name and support to the Ryan-Rivlin plan ? […]

  9. The conservative case for the Affordable Care Act, Part II | politicsense.societydirect.com  ::  1:12 am on March 21st, 2011:

    […] Act?s structure almost exactly. The Tax Policy Center noticed the same thing. And Alice Rivlin ? who […]

  10. Ryan Plan: It’s a Killer | Medicynic  ::  6:13 pm on April 5th, 2011:

    […] Institute: Medicare would be replaced, but with what? The budget plan would dump Medicare for a voucher system where seniors would get an annual subsidy to buy health insurance in the private market. But today, […]

  11. Paul Randall  ::  6:14 pm on April 5th, 2011:

    Republicans want to repeal Obamacare because it is unsustainable and unconstitutional and unfair to force private insurers to cover preexisting and chronic conditions but then they want to replace Medicare with Obamacare.

    This is the kind of nonsense we have come to expect from them. Why should Americans be expected to trade an efficient program like medicare with a 3-5% medical loss ration for something that will have something like a 20-30% medical loss ratio? Who are the republicans working for the American people of insurers?

  12. GOP’s Ambitious Fiscal Plan Contains Some Large Blanks [News Report] | Abrition  ::  2:06 am on April 6th, 2011:

    […] would be replaced, but with what? The budget plan would dump Medicare for a voucher system where seniors would get an annual subsidy to buy health insurance in the private market. But today, […]

  13. The House GOP Budget: Lots of Change, and Many Questions  ::  12:00 am on April 7th, 2011:

    […] would be replaced, but with what? The budget plan would dump Medicare for a voucher system where seniors would get an annual subsidy to buy health insurance in the private market. But today, […]

  14. John  ::  10:40 pm on April 10th, 2011:

    Why not! Public schools are infinitely better where this has been tried, right. Or are they like TX, where after making a mess of the public school budgets, the governor is now gutting the budget for these also?

    If you want to kill medicare, have the guts to say it in plain English. And to discuss the likely results for health care access and costs.

  15. Bonnie Francis  ::  12:00 pm on April 14th, 2011:

    Trying desparately NOT to be cynical and demanding that we stop the class warfare that is manipulative and decisive, why can’t we model the Congress’ healthcare plan for everyone. Seems to me that would behonest andhave lots of traction w/the American publick. Talk witheach other like statesrmen and save us from thedependent society you have made us! Or is that your plan…to to keep us beholden to the government for our healthcare? Thank you. nbc

  16. gadfly  ::  1:04 pm on April 14th, 2011:

    Wow! All Gleckman does is take the biggest fault in ACA (lack of a single payer system or even a public option), and foist it on seniors.

    The fact is that Medicare is NOT costly compared to insurance-based coverage because it is able to set prices. Apply the prices charged in the current private sector (which include much higher administrative costs plus profits) to patients over 65 and watch what real cost skyrocketing means.

    Of course one should eliminate waste and fraud . . . whether in the private insurance or Medicare coverage. Take those out of both and Medicare remains by far the better deal.

    Finally, nobody should confuse single payer or the public option or the voucher joke with Medicare. The first three are all pay-premiums-as-you-go. Medicare gets much of its money from health investments made over 40 years or so.

  17. Teresa Farrell  ::  11:52 am on June 8th, 2011:

    US healthcare system is broken. If you look at the delivery side, the part that is working is the socialized or government, ie. medicare/medicaid side; not the private or insurance/provider system. When speaking of delivery it is about access to care and quality of care. Medicare and medicaid have far less administrative cost, practice cost controls to limit abuse, and less denial of care. Access is affordable. You cannot say that about the private or insurance/provider controlled side of the coin. Access is controlled by insurance or corporate insterests. Period.

    I was a consultant in the industry when most of these companies were non-profit corporate structures. They arose out of a need for cost pooling and keeping medical costs down for individuals. As non profits there were also control on salaries and other corporate expenses. The non profits were allowed to move excess monies forward for slated improvements, expansion, etc. but it was contained and legally controlled. The idea that Mr. Recht casually mentions as “Many reliable studies of health insurance companies showed that they have a lower profit margin than most other businesses. Our medical insurance problems are a reflection of the market they insure.” is amazing. Our country is the only country in the world where companies are allowed such outrageous profits and executive salaries on brokering health services. Why do we allow these middle corporations who deliver nothing but administrative processes to control access, often control medical outcomes and make any profit at all. It is obscene. As non-profit organizations, salaries and incentives are controlled, too. The executives I worked with made solid 6 figure salaries 20 years ago…not the obscene 7 and 8 figure salaries with all the perks they receive now. Do we forget this? Why is it simply washed away because they aren’t making as much profit as other industries? Oh, poor things! They aren’t making cars or light bulbs who have to create and sustain a market. They are dealing in healthcare and human lives which is a ready market, a market that belongs to the people of this country. It should be managed by the people, through its representation. Not turned over to bunch of business mercenaries who think in terms of profits before anything else. They should not be making profits. PERIOD. Any excess premiums collected or monies on investments should be reapplied to the pool to cut the future premiums or provide better access and they should be held accountible on audits to prove and publish it.

    REMEMBER…insurance companies do nothing other than set the rules and handle the money. In the course of those actions they are kind of like a casino, although there is more oversight and control on the casinos. They do nothing to control or limit access, they hold up cash flow on payments for months creating excess burden and administration for providers and they offer no incentives for wellness. Their object is profits and will be profits until we can mandate that they return to non-profit status or go away forever. They do not serve the community. Where do they get their funding from the community. They give back nothing to the community.
    So when people suggest that the healthcare of our seniors should be turned over to the control of these mercenary for profit companies, I say no. They are a legal cartel in this country and more deadly to the citizenry than any drug cartel or oil cartel. We need to bust up this health insurance cartel now.

    Lastly,I want to restate the obvious. Medicare is NOT a a so-called entitlement. We have paid into it for most of our working life. It is an insurance and left alone it will last for another 50 years or more. That gives us time to reform it. Add more people, younger people to it. This increases the premium payments to the government program (by the way, the US government is definitely not profitable! L-)) and also lowers the risk pools by adding healthier individuals to the plan. More coverage for everyone with a plan that has lower aministrative costs and systematic controls.

    Spend the time to improve medicare for all instead of replacing with a corporate, for profit model that will not serve the public interest before its own…which is unlimited profits for them. Stop them…they are bankers, in disquise.

  18. Marsha Stevens  ::  12:29 pm on February 1st, 2012:

    While the proposed reforms on the existing Medicare system are attractively presented like a carrot before the cart, we should be able to discern the real motive behind these changes. It is like pulling out the rug of security from under the Senior Citizens of this country and have them pay higher premiums for new insurance under the Affordable Care Act, which would only serve to generate tremendous profits for accredited private companies in exchange for comparatively mediocre benefits. Seniors, especially those who, because of the existence of chronic or pre-existing medical conditions which have impaired their decision-making ability, should responsibly be provided access to a Dallas medical malpractice lawyer who will act as a patient advocate.