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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12 replies »

  1. Limo Divers Protest Medicare Mediciad Reform Cuts, It’s rumored this issue could become part of the Tea Party movement. AmeriChoice Health is also rumored to take a position on this reform. Recirculate those tax dollars? Help keep limo drivers working, benefits flowing and overpaid tax dollars remain in abuse. as well as other Federal agency’s encourage you to report any fraudulent activities, yet, the same government agencys were notified the way this company does business yet did nothing. Three years ago they were reported to these Federal agency’s and as of todays date not only were they allowed to continue doing business but were never charged once. Protected vendor status sure, politics sure,limited government budgets sure, Federal and State officals looking the other way sure, and rather then stop these activities a strong desire not to rock the boat existed. Even with the vast changes in the laws and budgets,a hands off policy remains, you tell me what’s wrong with this picture? The Government created this monster and now they don’t know what to do about it, like shooting yourself in your own foot etc. Tons of money to advance their national growth, its market positions, tons of money for political donations, tons of money to send 75 millon back to its home office from New York state alone, tons of money to suppot National TV shows, tons of money to pay hugh State fines, tons of money to hire the very best law firms, tons of money to pay for bribes and kickbacks, tons of money for hugh salarys and bonuses, all done on the back of the American taxpayor, you see this company receives all its money from the Federal government. Should your tax dollars be held to a higher standard? Should the government agencys responsible for there review be held to that same standard?Should the IRS audit their corruption? Why has this company not been charged? How long can the buck be passed here in more ways then one? Hey, it’s your tax dollars don’t complain now.. then don’t complain later on…
    ps… I know times are tough for a lot us, but it would be great to have a free limo to go to the Doctors, Pharmacy, Movies, Grocery shopping, and given free tickets for the movies. Offered soda, pop corn and hotdogs, as well as have them receive free coupons for Grocery items……Kind of makes you wish you also had Medicare and Mediciad right?

  2. 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).
    Um no, that’s not what then Speaker Newt Gingrich actually said. Courtesy of CNN “Labor Goes Too Far In A Medicare Ad”:
    Here’s the full quote: “What do you think the health care financing administration is?” Gingrich asked. “It’s a centralized command bureaucracy. It’s everything we’re telling Boris Yeltsin to get rid of. Now we don’t get rid of it in round one because we don’t think that’s politically smart and we don’t think that’s the right way to go through a transition. But we believe it’s going to wither on the vine because we think people are going to voluntarily leave it. Voluntarily.”
    Even CNN acknowledged that Newt Gingrich never said that Medicare would “wither on the vine,” he was clearly talking about the health care financing administration. This lie was exposed and debunked more than a decade ago so I guess we’re about due for someone to think they can get away with spreading it again.

  3. I don’t understand the fear of government intervention in healthcare. This is a moral issue that is being lost in politics. We have a freely elected government. We’ve got what we voted for..

  4. There are a lot of inaccuracies regarding Medicare Advantage plans. For example, President Obama claims government subsidies given to private insurance companies for offering Medicare Advantage plans only pad their profits and fail to improve the health of seniors. But insurers offering Medicare Advantage plans use a large portion of the government subsidies to provide added benefits, like vision, dental and prescription drug coverages not offered by traditional Medicare. These added benefits are one reason why these plans are popular with seniors. Medicare Advantage also ensures that seniors in rural and other areas have access to Medicare coverage since many doctors refuse to accept Medicare. According to, which has a search tool to find Medicare plans by zip code, enrollment in Medicare Advantage plans continues to grow significantly each year because seniors prefer the comprehensive coverage and preventative care benefits they provide.

  5. Your comment that “market pressures on providers …are lacking under fee for service payment” is incorrect. Your statement that they are “sorely lacking” is tendentious. Medicare pays less than cost for nearly every service it covers, and Medicaid pays only a small fraction of cost. That means that either someone other than Medicare/Medicaid pays providers part of the cost for services provided to Medicare patients, or they are provided for under cost. Both of these circumstances obtain, since any extra money paid by non-government (“commercial”) insurance is used to make up for shortfalls caused by care to Medicare and Medicaid patients (“cost-shifting”), but that money is very often insufficient, and many providers operate at a loss. Both government programs appear to their patients to be paying for their care, because they get their care, and it’s illegal for the providers to bill them more than what Medicare/Medicaid have declared to be the “allowable” price. That price is nearly always below cost. The patients don’t know that. That’s why Pres. Obama can say that Medicare seems to Americans to be working pretty well. Americans usually don’t know that Medicare is being propped up by private insurers and by providers. The public option, if price controls are used, would remove the ability of private insurers and providers to prop up Medicare and Medicaid. All would fall down hard, and patients would learn fast how market forces are working. That is, they are working in the distorted channels created by our distorted and tenuous system, which is quickly heading for bankruptcy.

  6. While we dole out more benefits so we can all be equally medicated, other countries don’t. It’s an international marketplace, and we’re creating costs on American businesses which our competitors don’t have.
    In the end, if we achieve “equal” medical care for all, will we be competitive? If we are not competitive, we’ll lose our place as the world financial leader. What are the overall effects of losing that status? What if we are the 3rd largest GDP instead of the largest GDP by a factor of 2? Will your standard of living go down? Our military dominance will likely drop too – after all, the competition will have 4 times as many people as we do, and wealth far exceeding ours. What if they decide to invade us? Will you be happy that at least all people in your country have access to medical care? Even though your freedom is restricted? Is everyone being “middle class” better than having the opportunity to make something great? Does motivation cede when opportunity is removed?
    What makes America great is that we have the freedom to fail or succeed. Or, at least we used to. Today, if you fail, the gov’t bails you out – whether it is economic stupidity, homelessness, health care, or taking a bad mortgage. Unfortunately, as we take away the right to fail, we inadvertently take away the right to succeed – because those who are successful are forced to take care of those that fail. This is the American downward spiral of failure.
    Anyway, I know you’re talking about health reform. You’re not adequately considering the long term ramifications of any health reform. The question at hand should not be how we reform, it should be how we eliminate health care from the govt’s responsibility so that our great nation can be a great nation even 200 years from now. It is this mentality of dependency which is killing America.

  7. Its really nice to hear about such type of Health Reform .Because in this type of Health reform important health issues are discussed.

  8. “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.”
    Democrats where all onboard when Ted Kennedy did the exact same thing with the HMO Act of 1973. The right just returned the favor.
    “Some private plans do little to contain costs: so-called “private fee for service” plans offer no provider networks”
    Um that is what FFS stands for in this case, it was the intent they not have limiting networks. The comment they do little to control cost is dishonest, you can’t find one program that doesn’t offer disease management and other patient services not available in Medicare. Every FFS plan is a step up from traditional Medicare.
    Frakts study is junk, quoting it without also disclosing how he determined his .14 of “value” is misleading. Carriers are not pocketing anything close to .86 in profit for the extra dollar spent. Why not just quote the actual profit the carriers make, it is readily available and far more honest of a debate then quoting a survey study. When you consider they deliver Medicare benefits for .98 to .97 of FFS their additional profit out of the supplemental payments are minimial compred to the extra benefits delivered.