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