Medicare Modernization

Congress finally has broken the logjam over legislation to add a prescription drug benefit to Medicare, but debate still is heated over how much or even whether the program should be updated and modernized in the process.

Clearly this is the linchpin issue and deserves a vigorous and open discussion of the issues and their implications.

Medicare was created in 1965 in an era when fee-for-service health coverage was commonplace in private health insurance. Not surprisingly, fee-for-service was the template that Congress used for the program’s payment structure. Patients see a physician, hospital, or laboratory, which is paid a fee or set of fees for their services.

Medicare remains stuck in its 1965 mode while the private health market has moved on to other payment structures to try to balance cost and access.

The federal government’s solutions to contain costs was to ratchet down payments to doctors, hospitals, and other providers, with a growing number of physicians now say are so low they can’t take any new Medicare patients. In addition, government lags in approving new benefits. As a result, Medicare today pays only about half of seniors’ health care expenses – a substandard health plan by any measure.

Nonetheless, the great majority of seniors receive their care through Medicare’s fee-for-service system, compared to only a small fraction of working Americans.

Medicare lags behind

Senator John Breaux, a Democrat of Louisiana, has compared the current Medicare program to a worn out 1965 Chevy that has seen better days. It’s a gas-guzzler, doesn’t have airbags or other safety features, and is missing many modern technologies.

As health care services become more abundant and as costs of new procedures and technologies go up, Medicare will fall further and further behind.

Students of the Medicare program have been arguing for nearly a decade that the demand for an outpatient prescription drug benefit for seniors should be used as a sweetener to bring Medicare into the age of modern health care.

Twenty-seven Republican Senators sent a letter to the White House June 19 insisting that the president push for Medicare updates along with the new drug benefit. The House bill offers better hope than the Senate version of including program reforms.

FEHBP as a model

President Bush and congressional leaders have advocated using the Federal Employees Health Benefits Program (FEHBP) as the new template for Medicare. Like federal workers, seniors would be able to choose from a range of competing private health plans that would provide more comprehensive health services, including prescription drugs, and wouldn’t need an act of Congress to add a new benefit or technology. The federal government still would pick up most of the cost of the new plans.

Also, by participating in a health plan, seniors would have someone to help coordinate their care in this increasingly complex medical world. There are virtually no incentives in the fee-for-service Medicare system for this coordination of care.

As a result, seniors on traditional Medicare rely on themselves, their family, neighbors, and the media to help them sort out the information and recommendations they are getting from their doctors – sometimes as many as 10 or more specialists, who are prescribing different treatments and medicines with little or no knowledge of the medical care the patient is getting from others. This is especially problematic for patients with multiple chronic illnesses.

Dartmouth Medical School researcher Elliott Fisher, M.D, estimates that 30% of Medicare spending is wasted on unnecessary or even harmful medical services. Clearly, the current fee-for-service Medicare system is bad for taxpayers and often for seniors as well.

Nonetheless, long-time Medicare advocates claim that we should stick with Medicare’s payment structure because it does a better job of controlling costs than private plans. The Joint Economic Committee (JEC), however, proved this wrong, showing that over a 20 year period, the FEHBP’s cost control has been slightly better than Medicare’s even though the FEHBP offers more comprehensive coverage. FEHBP premiums grew at an average rate of 6.5% between 1983 and 2002, while Medicare’s average annual rate was 6.7%.

Further, the JEC reported, “Removing the estimated effects of drug coverage from FEHBP to attempt a more ‘apples to apples’ comparison reduces the FEHBP spending growth rate to 5.8% per year,” well below Medicare’s 6.7% rate.

Choices and competition

A new payment system is needed for Medicare, and clearly, Congress should not miss this opportunity. Seniors on Medicare today should be able to stay with fee for service Medicare if they choose, but new retirees and the huge influx of Baby Boomers who start rushing into the program in eight years should have a choice of private plans, approved by Medicare, that will have the flexibility to update their benefit structure to reflect changes in medical knowledge and care. In being paid a negotiated premium for offering a comprehensive package of services, the plans will have an incentive to make sure that there is coordination of health care among various specialists treating a patient.

The prescription drug benefit gets all the headlines, but the real test of whether Medicare will survive for the future as a functional program serving both seniors and taxpayers will be in whether Congress has the courage to begin the process now of bringing Medicare’s payment structure into the modern era.




Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization that focuses on consumer choice and free-markets in the health sector. She can be reached at P.O. Box 19080, Alexandria, VA 22320 or galen@galen.org.

