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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  1. 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.

  2. 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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  3. 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.

  4. 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.
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  5. 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.

  6. 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.

  7. 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 covered expensive drugs only.

    The cost might not be too bad. I used to think that cancer and heart drugs were driving the country bankrupt, but they really aren’t. I may have this wrong, but even with rampant price gouging the total expenditure on cancer drugs is less than $1 billion a year.

    Once again in health care, the juiciest story may not be best way to derive policy.

    Incidentally, I also read about drugs which are off patent but still have no competition. Sometimes the price is raised from $20 a month to $200 a month just for maximum profit. I do not know how common this is.

  8. 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 outcome one offs they can subsidize them or convience the seniors why its worth forking over their disposable income instead of spending the working tax payor.

  9. 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.

  10. 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 in the National Review are a good backup for this approach to limiting the growth of Medicare.

  11. 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 and allow them to work longer. Their employer can contribute to their escalating HSA deductible.

    We will still have 10 trillion of stuidity to pay out thanks to the people that designed the original Medicare but we can’t change that. We can make sure we don’t continue the failed concept though.

  12. 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 the country, including rents, dividends, pensions, capital gains, etc.

    Theoretically we could just bite the bullet and insteall a value-added/sales tax to raise the money.

    Or we can go after the two cost drivers —

    a. the number of people turning 65;

    b. the cost per person of everyone in the program.

    Raising the eligibility age would have to be a lot more drastic than just going to age-67-by 2030 to have a major impact.

    Lowering the cost per person would require major fee-slashing in hospitals, which is where most of Medicare spending takes place
    (i.e.per diem charges, doctors practicing in the hospitals, rehab facilities after a hospital stay, plus DSH payments to hosptials which are smuggled into Medicare to help the uninsured.)

    It is humanly possible to pay hospitals the same amount of money each year for patient care. Thus far the Medicare bureaucracy has never had the aggressiveness or the Congressional backing to do this.

    Letting the cost of Medicare grow to $1.3 trillion and then raising taxes is the classic “defined benefit” approach. Unfortunately, the government is already stretched by defined benefit demands from public employees.

    The alternative is a “defined contribution” approach — here is the money, and this is all the money there is…now spend it wisely.

    We may wind up with the Paul Ryan program.. In terms of intellectual integrity, anyone who opposes Ryan should be offering their own version of defined contribution — and ACO’s alone is not enough.

    Bob Hertz – The Health Care Crusade

  13. 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.

  14. “intelectual deficency” (Dude, that is SO rich, and Irony-Free)

    “consiquences”

    “truw”

    “then we do”

    “pregress”
    ___

    Wow. What can I say?

  15. I think to be liberal one must suffer an intelectual deficency which prevents you from seeing the consiquences of actions. This is a great example.

    “Every other industrialized nation on the planet has demonstrated that a system of national healthcare achieves these goals”

    No country on the planet has found a sustainable solution. They have found ways to pay for it today by borrowing heavily from the future but all those systems are sure to fail as the debt can’t be sustained. Implementing a solution that is known to fail isn’t a solution.

    “achieves these goals without drawing age or any other lines.”

    Again not truw at all. No other nation spends nearly as much as we do on end of life. They focus more resources on the young then we do. They draw a very clear line.

    Who are these profiteers you ramble on about, 70% of health insurance is delivered through government, non profit or self funded. Let go of the Boogey man and maybe we could make some pregress.

    Sometimes Peace comes from war

  16. OK. That is excellent.

    A favorite quote of mine comes from financial writer Yves Smith (NakedCapitalism.com). It’s about the financial markets specifically, but I find it relevant to your point.

    “[O]pacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.”

    Rewind: “After all, efficient markets produce minimal profits.”

  17. Nate Ogden:

    One can never hope to solve a problem that cannot be clearly and honestly articulated. When attempting to solve the equation 4 + x = 5, whining that donkeys always want to solve for x and it would be better to solve for y like the elephants suggest IS NOT A SOLUTION. The knee-jerk obssession of many Americans to reduce real and serious problems to donkey/elephant arguments renders their opinions worthless.

    The goals of a healthcare system in a modern country should be universal access with maximum effectiveness at the lowest possible cost. This is not a wheel that needs to be reinvented. Every other industrialized nation on the planet has demonstrated that a system of national healthcare achieves these goals without drawing age or any other lines.

