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Can Medicare Reach Its 65th Birthday?

Every day, 10,000 people in the U.S. celebrate their 65th birthday, making each one of these seniors eligible for Medicare. The very program that gives America’s seniors access to affordable health care will turn a youngish 48 on July 30, but in a biting irony, it could go bankrupt before reaching its 65th birthday.

We cannot wish away or ignore the reality that Medicare’s Part A trust fund — the portion that pays hospital claims — is currently projected to run out of money by 2026. The good news, however, is that it is possible to put Medicare on a sustainable path if we can surmount current political hurdles.

It is no secret that Washington is better known for what it is not doing than what it is doing these days. Partisan gridlock has proved to be an insurmountable impasse for potentially worthy legislative efforts. This is especially true when it comes to making the changes needed to sustain Medicare’s future, where Washington is truly making things much harder than they need to be.

Much of the current debate has focused on reforms that would only slightly defer Medicare’s pending insolvency, with the potential for mere cost-shifting. With many of those recommendations, political disagreement is so strong that an extremely limited chance exists to pass a compromise version. However, even if enacted, these reforms would only address the symptoms of Medicare’s condition rather than the underlying problem. The result would only help Medicare limp to its 65th birthday at best.

There is a much more meaningful reform out there that addresses the underlying problem, and, surprisingly, bipartisan consensus exists around the need to end the fee-for-service system in Medicare.

The current fee-for-service payment system compensates physicians and other health care providers for each service they deliver, such as an office visit, test or other procedure. While it is critical that providers be fairly compensated, Medicare’s fee-for-service structure contributes to inefficient care that is often disconnected with actual patient outcomes. It has accelerated the program’s financial imbalance with inflationary spending that has little or no connection to helping beneficiaries get healthier.

Republicans and Democrats, liberals and conservatives agree that changing fee-for-service Medicare would extend the program’s timeline by addressing the root cause of its troubles. A number of proposals released this year can serve as a starting point for deliberations in Congress. They include those developed by leading think tanks, such as the Bipartisan Policy Center and The Engelberg Center at the Brookings Institution, as well as those introduced, or currently being drafted in Congress, including the Medicare Physician Payment Innovation Act of 2013, initiated by Reps. Allison Schwartz, D-Pa., and Joe Heck, R-Nev.

The underlying concept central to these proposals and to meaningful, broader Medicare reform is to transform the system so that it rewards value instead of volume. These proposals support the advancement of innovation so that beneficiaries truly receive effective care. Moving away from fee-for-service to new, value-driven payment models is the first step to improving care for beneficiaries.

New models are already being tested by the Centers for Medicare and Medicaid Services and across the private sector that reimburse providers through bundled or capitated payments. Under these models, instead of paying for each individual service, providers are paid a single fee to take care of each patient or set of patients, based on their specific illness or a defined episode of care, with all services covered by that fee. This allows physicians greater flexibility to deliver and personalize patient care to increase effectiveness and often times allows them the chance to share in any savings from improved efficiencies, if quality is maintained or improved. Unlike fee-for-service, these new payment models provide the right kind of incentives, encouraging the best, rather than the most care.

If we are to help Medicare reach its own 65th birthday, it is vitally important that policymakers begin to rise above partisan factions, engage in constructive deliberation on these issues, and take action. The opportunity exists, and the cause is great. Medicare is an important part of our nation’s history and reform must be made a priority if the program is to live on and remain for generations to come.

To ensure Medicare celebrates its 65th birthday, we must act now.

Douglas Holtz-Eakin is president of the American Action Forum. Kenneth Thorpe is the Robert W. Woodruff professor and chairman of the Department of Health Policy and Management at Emory University. Both are co-chairs of the Partnership for the Future of Medicare, a bipartisan organization focused on ensuring the long-term security of Medicare.

This column originally appeared in USA Today on July 20, 2013.

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13 replies »

  1. Why are people living much longer today than they were before?

    Because of medical care. In order to keep people alive in the future, the money will have to come from somewhere.

    Medical staff won’t want to work for nothing. It’s not just Medicare that will struggle to see it’s 65th birthday, the economy as a whole is on thin ice.

