OP-ED

Medicare Musings

I have been thinking about the connection between healthcare cost growth and the budget crisis. Many pundits have pointed out that rising Medicare costs are one of the biggest contributors to our budget mess. Republicans want deep cuts in future Medicare spending while Democrats are sensitive to constituents who demand the Congress keeps its hands off “their Medicare.” Current Medicare spending growth trends are unsustainable – at some point the math will trump the politics.

There are several options for putting Medicare on a much lower cost trajectory. Here is what I have come up with:

1) Do nothing but pray. Projections of future spending growth are mostly guesswork. Maybe the guesses are wrong. Consider that technological change has been a major driver of cost growth. (It is interesting to ask why medical technology nearly always seems to cause spending to increase, but I will save that for another blog.) Perhaps medical science has reached the bottom of the well and that output of costly new technologies will slow to a trickle. Of course, this will also mean that a century of advances in medical care will come to an end. I don’t know if we will really be better off; we will spend less on medical care than we projected, but we will also receive fewer benefits than we projected. Besides, the head-in-the-sand approach to cost cutting hasn’t worked yet. (Note to readers. Please do not comment that we can save the system through prevention. The Committee on the Cost of Medical Care already made the same point – in 1932.)

2) Slash provider fees. The Affordable Care Act already calls for large reductions in provider fees. Dare we slash them again? At some point the best and brightest young Americans will decide that investing eight or more years after college getting a medical degree and doing a residency just isn’t worth it. Let’s not go there. I don’t expect Congress to cut doctor fees any deeper (and I would not be surprised if Congress reneges on the planned cuts.) Congress could go after other providers. Medicare has already announced big reductions in payments to nursing homes. Can outpatient providers like DaVita be next?

3) Raise the age for Medicare eligibility. This is the surest and easiest way to “fix” Medicare. Again, the politics are strange. Proposals to raise the eligibility age to 67 in the year 2030 are met with howls of protest by today’s beneficiaries. They must think that if Congress can change Medicare in the future, they might also change Medicare today. Note to seniors: “do nothing but pray” is not an option. We ought to acknowledge, however, that raising the eligibility age does nothing to lower overall healthcare spending, but merely shifts the burden to the private sector. On the other hand, it might encourage productive older workers to remain in the work force, thereby raising GDP. (Second note to readers: The economy is not a zero sum game. Retiring older workers do not necessarily create jobs for younger workers.)

4) Raise taxes. If we raise taxes to cover the projected shortfall, we may eventually find ourselves in a position where the taxes we collect per worker to finance Medicare will approximate what other nations collect to finance their entire health care systems! Besides, raising taxes for Medicare leaves less room to raise taxes to cope with the rest of our debts. The Affordable Care Act already did this, which may be one reason why moderate Republicans have refused to discuss further tax increases.

5) Change the way medical care is delivered to Medicare patients. Medicare is the last open ended fee-for-service medical system in the developed world. Every health economist that I know, and that includes several of the economists who advised the President on health care reform, wants to do away with fee-for-service incentives. Perhaps we will. Medicare Managed Care is still strong, although the ACA may change that. The ACA creates new Accountable Care Organizations (but does so in a way that some believe is overbearing). Congressman Ryan proposes that seniors to choose their own private sector managed care plan and bear financial responsibility for making expensive choices. The belief that these proposals will cut costs is, admittedly, a leap of faith. But the CBO cannot put a score on a leap of faith. Proposals like this will not change projected deficits until they are well underway. Congress needs to act now.

Looking over these options, my plan is to work well into my seventies and take advantage of Northwestern’s generous health benefits. As for everyone else, I expect to see more selective fee reductions and similar band-aids. But if we want fundamental reform, we should do more. Neither one of my two ideas is original. And only one is pragmatic:

1) It seems that bailing out the federal government has a higher priority than lowering health care spending in the private sector. The recently appointed twelve member Congressional Panel of Elders should include an increase in the age of Medicare eligibility. It is the least speculative of all these options.

2) Have faith in economic incentives. Get rid of fee-for-service Medicare once and for all and make Medicare beneficiaries who want to cling to “their Medicare” pay for their profligacy. I think this is the best long run answer to our cost crisis. But I wonder which will happen first: true Medicare reform or the Cubs winning a World Series?

