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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  1. 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 compare prices for the same set of benefits, and that beneficiaries have some freedom to select their own health insurer. Currently, neither is typically true. Even where individuals can choose, as in Medicare D or Medicare Advantage or FEHBP, the benefits offered vary by insurer, making comparisons difficult if not impossible, while the number and complexity of choices can be overwhelming. (Imagine being an eighty-year-old trying to pick drug coverage from among the literally scores of different plans being offered in many urban areas!) And most working individuals can’t choose; the insurance selection is made by the employer, who wants a provider network that is acceptable to the majority of employees.
    Clearly, there are individuals who will choose more costly coverage. However, only if those who are going to be covered have freedom of choice, and have a financial stake in the cost of coverage so that “cheap” becomes attractive, will we ever see an answer to the insurers’ dilemma. (It may also require the federal government to revisit the regulations relating to provider quasi-monopolies, so that specialist groups can’t hold a fiscal gun to the insurers’ heads, but that’s another issue.)

  2. 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, but then there is always pain when a bloated industry restructures.
    You talk about mandated benefits and regulations, but countries like France and Germany have a ton of those too, and their costs are far less and their quality of care is as high as ours.
    Insurers are weak when it comes to controlling cost in America today, but not primarily because they are forced to include certain benefits. It is largely about incentives to providers and patient/consumer expectations as anyone who knows anything repeats ad nauseum.
    One example: it would not be difficult for a large health plan today to lower its rates by 10-20% across the board just by insisting on contracts with lower fee schedules and a few other restrictions. Of course, if it did so it would lose a large percentage of the providers in its network. So, maybe the network would be half the size. But the insurer wouldn’t get that far, because the uproar from providers would be taken by the media at face value and the insurer would be the bad guy for being unfair and greedy, rather than the good guy for lowering rates for identical services.
    Aside from the huge hit to public image, the plan’s members would want to leave in droves because the providers remaining in the network would be less prestigous and seen as “cheap” which is (wrongly) synonymous with low quality. And member pressure equals employer action when it comes time for renewals. Obviously, no plan is willing to take it that far, and so no plan that depends on contracted networks of independent providers is able to get the Medical cost trend below the growth rate of GDP.
    As was clear from the earlier post, that’s what I mean when I say health insurers are weak.

  3. 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 get rich off of kick backs in the solutions I suggest. If healthcare was solved and no longer an issue insurance companies, providers, interest groups would all stop paying up, DC needs healthcare to remain a crisis in order to get paid. Thats why a smart person never looks to DC for solutions

  4. “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.

  5. 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.
    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 covering employee medical expenses.
    Though CMS was evidently aware of a potential for underpayment, these projections indicate that proposed regulations may continue to underpay hospitals for treating unusually costly cases. Each 1% of underpayment represents a national shortfall of more than $1 billion.
    Medicare and Medicaid underpay physicians and hospitals by roughly $88.8 billion every year, which means privately insured patients are picking up the tab, according to a new study.
    In 1999, hospitals experienced approximately an 11.3% gap in operating margin between Medicare and commercial payers, and a 16.0% gap between Medicaid and commercial payers. By 2006, this had widened to a 32.5% gap between Medicare and commercial, and 37.8% between Medicaid and commercial, the report says.
    30%+ GAP IN INCOME! Yet certain people still question rather public insurance shifts cost to private insurance. Just about every provider will tell you if all their care was reimbursed at Medicare or Medicaid rates they would be out of business. Can any of the many providers that read this blog state the could survive on 100% public reimbursement?
    “They fail to control costs with those systems/groups.”
    This is not for lack of ability or desire, when the government passes AWP laws, limits UR, and burdens us with thousands of regulations we struggle to control cost, far different problem then not being able to do it.
    You can’t accurately compare Germany and France to the US as a whole, we are comprised of many different systems. Impeaching the quality of all systems because of he failure of a few is not an honest argument. Take Mid America private insurance, adjust for the public cost shifting then compare it to Germany or France. Medicare, Medicaid, NY, and MA are the worst healthcare systems in the world on cost and efficiency, they drag down the entire country. We don’t need to reform our entire system we need to fix the public plans and those in highly regulated liberal states.
    To claim I defend Medicare JD is Strawman abuse. You’re making up your own argument so I’ll let you argue that one out with yourself.
    To claim private insurers are weak is to not understand how our system works. You’re not weak because the federal government passes a law telling you how to do something or not do it. It’s called being regulated.
    We don’t need to cut provider payment per service we need Medicare and Medicaid to reimburse a fair rate.
    I have plenty of ways of combating rising cost, unlike Maggie, Ezra and others always telling us what we should be doing I actually do it every day for a living. I have over 100 clients I work with to control cost.
    Do away with PPOs, no favored pricing for anyone, public or private, everyone pays a doctor the same rate.
    Remind everyone what the word insurance means, teeth cleaning, birth control, and annual check ups are not unknown events thus they should not be marked up 20% and insured.
    Only allow premiums for high deductible insurance plans to be tax deducted by businesses and cap the deduction.
    Allow individuals to deduct the cost of an individual high deductible policy from their taxes like a business does.
    Have HHS and the Fed be a central clearing house for bills and payments.
    That’s just a handful of the many suggestions I have not only made but actually implemented with clients successfully.
    “I guess we’re back to the point of, “it’s not a big enough crisis yet that enough of us want any solutions.”
    Every day I implement solutions and work with small employers to solve the problem, what have you done?

