Careless

By

Perhaps the most hopeful sign about the Medicare reform law

President Bush signed this week is the fact that it has so many

Republicans in a tizzy. "I didn't come here to create the

largest expansion of Medicare in history," protests Arizona

Representative Jeff Flake. "If we veer off the path of thelimited government of Ronald Reagan, it will be at our peril,"

warns Indiana Representative Mike Pence.

But conservative critics give Bush and his allies far too

little credit. While the reform law certainly expands government--to
the tune of $400 billion over the first ten years--its

fundamental purpose is to realize a cherished conservative goal:

transforming Medicare into a loosely regulated voucher system in

which private companies, not the federal government, do the

actual insuring. No less an authority on right-wing dogma than

Newt Gingrich said as much in a recent Wall Street

Journal op-ed, calling the measure "the most important

reorganization of our nation's health-care system since the

original Medicare Bill of 1965."

Gingrich's enthusiastic endorsement is a big clue as to what

exactly this "reorganization" entails. Back in the 1990s, after

all, he spoke openly of letting Medicare "wither on the vine."

And, while Gingrich's successors may speak in sweeter
tones--promising, as Bush does, to "protect" and "modernize"
Medicare--it's still the same old crusade to undermine a vital
social

insurance program. Only this time around, it's working.

Back in January, when Bush first started talking seriously

about Medicare reform, he was candid about his intentions: He

would offer senior citizens prescription-drug coverage only if

they agreed to leave the government program and accept private

insurance instead. But the president's proposal provoked a harsh

backlash, particularly among those senior citizens with multiple

chronic conditions, who feared HMOs would force them to switch

doctors or lose access to the best specialists. The outcry was

so severe that even some Republicans suggested the president

reconsider. And, within days, Bush seemed to do just that,

promising to offer prescription-drug coverage even to those

senior citizens who wanted to remain in the traditional Medicare

program. His only caveat was that the drug benefit itself be

administered separately, by private insurers rather than the

government.

At first blush, the Bush reform law seems true to that

promise, since it creates a stand-alone drug benefit available

to seniors in traditional Medicare. Granted, it's not exactly a

lavish plan: With a huge coverage gap that would expose all but

the poorest beneficiaries to more than $3,000 in out-of-pocket

costs, it's a far cry from the kind of drug coverage most non-

elderly Americans have through their jobs. But the benefit

offers at least modest help to people who desperately need it,

and seniors won't have to abandon Medicare in order to get

it.

Or will they? The way everybody is talking about the details

of the new benefit--the $35 monthly premium, the 25 percent
cost-sharing, and so on--you might think those numbers were set in

stone. They aren't. The fine print of the Medicare law says

merely that the stand-alone drug insurance must be "actuarially

equivalent" to those specifications, meaning premiums and co-

pays can vary from plan to plan so long as the average amount

paid by beneficiaries is the same as it would be using the

numbers outlined in the law. It's up to the private insurers

actually administering the drug plans on behalf of the

government to come up with the specifics. And that's a big

problem, because it's easy to design a drug benefit that meets

this requirement yet is clearly (and deliberately) unattractive

to certain types of beneficiaries--namely, those likely to run

up the highest drug bills.

For example, as Cristina Boccuti and Marilyn Moon argue in a

recent paper for the Commonwealth Fund, a drug insurance company

could cover initial drug expenses more fully and skimp on

coverage for subsequent costs. From an actuarial standpoint, the

overall financial effects would be the same, but the plan would

be a much better deal for somebody using just a few medications

(nearly everything would be covered) than for somebody using

many (the coverage would run out quickly). In addition, under

the new law, the drug insurance companies are free to restrict

coverage to a list of drugs for which they can get big

discounts. (Such lists are known as "formularies.") It's a great

way to save money but also a wide-open invitation to manipulate

the market. A plan determined to exclude unhealthy seniors could

cover only the cheapest drug in every category, well aware that

seniors with multiple chronic conditions may need to take less

popular, more expensive drugs in order to avoid toxic

interactions.

So, for all the talk about guaranteeing seniors a drug

benefit even if they stay in Medicare, the guarantee is pretty

flimsy. The seniors most likely to fear managed care--i.e.,

those with the most serious medical conditions--could have the

hardest time finding useful stand-alone coverage. Their only

option would be to leave Medicare and entrust all of their care--

not just pharmaceuticals--to private managed care. Which, of

course, is the very scenario that scared so many elderly people

in the first place.