    We in this country, however, insist on creating absurdly complex and expensive systems to enable and protect rampant profiteering while maintaing the illusion of popular benefit. This is exactly the approach we are taking with our laughably bloated and curiously inept defense/security system. The burdens of the systems designed to save us are killing us.

    To be clear–any discussion of Medicare “reform” must begin with an absolute acknowledgement of which interests are to be served–those of the profiteers or those of the population. They are not the same. Dr. Davore seems to have weighed in with his “I’ve got mine and the rest of you healthcare hogs can pay for your ‘profligacy’.” As if that’s even possible. Coming from someone as distinguished and influential as he appears to be, I am not optimistic.

    PS. “…No Peace?…minor conflicts…” WTF? Try looking up the word PEACE in the dictionary.

  18. Brilliant ideas from the author_

    For the past two decades, it seems that the less they pay the doctors, the greater is the inflation in overall Medicare expenditures.

    What I find interesting is that they will take money from the doctors (an inflationary force) and purchase meaningfully unproven, productivity decreasing, and unusable HIT devices in the form of CPOE and EMRs.

    This too will be inflationary.

  19. “Since the American taxpayers have graciously accepted responsibility for ever- increasing military industrial profits, the nation has not known a moment’s peace.”

    Really? No peace? How many world wars have we had since we accepted responsibility for the military industrial complex? Would you rather we have full blown World Wars every 30 years then this hell of minor conflicts you think are so terrible?

    “What, exactly, is the reason for having seperate systems for accessing “healthcare” for those younger than 65 and those older than 65? Luckily, the answer to that question is simple.”

    Simple yet you still blow it. Ya I know actually picking up a book and learning history isn’t as easy as it sounds so I will help you out. The Democrats wanted universal compulsary national insurance since the early 1900s, they knew they couldn’t pass it so they started an incrimental plan to achieve the end goal. We know this, well because they said so, many times, in writing, in public, on tape. Like you said simple.

  20. Steve how does the unfunded Part D compare to the underfunded Part A and B?

    Why is 40 trillion of underfunded A and B accpetable but a few hundred billion of unfunded Part D is the end of the world?

  21. The question we all should be asking is, “Why does Medicare exist at all?” What, exactly, is the reason for having seperate systems for accessing “healthcare” for those younger than 65 and those older than 65? Luckily, the answer to that question is simple.

    The grossly complex and contorted “system” for accessing “healthcare” in America exists for only one purpose–to support the business models of the capitalist peddlers that profit mightily from it. Younger Americans are sold “health insurance” which, for most, are dollars wasted creating nothing more than insurance industry profits. When needs can no longer be deferred (pent up demand), the costs are shifted to the government, the only player with enough money to support the bloated medical treatment industry.

    While it has become common to include Medicare with Social Security under the label of “entitlements,” it is more accurate to consider it alongside the military industrial complex, another bloated, wasteful industry that relies on the government for its existence. Since the American taxpayers have graciously accepted responsibility for ever- increasing military industrial profits, the nation has not known a moment’s peace. And since they have accepted responsibility for ever-increasing medical industrial profits, it has not known a moment’s health. (47th longest life expectancy, among other things)

    The above observations should be intuitively obvious to the most casual observer. What should be further obvious is that, despite all the ranting, Medicare is not going anywhere, especially with the baby boomers (comprising one quarter of the population) chomping at the bit to pour their government-provided dollars into the medical industrial machine. Without that cash, the machine would wither and die, especially considering the dire employment prospects for the under-65 group which will increasingly restrict its contribution to machine profitability. It’s hard enough to get blood from a turnip and turnips just keep gettin’ harder to find.

    As an aside: It is interesting that one of the arguments against a Canadian-style national healthcare system is that there are wait times for certain elective procedures. The solution? Wait times for Medicare. Things just keep getting curiouser and curiouser.

  22. I mostly agree with John. To propose increasing the age of Medicare eligibility seems to be deeply misguided. This is not a time to be taking large scale austerity measures that increase out of pocket expenses in the short term without increasing income. You don’t have to be a Keynesian to appreciate that.

    Also, life expectancy is increasing for the relatively wealthy but not for those below the median in income. This would be a cruel twist indeed to deprive lower income people disproportionately of Medicare benefits.

    On top of that, politically this is a deeply unpopular idea. the party that gets behind it is asking to lose big. I don’t see why Dr. Dranove sees this as the more practical option.