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He shares his insights on the the health care industry at Code Red.

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Anthony
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David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He shares his insights on the the health care industry at Code Red.

jabbarbs
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David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He shares his insights on the the health care industry at Code Red.
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jabbarbs
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David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He shares his insights on the the health care industry at Code Red.

rony
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I have been thinking about the connection between healthcare cost growth and the budget crisis. Many pundits have pointed out that rising Medicare costs are one of the biggest contributors to our budget mess. Republicans want deep cuts in future Medicare spending while Democrats are sensitive to constituents who demand the Congress keeps its hands off “their Medicare.” Current Medicare spending growth trends are unsustainable – at some point the math will trump the politics.
earn money

rony biswas
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its really nice idea i think it would be helpful four all thank you for sharing us.

nila01324
Guest

Hey admin,
its really nice idea i think it would be helpful four all thank you for sharing us.

alex d
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alex d

Medicare Solutions can help you find the best medicare drug plans to fit your life and budget. With a list of providers, health plans listed by state and commonly asked questions, Medicare Solutions is the leader for assistance with medicare supplement.

Jack
Guest

After reading your article, I had deep emotion and helpful solution about this field as well.

nate ogden
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nate ogden

lipitor and nexium cost 10 times as much as any cancer drug. Its the common rx that are slight virations to off patent drugs that drive spending. I wouldn’t pay 100,000 for a cancer drug that extends life 4 months but that is not the biggest problem. Just the most salacious for headlines.

Bob Hertz
Guest

I agree that real competition in drugs would make most of Part D unnecessary. Some drugs have no effective substitutes (i.e. many cancer drugs),, and big pharma follows what I consider to be the repulsive business model of price gouging when you have the chance. Although my personal preference would be to have the FDA declare a maximum price on all drugs, i.e. about 10 times the real cost of production, (which is about what Canada, France, Japan and Germany do). But that may be politically impossible. So I would go along with Nate and accept a Part D that… Read more »

nate ogden
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nate ogden

The average doctor and the average person should never have anything to do with Medicare.

What we need is the plan Liberals sold us in 1965 before they hoodwinked us and passed the unsustainable montrosety we have today.

bob hertz
Guest

Nate has a point. If Medicare had a deductible of $3000, then Part B would virtually disappear. Very few things done in a doctor’s office come anywhere near $3000 on the Medicare fee schedule. This would greatly limit the popularity of diagnostic tests on healthy older individuals, which do save a very few lives but at spectacular overall cost. It would be better for if the average doctor had no dealings with Medicare at all. (Note: I woild suggest that some form of Part D for drug coverage remain in place with a low deductible.) Kevin Williamson’s articles on taxation… Read more »

nate ogden
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nate ogden

in regards to part D what conditions do we need it to cover? Can’t 80%+ of all conditions be treated with a $4 generic in which case we don’t need Part D at all. it might not be the latest and greatest drug and they might need to take 2 pills per day instead of the $300 a month patented combination but we don’t have the money to make ease the priority. If any form of part D continues it should only cover therapies without off patent treatments. If the pharma companies want to continue to market their similar medical… Read more »

nate ogden
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nate ogden

We need to apologise to future generations for screewing them with our grandparents greed then start undoing the damage. That me dismanteling the programs that created the problem. Medicare should be turned into an HSA for everyone under 60 as of today. The deductible should increase for every 5 year age bracket to a point where for those in their 40s today medicare is only a catostrophic plan. Those in their 40s have plenty of time and earning potential to start saving. I would make Medicare prime for everyone that hits 65. This will help make them more attractive employees… Read more »

bob hertz
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If we do nothing about Medicare, then by 2020 the following will be true: a. The number of people in the program will grow from the current 45 millon to about 65 million, based on pure demographics; b. The cost of Medicare per person will grow from the current $11,500 to about $20,000, based on historical growth of 5 to 7 per cent a year. The total expense of Medicare would thus grow from the current $500 billion a year to about $1.3 trillion. That is an increase of $800 billion, or about 10% on every dollar of income in… Read more »

Darrel Anderson
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Darrel Anderson

Why are we lied to? Example you can elect to change plans once each year without regard to health concerns. Well that may be true for Medicare subsidised plans but you cannot with medicare supplement plans.
They set that up so politions could lie with a straight face.