  6. “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 for change. Same mindset on global warming and energy conversion/alternatives. Is this because American citizens are essentially bankrupt and captives of their borrow/spend lifestyle which gives them zero disposable income to spend on what’s really important?

  7. 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 you look at the entire population and everything people seek from the medical system, and yet they pay almost half as much.
    What I don’t understand about you (forget the Rush Limbaugh moments) is why you are defending prices for services that are roughly twice what they are in comparable nations. By saying Medicare underpays, that is what you are tacitly doing.
    Having said that, the main reason private insurers are weak on controlling costs is exactly the same reason why starting health care reform with payment changes that result in cuts to provider incomes will fail: the public’s mind has been captured by the provider lobby.
    Dr. Richard Reece at the top of the thread has been ignored here, but in some ways he represents the most powerful voice of all of us: the majority of practicing physicians and hospital management. 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.
    (By the way Nate, I accept your correction on Medicare’s marketing expenses. I shouldn’t have said that it doesn’t have any such expenses, only that these are lower than private plans on a per member basis. One could quibble on the meaning of “marketing” here, but I won’t.)

  8. “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.

  9. 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?
    “What? Who’s cost shifting to whom.”
    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. For example please read;
    “When Blue Shield of California enters negotiations with providers each year, hospitals are pretty frank about why they need to raise prices, says David S. Joyner, senior vice president for network management. One of the top reasons: Medicare and Medi-Cal, California’s Medicaid program, aren’t paying enough.”
    “Blue Shield of California and Premera Blue Cross in Mountlake Terrace, Wash., have worked with Milliman, the actuarial and consulting firm, to evaluate exactly how much more private health plans have to pay in their states because of government underpayments. In Washington, where Medicare pays about a quarter less than private insurers, hospitals in 2004 charged private payers $738 million to make up for underpayments, while physicians charged private payers $620 million to make up for shortfalls, putting the total at close to $1.4 billion, according to the Premera study. That translated to $902 per family insurance policy, or 13 percent of all commercial hospital and physician payments.
    Milliman found similar results in California, where employers and employees paid about $951 per family insurance policy to cover losses from Medicare and Medi-Cal. The cost shift rose from 3.6 percent of premiums in 2000 to 9.5 percent in 2004.”
    There are numerous other studies showing the same thing, google Medicare cost shift and you will see them. On top of this every state I am aware of charges a Premium tax that covers the uninsured and other social services. Google New York State Health Care Reform Act (HCRA), it reads;
    “HCRA is a major component of New York State’s Health Care financing laws which governs hospital reimbursement methodologies and targets funding for a multitude of health care initiatives. The law also requires that certain third-party payors and providers of health care services participate in the funding of these initiatives through the submission of authorized surcharges and assessments.”
    I could go on for pages, needless to say there is zero debate about the cost shifting from government plans, states, and other entities.
    “If most government programs are poorly administered it is because corporate lobbyists and anti-tax/anti-regulation Republicans design them that way.”
    Your political bias blinds you of the truth. Are you claiming Barney Frank and the Democrats didn’t stop housing reform? Are you claiming, contrary to Ted Kennedy himself, he didn’t right the HMO Act of 1973? Are you claiming it’s wasn’t liberals in Albany that passed HCRA?
    How many examples do I need to show you for you to admit you where wrong? Just name the number and I’ll do it.

