Health Reform and Medicare: Part I

Here’s a pop quiz on health reform: Which prominent Republican said the following:

And if you don’t [oppose this health care legislation] and if I don’t do it, one of these days you and I are going to spend our sunset years telling our children, and our children’s children, what it once was like in America when men were free.

Johnson Signing Medicare

OK, it’s a trick question: the answer is Ronald Reagan, paid spokesman for the American Medical Association’s Women’s Auxiliary, speaking in 1961 against the bill that ultimately emerged as Medicare. (A recording of his “coffee klatch” talk, “Ronald Reagan Speaks Out Against Socialized Medicine,” is here.

Although what political scientist Jonathan Oberlander has termed “a politics of consensus” lasted for some thirty years after Medicare’s enactment, bipartisanship broke down in 1995 when Newt Gingrich targeted Medicare for cuts of 30% and urged privatization using managed care. By the lights of conservative Republicans, severe cuts in traditional Medicare would encourage flight to managed care alternatives, so that, in the famous phrase of Newt Gingrich, Medicare would “wither on the vine.” (1 St. Louis U.J. Health L. & Pol’y 5-43 (2007), Abstract). Although President Clinton used the Republicans’ Medicare reform to his own benefit (polls showed that his defense of Medicare helped him secure re-election), ultimately much of the Republicans’ agenda for reform was adopted in 2003. Since then Republicans have not relented in their criticism of the program– with some in leadership positions even questioning the government’s role in health care for seniors. (See Rachel Maddow’s cable television show featuring a parade of video clips of Republicans bashing Medicare, including former Speaker DeLay –echoed by Representative Roy Blunt–asserting that “Medicare shouldn’t be a government program”).

Last week Republicans on the Senate Finance Committee opposing health reform switched gears and adopted a much more enthusiastic view of Medicare. After long decrying the program’s faults and fiscal problems, they were now soberly warning that any cuts in the program will hurt Medicare beneficiaries. A related tack has been to characterize the plan as a straightforward transfer from seniors to the uninsured. As Senator Kyle recently put it, “Seniors should not foot the bill for the uninsured. Medicare should not be the piggy bank for new non-Medicare spending, a new entitlement.”

To be sure, there is no small irony in the Republicans’ new-found enthusiasm for Medicare. However politically astute exposing this hypocrisy may be, Democrats still find themselves on the horns of a serious policy dilemma. Their problem is the result of the ingenious design of the Medicare Advantage program. Adopted with virtually no Democratic support in 2003, the Medicare Modernization Act of 2003 (MMA) took a variety of steps designed to encourage migration to private HMOs and PPOs (Medicare Advantage plans). Although deploying a heavy dose of government subsidies and creating a deeply flawed competitive bidding system, the MMA succeeded in encouraging large numbers of seniors to join Medicare Advantage plans.

Elsewhere, I’ve analogized the design of the MMA to “nation building”: an ambitious attempt to create markets and competition where little existed before, but funded by enormous public subsidies. Viewed less charitably, the new laws seem more like an insurgency. Incentives contained in the Medicare Modernization Act are geared to undermine traditional Medicare: large subsidies are given to private payers that in turn produce extra service benefits, a structure designed to lure seniors into private plans, while doing little to improve traditional Medicare.

For today’s reformers, there is both opportunity and risk. Medicare pays far more to private plans than it would pay if they stayed in traditional Medicare. (The Commonwealth fund estimates that these extra payments will amount to $11.9 billion, or $1,100 per enrollee, in 2009). Some private plans do little to contain costs: so-called “private fee for service” plans offer no provider networks and simply funnel higher payments to intermediaries. But other plans, primarily HMOs, do provide care at lower costs than traditional fee for service plans. Such plans introduce market pressures on providers that are sorely lacking under fee for service payment. Importantly, under the MMA one must return a large part of that differential to beneficiaries in the form of additional services (such as vision or hearing) or reduced cost sharing or reduced premiums.

So what is the net of cost control incentives, subsidies to private plans, and enhanced benefits? Economist Austin Frakt’s study of extra payments to Medicare Advantage plans suggests that on balance they have not produced net benefits:

[F]or each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries …What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.

But undermining all Medicare Advantage programs is bad policy and bad politics.

Health reformers hoping to capture some $400-500 billion in savings by eliminating subsidies to Medicare Advantage plans face a difficult political dilemma. Over 22% of Medicare beneficiaries are enrolled in a Medicare Advantage plan and are happily receiving “extra” benefits from them. While cutting subsidies will eliminate large amounts of wasteful spending that can be used to finance expanding insurance to all, some reductions in benefits will occur and in the future private plans may offer fewer additional benefits. Adding another horn to the dilemma is the fact that many Medicare HMOs are delivering cost-effective alternatives in their markets and helping to encourage changes in medical practice. Senator Nelson of Florida has sought to “grandfather” (i.e. protect) HMOs that deliver care below the cost of fee for service providers in their markets. Yet even here, this sensible exception has run into political headwinds. Pitting equity against efficiency, members of the Senate Finance Committee were eager to point out that the grandfather clause would be applied primarily in regions with the highest costs.

Reformers will need a fine scalpel and steady hand in order to perform surgery on Medicare Advantage.

In my next post I will discuss some other–and arguably more important in the long run– reforms to Medicare: those seeking to move away from fee for service payment and to nudge providers to adopt new forms of delivering care.

Professor Greaney’s is a nationally recognized expert on health care law and the Chester A. Myers Professor of Law and the Director, Center for Health Law Studies, St. Louis University School of Law.  Thomas Greaney has spent the last two decades examining the evolution of the health care industry. He is also a frequent contributor at Health Reform Watch where this post first appeared.  His testimony to the Senate on “Competition in the Health Care Marketplace” may be found here.

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