That's not the only way the new Medicare law favors the

private sector. An even stronger inducement for seniors to adopt

private plans comes from a shift in the way insurers get paid.

Under the current arrangement, every time a senior citizen opts

to join an HMO rather than stay in Medicare, the federal

government pays that insurance company a fixed fee--one

originally set near the average cost of insuring a senior

citizen in traditional Medicare. This system, which came to be

called Medicare+Choice during the Clinton years, seemed terrific

for a while, since private insurers offered all sorts of goodies

that Medicare didn't: catastrophic coverage, lower co-payments,

and, most important, prescription-drug coverage. At one point in

the mid-'90s, 16 percent of all Medicare beneficiaries had opted

out of Medicare to enroll in HMOs. Most experts figured that

proportion would continue to rise until HMOs were the dominant

form of coverage among senior citizens. After all, if the plans

were so efficient that they could offer everybody more generous

benefits than Medicare for roughly the same cost, why shouldn't

they take over?

But, when the Clinton administration took a closer look at

the Medicare HMOs, it discovered they hadn't actually been more

efficient; the government had simply been paying them too much.

The private insurers were attracting primarily those people most

willing to put up with managed care's restrictions on access to

specialists and treatments--which, almost by definition, meant

people with the least severe health problems. One study by the

General Accounting Office found that the government had been

paying private insurance companies 13 percent more per person

than it would have cost to take care of the same person on

Medicare. Subsequent studies by the Medicare Payment Advisory

Commission found similar rates of overpayment. (While the

insurance industry strenuously disputes these studies,

government statistics show that in private insurance just 84

cents of every dollar goes to actual patient care--as opposed to

98 cents in Medicare--in part because insurers must spend

lavishly on marketing and show profits that will impress the

stock market.)

Confronted with these facts, the Clinton administration took

the obvious remedial action: It stopped paying the plans more

than they deserved. Lo and behold, the insurance companies

suddenly couldn't afford to offer such generous benefits. Today,

nearly a third of Medicare+Choice plans offer no drug coverage

at all, while those that do offer skimpier benefits by the day:

More than half cover generic drugs only; a slightly smaller

proportion stop reimbursing expenses beyond $750 per year. Still

other plans have simply dropped out of Medicare altogether. As a

result, the percentage of Medicare beneficiaries enrolled in

HMOs has dropped by about a third, to 11 percent.

One sensible response to this experience would be to

recognize that perhaps private insurance isn't worth the effort

after all. But the Bush administration has settled on a

different approach: It has decided to make the private plans

competitive again by giving them even more money. It

already raised payments to private insurers through

administrative actions. The new Medicare law goes even further,

increasing payments to the point where Medicare may be paying

some private plans an extra 30 percent per beneficiary--i.e., well
beyond the overpayments the Clinton administration

eliminated--according to analysis by Medicare's own actuaries.

The stock market has already taken heed of this anticipated

windfall: In the two weeks after the law's details became

public, at least two major insurers who take Medicare

beneficiaries saw their stocks rise significantly: Humana's by 7

percent and PacifiCare's by 15 percent.

On top of this, if all goes as planned, in 2010 the newly

revitalized managed care industry will get a chance to flex its

muscle in a carefully constructed experiment. In six communities

selected by the federal government, senior citizens will get a

voucher good for buying coverage from traditional Medicare or a

private insurance plan. But, unlike in the current system,

Medicare and the private plans will each bid for business,

offering not just different benefits but different premiums. If

seniors choose more expensive options, they'll have to pay the

difference between the voucher and the premium; if they choose

the cheaper options, they'll get the difference as a cash

rebate. It's a test run of a system called "premium support," an

idea health policy experts have been debating for years.

Conservatives expect these experiments will prove the

inherent superiority of private insurance--and, thus, the wisdom

of premium support as a model for Medicare. But the experiments

are unlikely to prove anything. Given that the private insurers

attract healthy seniors who cost less to insure, they'll have a

built-in advantage allowing them to undercut Medicare's

premiums, offer better benefits, or both. That's not a fair

competition designed to show whether government-run insurance

can keep up with the private alternative; it's a rigged contest

designed to lure healthy seniors into private plans and leave

sick ones in an increasingly overburdened Medicare.