  10. 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.

  11. “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 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.”
    Show me anywhere in the world this is happening, if it were possible in healthcare?
    “Medicare and Medicaid play vital roles in today’s system, but much of their viability depends on cost-shifting to the private sector.”
    What? Who’s cost shifting to whom. Seems private insurance is all about cost shifting overly expensive insured/uninsured/uninsurable to the government(tax-payer) which makes their bottom line much better.
    “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.”
    Public programs (single-pay) is the only way to level the playing field and provide affordability.

  12. 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.

  13. 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 system focussed on prevention.
    Adding dental care to healthcare is also a no-brainer, who ever keeps dentist out of the party is nuts.

  14. 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 to Medicare. Congress was just about the only client that hadn’t learned by this time how inefficient price plus pricing was and all the problems it lead to.
    There has been considerable consolidation in the market and sever competition so it is not nearly the problem it once was, but they have also gone to an automated pay just about anything that gets billed and we’ll try to catch it later admin model. One of the reasons their admin fees are so low is the do no claims management.
    If you where to take the private block of business and add it to Medicare you would either lose tens of billions to fraud or have to spend a billion to improve admin. The private plans are also far more complex then Medicare, Medicare has a 1960-70s plan design.
    You will find very few examples in life where the government does something cheaper then the private sector. Competition forces companies to innovate and those that don’t die, taking the capital invested with them. In government plans any failed investments are still paid for.
    If I was allowed to see a Medicare plan free of state premium tax and compliance with COBRA, HIPAA and other regulations we could do it for less them Medicare does and have far superior results.
    Roger what is the difference in a federal program between error and fraud? When a state “erroneously” enrolls someone in SCHIP instead of Medicaid and coincidently gets higher reimbursement is it accurate to consider it just an error? When for political reasons they have lax and unaudited enrollment verification aren’t they defrauding the tax payor? Administering health plans isn’t hard if you have proper procedures, if someone knowingly neglects to implement these I consider it fraud not an error. States intentionally fail to comply with the law, by doing so they get increased federal funding and spending in their State, I think most people would consider that fraud. If you read the HHS audits they constantly talk about the deficiencies in data collection and reporting making audits near impossible, you don’t accidentally not comply with the law for decades even when your reminded every two years.

  15. 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?

  16. I agree with Maggie Mahar and Roger Collier’s response to her.
    I believe that our US Health Care System is so broken that it will take the same creativity and boldness that we are applying the the environmental and energy crises to begin to fix it.
    Lot’s of pain ahead but(putting aside moral imperatives)we really have no choice economically now.
    Dr.Rick Lippin

  17. I am always baffled that there is such vitriol on the administrative side of the equation in health care spending yet it dwarfed by the medical spending. Like focusing on a few crumbs of the pie instead of the 3/4 or more.

  18. Thanks for all the comments so far. Before I lose track, here are a few responses:
    To tcoyote:
    There is shadow pricing by insurers, but a bigger factor may be provider rate demands designed to ensure that revenue targets are met. A hospital with half public program business and half private program business will demand higher rates from private insurers when Medicare and Medicaid fail to pay fully loaded costs plus a profit margin. We need to recognize that there are several players in this game.
    Your statement about insurers that “small businesses cannot afford their products,” is true, but it’s an issue far bigger than insurer product design and pricing. If insurers offered the same products and pricing to small businesses as to large groups (hmmm, community rating), most small businesses would still be unable to afford coverage. And if the product were a totally bare bones one, the effect would simply be to shift costs to employees in the form of deductibles, coinsurance, etc.
    To jd:
    I agree about both admin and medical costs. We have to have a system with lower marketing and underwriting costs and with fewer payer/coverage combinations, (lower executive compensation, too, perhaps!) and as you say: “You’ve got to address the perverse provider incentives…”
    To Richard Reece MD:
    Somehow I’m not convinced that having more doctors and paying them more is going to solve our health care system problem. However, I do agree that having public programs paying far below private insurance is a recipe for disaster.
    To Nate:
    It’s not true that “Medicaid and SCHIP have double digit fraud rates.” Error rates, maybe, fraud rates, no.
    I’d be interested in knowing what private insurer error rates are. However, I suspect that public programs will always have higher error rates becuse of the “it’s only government money” attitude.
    (I was working as a consultant to a state Medicaid agency when my client discovered that just one solo mental health practitioner had billed and been paid more than the entire agency budget for mental health services, something that would have required him to work thousand-hour days. Things have been tightened up since then, fortunately.)
    To Maggie Mahar:
    Yes! Yes! Yes!
    Whether it’s as part of Medicare reform or within a totally revamped system, we have to find ways to eliminate wasteful, ineffective, costly medical treatments, like those reported by the Dartmouth Atlas project (and many others).

