How Medicare Should and Should Not Control Expenditures

Keywords::

• cost
• expenditure
• Medicare
• senior

In 2011, the first US baby boomers, who were born in 1946, reached the age of 65 years and became eligible for Medicare. The baby boom lasted approximately 20 years, which means that the proportion of senior citizens will rise dramatically until approximately 2030, from 13 to an estimated 20% of the total population, growing from 42 million people in 2010 to 70 million in 2030 [101]. Older groups, such as those over the age of 80 years, will grow even faster.

This demographic ‘time bomb’ is partly responsible for the worries that Medicare will go bankrupt. The most recent estimates by the trustees of the Medicare program indicate that for Part A of the program, Hospital Insurance, which is funded by a mandatory payroll tax, assets will be depleted by 2024, at which point, “beneficiary access to healthcare services would rapidly be curtailed” [102]. While other parts of Medicare, particularly physician services and pharmaceuticals, also face challenges, they are funded by general revenues rather than a payroll tax and are not threatened in the same way.

As with any program facing deficit, revenues must be raised or expenditures lowered. Raising revenues, however, proves to be difficult. It is true that some changes have been made at the margins – in particular, charging wealthier individuals more in premiums. However, the type of changes necessary to bolster revenue enough to support future expenditures would involve raising the payroll tax. Currently, 2.9% of payroll is taxed to support Medicare, split evenly between employers and employees (with another 12.4% earmarked for Social Security, which provides cash benefits), a rate that has not increased for a quarter of a century. The political climate in the country makes an increase in the payroll tax rate almost inconceivable.

If Medicare is to balance revenue and expenditures in the future, the most likely way is through lowering the rate of increase in expenditures. Before discussing policy proposals for doing so, it is essential to understand that Medicare does not have total control of its own spending. The same factors that drive national healthcare expenditures also drive Medicare expenditures. These include the highly technological and costly way in which care is delivered; the preponderance of specialists and relative lack of primary care physicians; the income levels of healthcare professionals in the country, which lead to prices that far exceed those in other countries; and costly health behaviors that result in costly health problems, such as obesity.

How can Medicare save? One proposal that is currently popular among some political conservatives is raising the age of Medicare eligibility from 65 to 67 years. This would mimic what was done many years ago for Social Security eligibility. The Congressional Budget Office estimates that it would save the federal government approximately US$150 billion over a 10-year period, or by approximately 5% of total Medicare spending [103].

However, such a policy shift would do nothing to control overall healthcare costs. Rather, it would shift these costs from the working-age population, who currently pay the payroll tax, as well as the vast majority of general revenues devoted to Medicare, to (mostly retired) seniors. The average retirement age in the USA is 62 years so the proposal would entail retirees aged 65 and 66 years to secure private coverage [1]. While this will now be possible since, under the Affordable Care Act, people cannot be turned down for private coverage as a result of past or current health problems, it will still be expensive (seniors can be charged three-times as much as younger people). In total, it is estimated that two-thirds of 65- and 66-year olds will pay more out of pocket [104]. Moreover, it constitutes a shifting from government-sponsored to private insurance coverage since there is no public option under the Affordable Care Act. There is much debate about which of these is more efficient. Private insurers are more innovative in devising ways to control unnecessary utilization, but public insurers have much lower administrative costs and are able to secure considerably lower prices from providers. It is difficult to find evidence, however, showing that private insurance is better at controlling costs. On the contrary, between 2001 and 2010, Medicare costs rose by 5.2% per year compared with 7.8% under private insurance when comparing a common set of benefits [2].

Another proposal being discussed is a move to rely more on competition. Called ‘premium support’, the idea is to introduce more competition into the Medicare program through ‘managed competition’. Medicare beneficiaries would no longer all receive the same benefits. Rather, they would receive a voucher for a fixed amount of money that they would use to purchase their Medicare, either from an insurance company or from the federal government.

The concept is logical. If people are at financial risk when they purchase more expensive coverage, they will think twice before purchasing extravagant coverage. This should make insurers more conscious of the benefits and costs of the coverage they provide, and to do so, they would be expected to drive a hard bargain with the networks of providers and suppliers with which they negotiate. Indeed, the system is akin to the way in which most working Americans obtain insurance from their employers. Such a system must be designed very cleverly, however, in order to avoid major problems. One such issue is how to resize the vouchers over time. Current proposals limit rates of increase to a single percentage point above growth in gross domestic product, which will almost certainly mean that the vouchers will become increasingly insufficient over time. Another issue relates to risk adjustment. Premium support proposals use risk adjustment formulas to compensate insurers that enroll a disproportionately unhealthy set of enrollees. These formulas, however, are imperfect, so it is still advantageous for insurers to market towards healthier seniors. This may, in turn, mean that the government program will get a sicker enrollment that is not fully accounted for by risk adjustment. As a result, premiums are likely to be higher, making it particularly difficult for lower-income beneficiaries to afford the public insurance option, which is sometimes called ‘traditional Medicare’. Consequently, they may have to move to a private-managed care plan, but most of these people have little experience in navigating through the hoops. Moreover, choosing the right plan is a trick in itself. Studies of the Medicare prescription drug insurance plan show that less than 10% of people choose the best plan [105]. All of these issues must be taken into account in the design of a premium support proposal for it to work effectively and equitably; it is a tall order.

A strategy that I would like to see used more is relying on Medicare‘s strong purchasing position to obtain lower prices. This has been used effectively in other countries; Canada provides a good example. Since provinces are the only purchasers of medical care, they have been able to negotiate far lower hospital and physician prices than in the USA. This has worked in selected situations in the USA, especially for the purchase of prescription drugs by state Medicare programs (prior to a change in law that became effective in 2006) and by the Veterans Health Administration, who pay less for drugs than Medicare and private insurers do. Medicare is the largest payer of healthcare services in the USA and could extract better prices for hospitals, physicians and drugs than it currently does [3].

The Affordable Care Act does provide Medicare with some other tools that should help in controlling future costs. In particular, hospitals (and eventually other providers) will be given incentive payments for providing better care, and payment reductions if they fall behind in quality. Moreover, there are financial incentives for heretofore disparate provider groups to start working together on the care of patients through Accountable Care Organizations, again with the prospect of higher payments for doing so. This is further encouraged by global payments for episodes of care rather than the separate billing of each service, which should foster collaboration among providers, but also reduce the incentive to overprovide services.

These are some of the many things Medicare can do to keep future expenditures in check. As noted, some are more advised than others. Focusing just on what Medicare can do, however, shifts focus away from the far greater problem of how the entire US system can be reformed in a way to move its expenditures to be more in line with other high-income developed countries. Medicare has become something of a political scapegoat; there is only so much it can do to control its spending when it is competing against all other insurers in its quest to provide access to high-quality care to its enrollees. It is necessary to begin a serious discussion on many tough topics, including nearly unlimited access to high-technology procedures, reforming end-of-life care and finding effective policies to improve the population‘s health behaviors.

Financial & competing interests disclosure

The author has no relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript. This includes employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.

No writing assistance was utilized in the production of this manuscript.

Additional information

Funding

The author has no relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript. This includes employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.