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The Siren Song of Public Programs

Although details of their 2008 health care reform plans vary, there is significant consensus among the new Washington heavyweights—Obama, Daschle, Baucus, and Clinton. Their common proposal: we should expand Medicaid and offer an under-65 version of Medicare to compete with private insurance.

It seems a seductive idea.  Medicaid and its little cousin, SCHIP, provide coverage to more than forty million low-income people, most of whom would otherwise have no insurance, while Medicare is an essential part of the lives of 45 million seniors.  It’s hard to imagine American health care without these programs, and understandable that there should be demands for their expansion to cover many of our forty-seven million uninsured.

Seductive it may be, but could the proposal also be the siren song that might lead to the wreck of reform?

A brief classical digression: in Homer’s Odyssey, the song of the two
sirens (who were not named Medicaid and Medicare), proved so attractive
to ancient mariners that they drove their vessels onto the rocks upon
which the sirens sat.

—So what risks could Medicaid expansion pose to the future of our health care ship?

Medicaid budgets are already in trouble in many states, with worse to come as the recession continues. Since Medicaid enrollment grows when the economy shrinks, expenditures rise just as tax revenues plunge, and while the federal government can print more money to fund its share, few states can legally run deficits. Some of the current reform proposals try to deal with the problem by promising no increase in state share, but none assumes the kind of bail-out that states may soon be demanding.

Medicaid expansion also could prove deceptive in terms of access to care. Payment rates are so low that many patients already have great difficulty in getting quality care. Increasing the Medicaid population may simply increase the frustration. (The experience of Massachusetts reform should be instructive: in spite of already having a very high proportion of its people insured, and in spite of the state having a high physician rate per capita, increasing the covered population by just five percent has created something of a medical resource crisis.)

—And why might health care reform be endangered by the attractions of the expansion of Medicare—a program that’s popular with its beneficiaries and has low administrative costs?

Medicare is popular; surveys show its beneficiaries more satisfied than those with private insurance. However, the move of almost a quarter of these beneficiaries to Medicare Advantage suggests that the traditional FFS program may be losing some attraction—and not necessarily just because of benefit limitations. Medicare patients are finding access to care increasingly difficult because of low FFS payment rates. At the same time, Medicare’s seemingly lower costs, compared to private insurance, might look more problematic in the competitive market envisioned by Secretary Daschle and others.

Medicare’s administrative costs are lower, although less dramatically so than supporters have claimed, at around 5 percent of total expenditures, versus some 10 percent for large group insurance (excluding premium taxes and commissions). However, an under-65 Medicare option, with lower medical costs per claim, would have a higher administrative cost percentage—perhaps twice as high—potentially eliminating most or all of the gap.

Relying on MedPac’s estimate that, in the Medicare Advantage program, traditional FFS is 12 percent less costly than private insurance, may not be a good idea, either.  The difference is largely due to the additional benefits provided by the MA plans, combined with political insistence on offering private insurance options in rural areas. In fact, urban PPOs are only slightly more costly than Medicare FFS, while HMOs nationally underbid FFS. The comparisons are especially remarkable given the estimated 10 percent cost-shift from government payers to private insurers. In other words, an under-65 Medicare option with no cost shift would likely be more expensive than private sector HMOs and PPOs.

The no cost-shift assumption is unlikely to be made by insurers evaluating reform proposals, however. Given their experience of Medicare payment over the past decade, insurance companies are likely to fight tooth and nail against a potential Medicare competitor with payment rates that they may have to subsidize. And with the deep pockets and political skills of insurance lobbyists, this is a fight that could leave reform truly wrecked.

If we want to move away from today’s dysfunctional health care system, we have to have true price competition, in which all payers compete fairly to control costs and consumers can freely and knowledgeably select the most cost-effective payers. Medicare and Medicaid play vital roles in today’s system, but much of their viability depends on cost-shifting to the private sector. If one of the goals of reform is marketplace affordability, we need a level playing field in terms of provider reimbursement, and that’s something that may make public program expansion infeasible. 

In Homer’s epic poem, Odysseus ordered his crew to block their ears with beeswax, then tie him to the mast so that he could observe the sirens without risking his ship. It would be unreasonable to expect something similar of Secretary Daschle, but questioning the current conventional wisdom of Washington health care reformers does seem in order.

Roger Collier was formerly CEO of a Compass Consulting Group and later part of KPMG. He now lives on an island off the coast of Washington State, and was recently a panelist for the Washington Governor's Blue Ribbon Commission on Health Care

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Roger CollierDeron S.PeterLymieGreg Park Recent comment authors
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Roger Collier
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Roger Collier

We seem to have strayed from the focus of my original piece on Medicare and Medicaid, but jd’s 1/27 post, in which he notes the dilemma facing insurers who want to offer a more cost-effective product, deserves everyone’s attention. If we want to control the cost of American health care and achieve something close to universal coverage, we have two basic system choices: (1) a government-run single payer system that has the absolute power to set provider payments, or (2) a multiple-choice insurer system in which there is genuine price competition. This second option requires that it be possible to… Read more »

jd
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jd

Nate, I also work in health insurance, and I know pretty well how the business works. You missed my points completely in your emotional response. To say that Medicare and Medicaid don’t “underpay” in the context of health care reform means that they don’t underpay relative to what health care should cost, and what it would cost if it weren’t for private insurers to soak up the excess. If hospitals and physicians couldn’t pass their bloated costs and manufactured demand on to private insurers, they would tighten their ships and change the way they do business. There would be pain,… Read more »

Nate
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Nate

Is gas government run single pay? They charge everyone the same price. How about clothing is that government run single pay? Can you name any other industry where some people get 90% discounts while others are forced to pay full price even if one is rigth after the other? Two patients walk in get the same treatment and one can pay 10 times as much as the other. Something isn’t right about that system. “Seems your magic solution has not found many converts in DC.” nor will it ever, my ideas actually solve problems, no way for a politician to… Read more »

Peter
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Peter

“Do away with PPOs, no favored pricing for anyone, public or private, everyone pays a doctor the same rate.”
Sounds like government run single-pay. Glad to see your on board Nate. :>)
Seems your magic solution has not found many converts in DC. I think you should call Obama and tell him you’ve found a solution which will fix healthcare at no cost to anyone.