  19. Is the US Constitution a siren song?
    US citizens need Healthcare that is safe, effective, patient-centered, timely, efficient and equitable.
    Its time to cut the cord that ties the employer to the employee. Workers should be able to purchase affordable health insurance independent of who they work for. Tying the needs of labor to corporate tax subsidies is wrong and fundamentally transfers wealth in the form of profits away from the healthcare system back into the pockets of those who have nothing to do with the actual delivery of care.
    The control employers have over employee health is wrong, the care system as it currently exists for working people is not patient-centric and hardly equitable because of this.
    Opening up Medicare to everyone actually makes sense and is a direction toward a national health system which can establish safety and quality standards that will cross state lines. A fair and equitable system means everyone is entitled to care thus everyone should be covered and contribute to the plan.
    Providing a penny’s worth of prevention will save hundres in cure and in the end a healthier society prevails based upobn its willing contribution and acceptance of care.
    The idea of looking for a backdoor way out of responsibility for our seniors and needy is not acceptable.Those who advocate such policy violate the basic contract with society ( are we all America’s illegitimate children?),remembering authorization for the care of our people is derived from the U.S. Constitution and this is the predicate for Medicare and a modern healthcare system.
    Maggie Mae

  20. Medicare needs structural reform– cutting waste and lifting quality– before we spend billions opening it up to everyone.
    Would we spend thousands painting a bridge we knew was structurally defective? So why throw billions into a broken healthcare system?
    As Atul Gawande pointed out in an article in the most recent New Yorker, today “Medicare costs about 1/3 more than the VA” and, on average offers poorer quality care and is more wasteful. (If the Obama administration fully funds the VA it will be as good as it was at the end of the 1990s–see the book The Best Care Anywhere,
    or my section on the VA in Money-Driven Medicine”)
    The problem with Medicare, Gawande points out, is that it “has had a hard time trying to get doctors and hospitals to improve the safety and quality of their care.” And lower-quality less safe care is more expensive–which is one reason why Medicare costs 30% more per patient than the VA.
    The structural reforms Medicare needs include financial carrots and sticks that provide incentives for providers to improve safety and quality–lower fees for treatments that are marginally effective, if at all–
    while paying more for treatments that provide the greatest benefit to the patient.
    . Medicare patients also need to be steered to higher quality, safer care with high co-pays for treatments that we know are not effective for patients fitting a certain profile, low or no co-pays for treatments that we know provide solid benefits.
    No one should worry about Medicare cutting doctor’s fees by 20% across the board next Janauary. It won’t happen. The vote in Congress last summer on a similar proposal made that clear.
    Legislators would rather stand up to the entire for-profit insurance industry and its lobby (as they did last summer) than do something that would infuriate seniors and the AARP.
    A wholesale cut of doctors’ fees would mean many fewer doctors would take Medicare patients– that would be the beginning of the end for Medicare. No Democrat wants that to happen on his watch.
    This is the problem both in Medicare and in the private sector: Overuse and indiscriminate use of over-priced, sometimes unproven advanced medical technologies is undermining the quality of care, exposing patients to unncecessary risks, and driving the health care inflation that is making care unaffordable. I’ve written about this in a two-part post on HealthBeat–
    here http://www.healthbeatblog.org/2008/10/the-truth-about.html and here http://www.healthbeatblog.org/2008/11/the-truth-about.html%20

  21. “It won’t advertise,”
    This is part of the hidden fees no one knows about. http://www.hhs.gov/budget/05budget/centersformed.html
    “The National Medicare & You Education Program: Beneficiary education is a high priority for CMS. CMS educates beneficiaries about their current benefits and future choices so they can be informed health care consumers. The FY 2005 budget provides $173.1 million (program level) to finance NMEP activities.$32.5 million for the national advertising campaign, which encourages beneficiaries to call 1-800-MEDICARE and visit http://www.medicare.gov with their Medicare questions.”
    Thats just one small program in Medicare.

