Medicare Reform: Who Decides?

Article excerpt

IN AN ORDINARY ENVIRONMENT, it is nearly impossible for Americans to conduct a reasoned discussion about Medicare. And entitlement reform remains fraught with political peril, as the recent special election in New York has shown: Democrat Kathy Hochul defeated Republican favorite Jane Corwin, in a campaign dominated by Hochul's attacks against Republican plans for Medicare. But it is no longer possible to avoid the truth. Medicare is bankrupt, and if we don't make gradual but significant changes to it, the program will end America as we know it.

On a per-capita basis, Medicare spending is growing faster than the economy. On top ofthat, the Baby Boomers have started to retire: in 2031, when the last of the boomers reach age 65, there will be 77 million people on Medicare, compared to 47 million today. No tax increase would be large enough to keep up with the growth in Medicare spending, and so controlling spending is the only way out.

What gets lost in the debate about Medicare is that both Democrats and Republicans know that Medicare is broke, and responsible members of both parties have proposed plausible reforms of the program. Indeed, both Obamacare and the 2012 GOP budget authored by Paul Ryan would impose comparable reductions in the growth of Medicare spending. Where the president and Rep. Ryan differ is less in the "how much," and more in the "how." Put simply, the Obama approach puts government experts in charge of controlling costs, and the Ryan approach hands more control to individual seniors.

What does this mean in reality? How will these abstract-sounding concepts affect how doctors care for sick patients? Which one is more likely to work? It's worth spending some time on these questions. We can start with the basics of how Medicare works today.

Health insurance is, in theory, fairly simple. Participants in an insurance plan pay monthly premiums. Those premiums, in total, should be enough to fund the actual health costs incurred by those in the plan who get sick, along with the administrative costs of running the plan. In order to ensure that premiums are as affordable as possible, insurers try to make sure that they pay for needed, but not unneeded, care. For example, a patient with a simple heartburn shouldn't be managed as if he'd had a lifethreatening heart attack, even though the two disorders often look and feel alike at first glance.

There are two tools Medicare could use to ensure that it pays for needed care and not unneeded care. The first is cost-sharing, and the second is rationing. As you will see, in our current system, Medicare does neither. Instead, it imposes price controls on physicians and hospitals, and those controls are increasingly driving doctors out of the Medicare system.


COST-SHARING INVOLVES having the patient pay for a portion of the costs of his care. This way, if a doctor orders unnecessary tests or procedures, the patient has an incentive to say: do I really need this test, if it's going to cost me an extra $1,000? Cost-sharing comes in three forms: deductibles (the insurance kicks in after the patient has paid some minimum amount, say $3,000), co-pays (the patient pays a fixed dollar amount, say $30, to pick up a bottle of pills that retail for $500), and co-insurance (the patient pays a fixed percentage, say 10 percent, of all extra costs above the deductible).

Medicare, in theory, uses all of these tools to contain costs. Most retirees pay $248 a month for hospitalization insurance through Medicare Part A, and $96 or $111 a month for physician services and outpatient hospital services through Medicare Part B. Retirees are supposed to pay $1,132 for hospital stays of one to 60 days, $283 a day for days 61 to 90, $566 a day for days 91 to 150, and all costs beyond day 150 of a hospital stay. Similarly, for Part B, retirees pay a deductible of $162 per year, and then a coinsurance fee of 20 percent of all physician or outpatient charges above $162. …