  2. One suspects that long before 2026, Parts A and B at least will be melded together.

    This will enable the whole package to invade general revenue with no hesitation.

    Based on unavoidable demographics and most growth in per person spending, Medicare in total will cost $1 trillion a year some time in the early 2020’s.

    That is a lead pipe certainty. The big question is what will federal tax revenues be at that point.

    I get rather annoyed with political economists who refer to GDP growth onky.
    It is totally possible for tax revenues to stagnate even while GDP is growing.

    In fact, according toi David Cay Johnston that is exactly what happened between 2000 and 2010. Check out the Statistical Abstract of the US to confirm.

    If that happens again, look out. Americans do not want to accept the fact that longer lives mean more taxes, or at the very least forced savings.
    An lesser course could be a disaster.

  3. This is a fascinating discussion about an enormously important subject, but it’s rife with misleading statements.

    There are in fact two Medicare Trust Funds, Hospital Insurance (HI) covering Part A, and Supplemental Medical Insurance (SMI) covering Parts B and D. The key difference between the funds is in their financing: HI depends on payroll taxes, while SMI depends on Part B and Part D enrollee premiums plus general tax revenues. Theoretically, SMI cannot be depleted since premiums and tax revenue infusions are increased each year to reflect anticipated expenditures. On the other hand, HI is projected to be exhausted in 2026, after which Part A expenditures will be limited to new Medicare payroll tax revenues.

    As should be obvious from the above, Holtz-Eakin’s and Thorpe’s support for new payment approaches—affecting mainly physicians—would do little to solve 2026’s impending crisis. However, given that Part B and Part D expenditures are increasing much faster than the overall economy, SMI may eventually face its own crisis when continued increases in its share of general tax revenues become politically unacceptable.

    Other nations do have more control. Hospitals’ and other facilities’ expenditures are typically limited by government budgets, while physicians’ reimbursement is similarly set to fit within funding guidelines set by governments or by coalitions of insurers. The American approach is not unique in every respect, but it is an extreme example of more services provided instantly equating to more expenditures. (It’s only fair to point out that other countries’ health care costs are also increasing faster than their overall economies.)

    It’s hard to see providers eagerly accepting the approaches espoused by Holtz-Eakin and Thorpe. As Barry Carol points out, the actuarial risk is too great. However, the political risk is even greater. Congress won’t rush to adopt approaches that threaten the incomes of millions of providers (SGR cuts, anyone?). And whatever the IPAB may propose—if it ever exists—Congress will still be able to override.

    So, with Congress unlikely to give Medicare the flexibility to impose real payment reforms, what can be done? The trick is to shift actuarial risk from the Trust Funds, but without having the government imposing it on individual providers. Curiously, Holtz-Eakin and Thorpe fail to mention Medicare Advantage. While the program has been far too much of a giveaway to insurers, the structure does shift risk and provide the flexibility that the monolithic traditional Medicare program will never have. As a recent Kaiser study showed, creating true competition between the traditional and MA programs would result in major reductions in total expenditures.

    Is there any chance of this—or anything similar—happening? Not until we’re desperate. Having Paul Ryan as the primary backer of the competition approach made it anathema to Democrats, while its dependence on exchanges sounds too much like Obamacare to Republicans.

    Maybe we’ll just have to wait until the Part A crisis in 2026—or whenever unrestrained government funding of Part B finally causes Congress to choke.

  4. It may be projected so because of the problem that the company is currently facing but it will not always be so. With proper management in terms of finances and operations, the company will be here to stay for a long time. Besides, why should they take away something that have helped them a lot for a very long time.

  5. I quite agree with you Bob, no matter what happens, as long as the Govt. can tax and borrow money, they will keep writing Medicare checks.

  6. Bob, supposedly fraudulent banks were too big to fail (or prosecute). Think Medicare will be?

  7. I don’t think partisan factions are going to end anytime soon. The delays and glitches are not helping very much either. But, yes, it’d be great if Medicare made it to its 65th birthday.