  22. We keep on making the system too complex. While a competition will help. The key is not the premise but the implementation. How do you create competition? When the number of seats are controlled by congress? Because of the nature of the business that it effects life, people are more inclined to take the abuse and go and see a provider. Competition does a fair job if it were optional needs not necessity.
    For example, if you raise the price of service to unbelievably high, still people will go. So only way, however narrow scope this comment is, to reduce the cost is to increase the number of doctors and give the patients the right to understand what they are paying. Over supply of doctors could lead to small reduction in price.
    The total solution lies in looking at the entire model for healthcare from policy to quality, from ethics to pricing, from wellness to cure, from rationing to globalization.

  23. Tcoyote,
    “They need to begin excluding the high cost providers from their panels,”
    In states with Any Willing Provider Law(AWP) this is expressly illegal and in the other states legal but guaranteed to get you sued. Further Providers of Health and Medicine can be very shrewd marketers, you can kick out a bad performing provider and save 1% of premium but that doesn’t do you any good when members demand their employer change plans to one that includes that provider.
    A perfect example is what was happening in Boston;
    “Their subject, as we discussed recently, was a secret increase in the reimbursement BCBS would give to Partners, far beyond the reimbursement given to other Boston teaching hospitals.”
    What if someone decided to not accept Partner Health providers because their reimbursement was so much higher? They would have gone to another carrier or plan. American consumers don’t like having their provider choice or care dictated to them. When they THINK they need something or to be treated by someone no matter how inefficient they want it.
    “Their enrollment is shrinking for a simple reason: small businesses cannot afford their products.”
    This is an odd argument being that the reason premium cost is increasing to a point small businesses can’t afford it is small group reform. It is State and Federal regulation that has driven the cost up to the point it is. Look at CalChoice and what it did to small employer premiums in CA. Ignore the administrative cost and look at the liability of COBRA and HIPAA and some states mandatory coverage requirements. I have an ex client in Ohio with under 100 employees that has a 27 year old dependent with major medical conditions driving up their premium by 200K a year, it worked out to $2500 per employee per year from one dependent. Ohio requires fully insured carriers to cover disabled dependents forever. The state couldn’t afford to fund Medicaid so they dumped the liability on employers, since when should our businesses also be forced to act as social safety nets?
    Expansion of Medicaid and SCHIP
    It always amuses me when people advocate for their expansion and try to claim they are cheaper and more efficient, Roger did a great job bringing a number of these fallacies to light but skipped fraud and waste. Medicaid and SCHIP have double digit fraud rates.
    “The FY 2007 annual national SCHIP error rate is 14.7 percent. The FY 2007 annual component error rate for SCHIP fee-for-service is 11.0 percent. The FY 2007 annual component error rate for SCHIP managed care is 0.1 percent. The FY 2007 annual component error rate for SCHIP eligibility is 11.0 percent. HHS also calculated a national case error rate. The active case error rate for SCHIP is 11.5 percent and the negative case error rate is 1.6 percent. “
    “Additionally, OIG is concerned that the error rates for certain provider types may be understated. Specifically, through the review of additional medical records and interviews with beneficiaries and providers, an OIG audit of the CERT DMEPOS error rate determination for FY 2006 found a 28.9-percent error rate in the CERT DMEPOS sample.”
    That’s right 28.9 error rates!
    “For example, OIG determined that 47 percent of the Part B mental health services allowed by Medicare in 2003 did not meet program requirements, resulting in a projected $718 million in improper payments. Miscoded and undocumented services accounted for the greatest number of payment errors, and violations of the “incident to” rule resulted in an estimated $72 million in improper payments.”
    “In 2007, OIG found that 31 percent of DMEPOS suppliers in three South Florida counties did not maintain physical facilities or were not open and staffed, contrary to Medicare requirements. Similarly, in 2008, OIG inspected 905 suppliers in Los Angeles County and found that 13 percent did not have physical facilities or were not open during repeated unannounced site visits. “
    “OIG also found that CMS has had limited success controlling aberrant billing by infusion clinics. In the second half of 2006, the claims originating in three South Florida counties accounted for 79 percent of the amount submitted to Medicare nationally for drug claims involving HIV/AIDS patients and constituted 37 percent of the total amount Medicare paid for services for beneficiaries with HIV/AIDS. However, only 10 percent of Medicare beneficiaries with HIV/AIDS lived in these three counties.”
    “For example, in a 2006 report, OIG found that Medicare allowed, on average, $7,215 for the rental of an oxygen concentrator that costs about $600 to purchase new. Additionally, beneficiaries incurred $1,443 in coinsurance charges. “
    “For example, in March 2008, the Medicare payment amount for irinotecan was more than double the OIG calculated average manufacturer sales price, primarily because Medicare’s reimbursement calculation did not yet take into account sales of a newly approved, lower priced generic irinotecan. OIG estimates that had the Medicare payment amount for irinotecan been based on the average manufacturer sales price, Medicare expenditures for this drug would have been reduced by $6.5 million in that month alone. Because of the two-quarter lag in the ASP system, the Medicare payment amount will not reflect any sales of lower priced irinotecan until the third quarter of 2008. “
    “To promote access to hospital care for patients with substantial medical needs, CMS makes additional payments called outlier payments. OIG found that a major hospital chain took advantage of the Medicare outlier payment system by billing for and receiving hundreds of millions of dollars in outlier payments by merely increasing its charges for services. In 2006, the hospital chain agreed to pay the Government more than $900 million to settle allegations concerning the improper outlier payments and allegations that it paid illegal kickbacks to doctors for patient referrals and used improper billing codes to receive inflated payments. “
    “For the 6-month period ending June 30, 2006, approximately $363 million (Federal share) in Medicaid payments and $67.2 million (Federal share) in SCHIP payments were made on behalf of beneficiaries who did not meet Federal and State eligibility requirements in these three States.”
    Medicare, Medicaid, and SCHIP are so inefficient and rote with fraud they are not even options for reform. No honest discussion on improving the quality and efficiency of our healthcare system would advocate expanding three of the most inefficient and abused programs in the country.