    I agree completely with John and Maggie that the current legislation does more than it gets credit for to control costs. That was always the knock on it, and yet now Republicans are fighting furiously against some provisions of the law that control costs, precisely because they know that will be the outcome if they don’t (IPAB).

    Finally, both of Dr. Dranove’s proposed solutions, and any solution that lowers costs, have the clear implication the providers will be paid less (relative to GDP, not in nominal terms). This can either be done by reducing benefits and the amount of care purchased (his option 1) or by some combination of less unnecessary care, better care coordination and lower unit costs of care (option 2). Either way, providers get paid less in the end, so providers need to stop pretending that they can avoid this somehow. Option 1 is far less appealing than option 2, but option 2 is the intent of the ACA and other federal laws and is a focus of CMS. Maybe it can be done better, but it’s weird to write as though there aren’t major initiatives devoted to this approach. The laws incentivizing ACOs, for example, are all about creating incentives in the marketplace for a better kind of care delivery system that gets a better bang for the buck. Again, maybe the approach isn’t quite right, but something like this will be.

  23. ” While the GOP SAYS it wants to cut Medicare, it passed the largest unfunded spending bill in our history, Medicare Part D, expanding Medicare”

    The deranged Neo-Republican party we are seeing today bears little resemblance to the Republican party that passed the part D bill, and no resemblance at all to the Republican party whose Commander in Chief was calling for a kinder and gentler nation.

  24. ,a Republican Congress and president passed what you rightly describe as the “largest unfunded spending bill in our history,’ Medicare Part D,’ expanded Medicare,” without finding any money to pay for that expansion.

    This has added a large, unfunded burden to Medicare.

    You are right: we need to look at the facts–i.e. the numbers– not the stories (often misinformation — opinions without evidence.)

    .

  25. “Republicans want deep cuts in future Medicare spending while Democrats are sensitive to constituents who demand the Congress keeps its hands off “their Medicare.”

    I believe it was Tea Party members carrying the signs about keeping government out of Medicare. While the GOP SAYS it wants to cut Medicare, it passed the largest unfunded spending bill in our history, Medicare Part D, expanding Medicare. The GOP was aided in the last election because the ACA cut some Medicare spending. Take away the talk and look at actions.

    Steve

  26. Somewhere in these debates I would like to see the that inflammatory word “taxes” used less carelessly.
    Payroll taxes fund Social Security and Medicare
    Federal and state income taxes, fees and other types of taxes fund other expenses.

    At a time when wages are stagnant, ordinary people are digging their way out of a debt hole they fell into with the housing bubble, unemployment remains stubbornly high and unemployment income is steadily drying up— this is not the time to advance the idea of further austerity.

    When record numbers of unemployed older workers are tapping into
    Social Security early — not because they are greedy but because they are going broke — advancing the age of eligibility of either Social Security or Medicare is a totally nutty idea. I can’t believe anyone can advance the idea with a straight face.

    Ever hear of the “Doc fix”?
    That’s the perennial can that Congress has been kicking down the road ever since an ill-advised previous effort at Medicare reform turned out to have seriously unintended consequences. ACA has made that embarrassing little secret obsolete and replaced it with whipping boys that elected representatives can now blame for the decisions they were too cowardly to make themselves.

    I’m getting very tired of the relentless tide of negativity being directed at the new health care legislation before it even has a chance to take effect. The only experience I have in my lifetime to compare with it is the caterwauling that came from my white Southern peers in the Sixties dreading the destruction of the whole free enterprise system and a takeover by Communists as the result of the public accommodations section of he Civil Rights Act of 1964.

    Dr. Dranove, I respectfully suggest that the Austrian school of economics has been tried and shown to be a dismal disaster. My faith in economic incentives has conflicted with the better angels of my nature my entire adult life. And nothing I have seen or read has led me to believe the marketplace has any quality coming close to a human conscience.

    Thank you, Margalit and Maggie for your patience and civility. Mine seems to bve running low.

  27. Having faith in economic incentives implies managed care. Managed care when trickled down to the patient and doctor interaction translates into three assertions:
    1) Doctors are greedy irresponsible people who need someone to manage their actions.
    2) Patients are greedy irresponsible people who need the same someone to manage both their expectations and their activities.
    3) Somewhere, somehow, there exists a body devoid of greed and irresponsibility that is capable of regulating both doctors and patients.

    I question all three assertions.

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