  8. Thanks. I was not aware that an actual law tied benefits to the trust fund nominal balances.

    Given the voting strength of seniors, and given the dependence of many cities on hospital employment, I would say that if the trust fund balance was negative, the law would be changed in about 2 hours on the floor of Congress to allow general funds.

  9. The first line of the 2nd paragraph should read established to be financed with a dedicated payroll tax coupled with a trust fund mechanism.

  10. Bob –

    My understanding of the law governing the Medicare Part A, Social Security and Disability trust funds is that they are only authorized to pay benefits to the extent that there is a positive balance in the relevant trust fund. So, when we hear that if the Social Security fund balance falls to zero it will only be able to pay 75% of promised benefits means that the payroll taxes coming in during the year following the balance reaching zero will only be sufficient to pay 75% of the benefits due to beneficiaries in that year.

    These programs were established to be financed with a dedicated balance coupled with the trust fund mechanism to establish political support for the program and to ensure that there is at least some measure of long term discipline to guard against a runaway benefits expansion. The law can always be changed by Congress to supplement the trust funds with general revenue if needed when the time comes but the current law works as I stated it above. Long term adjustments are needed to reduce cost growth and, perhaps, to increase revenue flowing into the system.

    As I’m sure you know, Medicare Part B and Part D are financed 75% by general tax revenue and 25% by premiums paid by beneficiaries. There is no trust fund for those two parts of Medicare.

    As for bundled payments, I don’t know enough about the structure of healthcare in other countries to comment on how they handle it. For most hospitals in the U.S. though, doctors who practice in them are not hospital employees but private contractors with admitting and practice privileges. Hospitals are steadily adding more doctors to their staffs in recent years however. It’s a lot harder to estimate costs and determine an appropriate bundled payment that you can live with if you don’t control the entire continuum of care. Moreover, issues like readmission risk depends to a considerable degree on patient and family compliance post discharge which is why hospitals are putting a lot more effort into discharge planning and follow-up than in the past.

  11. Barry, it is my impression that providers in most other nations negotiate bundled payments all the time. I suppose this is much easier for them because hospital biiling is not bizarre like ours, and rehab centers are government funded. and drug prices are controlled.

    Anyways, they do it.

    One side point that is a pet peeve of mine:

    Holtz Eakin especially has been around Washington enough to know that the Medicare Trust Fund has no money in it to run out of.

    Medicare checks are cut every month by the US Treasury. It will cut those checks if the trust fund has a paper balance of $0 or a paper balance of $1trillion.

    This is not to say that Medicare funding will be smooth. But the idea that checks will stop for Part A is ludicrous. As long as the federal government can tax and borrow, it will write those checks.

  12. I remember reading in the early 1980’s that the Medicare Part A Trust Fund was projected to go bankrupt by 1988. Now the estimate is by 2026. We’ll see. For hospital based care, which Part A pays for, the fee for service model disappeared when the DRG system was implemented in 1983 or thereabouts.

    Moving to bundled and capitated payments for surgical procedures and management of chronic conditions like diabetes, asthma, COPD, etc. is a fine idea but most physician practices and even hospitals don’t feel able to take on significant actuarial risk because they can’t estimate likely costs for a panel of patients a year in advance accurately enough to determine what an adequate capitated payment would be. For bundled payments, especially for surgical procedures, only a hospital has the management infrastructure to oversee that and appropriately distribute the bundled payment to all of the providers involved in the care episode from the hospital itself to the surgeon to rehab centers and pharmacists for needed prescriptions.

    Overall Medicare spending has been coming in below expectations for four straight years now despite baby boomers aging into the system and as more people move onto the social security disability rolls. To quote from the late 60’s song by the rock band, Buffalo Springfield, “There’s something happening here. What it is ain’t exactly clear.”

    Strategies from tort reform to better fraud analytics to price and quality transparency tools could go a long way toward harvesting some of the low hanging fruit of waste that permeates the healthcare system including Medicare and Medicaid.

  13. Nothing will change significantly until some kind of restraint is imposed on the obscene profits that corporate interests derive from human suffering, a good start would be SINGLE PAYER and OVERTURN CITIZEN’S UNITED.
    Patrick Monk.RN. SF. Ca.

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