  24. In their frenzy for public programs to expand cover to all, wonk enthusiasts removed from reality conveniently forget the key to making expansion work: physicians. Coverage without physician access is meaningless. And the only federal progam doctors hate more than Medicare is Medicaid. Both are bureaucratic landmines, and both pay considerally less than private coverage. If Congress goes through with it 21% Medicare paycut, AMA surveys indicate about 30% of doctors will close their practices to new Medicare patients, as many already have to Medicaid patients. Furthermore, Medicaid carries the stigma of being strictly for welfare pateints. Perhaps it ought to change its name. In any event, Medicare and Medicaid are on collision course with the physician shortage, which grows worse each passing day.

  25. About admin costs for Medicare vs. private insurers: The cost of processing a claim is essentially identical (after all, it is private insurers who are processing Medicare claims!). The difference comes in the other stuff private insurers do more of: network development, provider-specific negotiations, disease management, advertising, commissions, utilization management (pre-authorization systems, etc.), quality improvement efforts (esp. NCQA accreditation), and so on. Also, certainly, the fact that Medicare has a higher medical cost per claim makes a big difference, as it does for private plans in Medicare Advantage (private plans admin for Medicare Advantage is in the range of 6-9%). Finally, salaries are a bit higher.
    Some of what private plans do lowers the cost of care a little, as Roger points out with HMOs in Medicare Advantage, but tcoyote is also right that by and large private insurers simply aim to peg their prices to Medicare (with varying degrees of success) and after about 1998 have been pretty weak on cost control measures. But as far as administrative costs go, we can be confident that if Medicare is expanded its admin costs will go up to approach but not equal that of private plans. It won’t advertise, salaries of upper management will be lower, there will be no commissions (though perhaps we could remove these in the private marketplace), and there will be less utilization management (that certainly isn’t an unmitigated good).
    Of course, the far bigger problem is medical costs, not admin costs. As bloated as admin costs can be, on both the payer and the provider sides, they are still combined less than 30% of our problem. You’ve got to address the perverse provider incentives head on sooner or later.

  26. If private health plans were willing to do more than merely hide behind Medicare’s skirts, shadow pricing Medicare hospital and physician payments, perhaps their offerings would be more affordable and their enrollment would cease falling. These companies are simply passing through last year’s cost increases in this year’s premium quotes, and that isn’t getting the job done. They need to begin excluding the high cost providers from their panels, and exploiting opportunities to reduce ambulatory care expenses. Their enrollment is shrinking for a simple reason:
    small businesses cannot afford their products. If we take reducing the number of uninsured seriously, we’d stop anguishing over which sector should dominate, and simply look for who provides the best value for the limited dollars available to subsidize coverage expansion. Both sectors will play a role in coverage expansion.