If that's not enough, the new law contains at least one

other egregious attempt to undermine Medicare: It hastens the

arrival of a financial shortfall that could make it easier for

Washington to cut health care spending for seniors. In part, the

law does this simply by using Medicare funds injudiciously,

whether it's on those unfair subsidies to the insurance industry

or on tax breaks to encourage the use of dedicated health

savings accounts. But, to make matters even worse, the law sets

a new standard for Medicare "insolvency." Currently, Medicare

consists of two separate programs, each with its own funding

source. Medicare Part A, which covers inpatient hospital

expenses, gets its money primarily from a trust fund financed by

payroll taxes. Medicare Part B, which covers doctor visits and

other outpatient services, gets its money primarily from general

tax revenue. Under the new law, if the actuaries responsible for

Medicare determine for two years in a row that general revenue

makes up more than 45 percent of the total Medicare budget, the

program will be declared "insolvent," requiring Congress to

either cut benefits or raise payroll taxes--both of which would

affect low-income people disproportionately.

It's important to note that the law does not limit

overall Medicare spending; it merely insists that general

revenue not make up too great a proportion. That's a

particularly perverse idea because the best way for Medicare to

become more efficient is to reduce expensive hospital stays,

which means spending less money from Part A and more from Part

B, which in turn means relying more heavily on general revenue.

In other words, the more efficient Medicare becomes, the closer

it comes to this trumped-up fiscal "crisis."

All of this raises the question: If private-sector reforms

like the one Bush signed won't actually make Medicare more

efficient, why are they so popular with conservatives? One

common argument is that a system of competing private plans will

eventually result in lower overall spending than would be

politically possible under the current, centralized government

system. It's an intuitively attractive argument that, once

again, is completely inconsistent with the facts. During the

early and mid-'90s, private health insurance indeed reduced

spending while Medicare's costs soared. But, since the late

'90s, the exact opposite has happened. Private insurance costs

have soared while Medicare has held spending closer to

inflation.

So, if you want to find an intellectually honest motive for

the right's attraction to Medicare reform, you have to look

somewhere else: to ideology. As a matter of philosophy,

conservatives just don't like the idea of having society as a

whole bear a collective burden for the health care of seniors--

particularly when the system does so by dictating prices across

the private sector or dictating equal benefits to individuals.

They'd much rather allow the marketplace to settle on prices

with no regulation, with each provider driving different

bargains. To Medicare's defenders, of course, universalism is

the program's most glorious virtue; to its detractors, it is the

program's most offensive flaw.

In fairness, there are respectable reasons to consider

giving private insurance a greater role in Medicare--like the

possibility that transferring more medical costs to consumers

might discourage frivolous (and potentially dangerous)

overtreatment. But, even if you think the need to impose this

sort of discipline warrants the sort of radical makeover the

Bush reforms contemplate, you must go about it with

extraordinary caution. The more you have consumers shop around

for cheaper health plans, the more you risk leaving the very

sick stuck paying ever-higher costs for their own coverage,

thereby eroding the very basis of insurance--the idea that the

healthy must help subsidize care for the sick. When you're

dealing with senior citizens, the sickest of whom depend upon

Medicare's freedom to maintain long-term relationships with

multiple specialists, you could easily make the program

unsustainable.

The only way to avoid this "Medicare death spiral" is to

regulate private insurance vigorously. And that, unsurprisingly,

is something the Bush reform declines to do. For all of its 600-odd
pages, the law is thin on new regulations designed to thwart

insurance plans from gaming the system. What's more, the Bush

administration has shown no interest in getting tough with

health care industries, particularly those that donate heavily

to Republican political campaigns. Quite the contrary, the

Medicare bill itself is a case study in the extent to which the

administration is willing to coddle its political
financiers--whether it's protecting the pharmaceutical industry
from

government-bargaining leverage or pumping up the health

insurance industry with subsidies far and above what they

deserve. That's why even Henry Aaron, the esteemed Brookings

Institution economist who has proposed his own premium-support

model for Medicare, thinks the Bush law could be a disaster.

"There are various ways to reduce the likelihood [of the

Medicare death spiral]," Aaron wrote on the eve of the final

vote. "Unfortunately, the conference committee proposal provides

no such safeguards, rendering the committee proposal too risky

to adopt." He was absolutely right. What a shame Congress didn't

listen.

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