Nate
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Nate

This is how I got reprimanded under another post. Instead of claiming Medicare pays a fair wage and private insurance over pays why not take 2 seconds and google it. Private insurance is charged more then a service is worth because Medicare SEVERLY underpays providers. Those without PPO access are screwed even worse. Long long list can we found by searching Medicare underpay or talking to any provider. http://www.bizjournals.com/seattle/stories/2006/05/29/daily10.html The study, by the actuarial firm Milliman Inc., concluded that nearly 9 percent of what employers pay in insurance premiums a year goes to subsidizing Medicaid and Medicare rather than to… Read more »

Peter
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Peter

“the public’s mind has been captured by the provider lobby.” Rather jd, I think politicians minds have been captured by lobbyists. I as said before we won’t fix much in this country until political funding has been fixed. “I don’t think Nate, or Peter or Maggie or etc., has proposed any clear path to defeating that Axis of Medicine and controlling costs in a rational way.” I guess we’re back to the point of, “it’s not a big enough crisis yet that enough of us want any solutions.” The biggest problem is that everyone wants the other guy to pay… Read more »

jd
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jd

Nate, Peter has a point, and it’s a very important one. Is it that Medicare and Medicaid underpay, or that private insurance overpays? The fact is that private insurers are in a fairly weak position, particularly with regard to any larger health systems or medical groups. They fail to control costs with those systems/groups. And as you know it is the increase in medical costs that is driving the increase in premiums. Compared to other industrialized nations with roughly equivalent per capita income to ours, we overpay immensely. Germany and France don’t have access issues any worse than ours when… Read more »

Peter
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Peter

“It is widely known and accepted that the low Medicare and Medicaid reimbursements leads to higher prices for private insurers. There has been numerous studies that quantified this.”
Funny how the title of the link was about “overcharging” to compensate for losses from Medicare/Medicaid reimbursements. Easy fix, bring everyone under one single-pay plan so that there is no cost shifting (overcharging), instead cost control from universal budgets and price/reimbursement controls.

Nate
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Nate

Brian, Like I said it’s the same people denying the facts no matter how many times you show them. Throw in certain health care authors who constantly make up conservative mind set to berate them with and ex CA wonks now living in equally progressive NY making facts up and never offering a correction and I just don’t see how you think it’s not intentional. If someone makes the same false claim 10 times in a month and ignores your corrections doesn’t that classify as deceit? Peter, “What? Who’s cost shifting to whom.” It is widely known and accepted that… Read more »

Deron S.
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There’s only one thing that I know for certain these days. It doesn’t matter if United Healthcare or Medicare is paying the claims. We have a chronic condition crisis that dwarfs any of the issues mentioned in this discussion.
While we argue and fight and make little progress with reform, we are getting sicker. But why should we care, our healthcare problems are someone else’s fault.

Peter
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Peter

“Because like all government programs Medicare is poorly administered, highly susceptible to fraud and waste, badly designed and managed, and no one with financial responsibility to watch over spending. It has always been this way and always will.” Wow Nate, I guess the present economic melt down is from a well administered, not susceptible to fraud and waste, well designed and managed with financial responsibility private sector. Along with the previous 12 massive government bailouts of private sector fiascos. If most government programs are poorly administered it is because corporate lobbyists and anti-tax/anti-regulation Republicans design them that way. “If we… Read more »

Nate
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Nate

Take with large servings of salt commentary parreting slogans, chants and 30 second sound bites lacking any detail or explanation of how to accomplish it.
Free healthcare for all is a great idea until you try to deliver on it. For examples of this in action see Communism, Zimbabwe and Venezuela. Chavez has very similar sounding retoric on capitilism, right up till the collapse of their oil industry now they are mailing RFPs to all those evil capitalist begging for salvation.
We haven’t had a capitilist model of healthcare since Medicare was passed in the 60s.

Lymie
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Lymie

Take with large servings of salt commentary from consultants such as Collier. The capitalist model of competition and profit has no role in medicine (or education, for that matter.) It is time to revise the mental models we see here. Maggie Mae has the right attitude. Health care is a right, society benefits from a healthy populace. It needs to be divorced from employment. The problems with healtcare now are a direct result of the old models. If there was not so much money being made from treating complications and doing procedures we would have a cheaper and better health… Read more »

Nate
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Nate

Greg, Because like all government programs Medicare is poorly administered, highly susceptible to fraud and waste, badly designed and managed, and no one with financial responsibility to watch over spending. It has always been this way and always will. Years ago what is now CMS use to pay the Medicare Intermediaries on a cost plus basis. This was usually the BCBS plan in the state as they have always curried government favor. Every couple years there would be a huge deal and congressional hearing on these firms over billing. They would include all sorts of salaries and expenses not related… Read more »

Greg Park
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Why would providing Medicare to the under 65 crowd double the administrative costs?
Are administrative costs greater because of the increased population, or because of more complex accounts?
If the later is true wouldn’t you anticipate administrative costs remain the same, or by percentage go down?