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Congress finally has broken the logjam over legislation to add a prescription drug benefit to Medicare, but debate still is heated over how much or even whether the program should be updated and modernized in the process.

Clearly this is the linchpin issue and deserves a vigorous and open discussion of the issues and their implications.

Medicare was created in 1965 in an era when fee-for-service health coverage was commonplace in private health insurance. Not surprisingly, fee-for-service was the template that Congress used for the program’s payment structure. Patients see a physician, hospital, or laboratory, which is paid a fee or set of fees for their services.

Medicare remains stuck in its 1965 mode while the private health market has moved on to other payment structures to try to balance cost and access.

The federal government’s solutions to contain costs was to ratchet down payments to doctors, hospitals, and other providers, with a growing number of physicians now say are so low they can’t take any new Medicare patients. In addition, government lags in approving new benefits. As a result, Medicare today pays only about half of seniors’ health care expenses – a substandard health plan by any measure.

Nonetheless, the great majority of seniors receive their care through Medicare’s fee-for-service system, compared to only a small fraction of working Americans.

Medicare lags behind

Senator John Breaux, a Democrat of Louisiana, has compared the current Medicare program to a worn out 1965 Chevy that has seen better days. It’s a gas-guzzler, doesn’t have airbags or other safety features, and is missing many modern technologies.

As health care services become more abundant and as costs of new procedures and technologies go up, Medicare will fall further and further behind.

Students of the Medicare program have been arguing for nearly a decade that the demand for an outpatient prescription drug benefit for seniors should be used as a sweetener to bring Medicare into the age of modern health care.

Twenty-seven Republican Senators sent a letter to the White House June 19 insisting that the president push for Medicare updates along with the new drug benefit. The House bill offers better hope than the Senate version of including program reforms.

FEHBP as a model

President Bush and congressional leaders have advocated using the Federal Employees Health Benefits Program (FEHBP) as the new template for Medicare. Like federal workers, seniors would be able to choose from a range of competing private health plans that would provide more comprehensive health services, including prescription drugs, and wouldn’t need an act of Congress to add a new benefit or technology. The federal government still would pick up most of the cost of the new plans.

Also, by participating in a health plan, seniors would have someone to help coordinate their care in this increasingly complex medical world. There are virtually no incentives in the fee-for-service Medicare system for this coordination of care.

As a result, seniors on traditional Medicare rely on themselves, their family, neighbors, and the media to help them sort out the information and recommendations they are getting from their doctors – sometimes as many as 10 or more specialists, who are prescribing different treatments and medicines with little or no knowledge of the medical care the patient is getting from others. This is especially problematic for patients with multiple chronic illnesses.

Dartmouth Medical School researcher Elliott Fisher, M.D, estimates that 30% of Medicare spending is wasted on unnecessary or even harmful medical services. Clearly, the current fee-for-service Medicare system is bad for taxpayers and often for seniors as well.

Nonetheless, long-time Medicare advocates claim that we should stick with Medicare’s payment structure because it does a better job of controlling costs than private plans. The Joint Economic Committee (JEC), however, proved this wrong, showing that over a 20 year period, the FEHBP’s cost control has been slightly better than Medicare’s even though the FEHBP offers more comprehensive coverage. FEHBP premiums grew at an average rate of 6.5% between 1983 and 2002, while Medicare’s average annual rate was 6.7%.

Further, the JEC reported, “Removing the estimated effects of drug coverage from FEHBP to attempt a more ‘apples to apples’ comparison reduces the FEHBP spending growth rate to 5.8% per year,” well below Medicare’s 6.7% rate.

Choices and competition

A new payment system is needed for Medicare, and clearly, Congress should not miss this opportunity. Seniors on Medicare today should be able to stay with fee for service Medicare if they choose, but new retirees and the huge influx of Baby Boomers who start rushing into the program in eight years should have a choice of private plans, approved by Medicare, that will have the flexibility to update their benefit structure to reflect changes in medical knowledge and care. In being paid a negotiated premium for offering a comprehensive package of services, the plans will have an incentive to make sure that there is coordination of health care among various specialists treating a patient.

The prescription drug benefit gets all the headlines, but the real test of whether Medicare will survive for the future as a functional program serving both seniors and taxpayers will be in whether Congress has the courage to begin the process now of bringing Medicare’s payment structure into the modern era.




Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization that focuses on consumer choice and free-markets in the health sector. She can be reached at P.O. Box 19080, Alexandria, VA 22320 or galen@galen.org.

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About the author