This post is background material for the discussion tonight on Virtually Speaking A-Z, which will be live at 8pm Eastern, and available as a standalone podcast shortly after midnight.  Stuart Zechman and I will be talking about the policy and politics of Medicare reform.  The following material draws heavily (to the point of some copying and pasting) on email written by Stuart.

Source material for this discussion includes the following:

Ezra Klein’s Health of Nation’s post for The American Prospect

OECD Health data

J Oberlander’s  Is Premium Support the Right Medicine for Medicare?

The  Heritage Foundation’s How to Transform Medicare into a Modern Premium Support System

Ezra Klein’s Washington Post interview with Henry Aaron

Henry Aaron’s and R D Reischauer’s The Medicare Reform Debate: What is the Next Step?

The House GOP Budget: The Path to Prosperity

Bowles-Simpson Report: The Moment of Truth

Health Care Systems

There are three components to any health care policy: patients, providers and payments.  How providers are paid for the delivery of services to patients is what we mean by a health care system. There are four such systems in place  in the US today:

Fee for Service

People who do not have health insurance pay for medical services as they go.  When a young couple decide to commit to monogamy, and, in doing so, stop using a condom for birth control, they go together to a Planned Parenthood clinic,  get tested for STDs and receive a prescription for contraception.  They pay cash for the services they receive for the provider, Planned Parenthood.

Fee for service systems are obviously universal–if only because there are some treatments that are not considered efficacious and will not be covered by any form of private or government insurance, and some providers that insist on operating only on a fee-for-service basis.

Private Health Insurance

People who have health insurance through the private sector pay, often in conjunction with their employer, a monthly premium that covers their receiving health care services from providers. These plans are complex–there are rules about which providers the patient can visit and have the services received during the visit be covered by this insurance. “Insurance” is also something of a misnomer. Insurance usually is something that protects an individual or firm from high-cost, low-probability events (floods, car theft, death).  In the case of health insurance, the premiums are more like pre-payments for services to be rendered than they are like  insurance in normal parlance. Of course, there is such a component to most private health insurance plan, although in the US that catastrophic coverage is frequently limited by the insurer to some maximum amount.

Germany and Switzerland have a private insurance health care system.

Public Insurance

In this case, the provider is paid directly by the government for services delivered to a patient. The patient may or may not pay premiums to the government, but, in any case, the provider bills the government, and gets paid directly by the government. This is how Medicare and Medicaid work. The providers are private entities, and bill for their services.  Public insurance can also be called a single payer system.

Canada has this kind of system.

Socialized Medicine

In this system, the providers work directly for the government, receiving a salary, regardless of what services they deliver. The Veterans Administration works this way.

The UK and Cuba have socialized medicine systems.

There is nothing inherently ineffective in any of the last three methods.  There is a big problem with patients, in rich countries like the OECD, who operate on a fee for service basis.  Some predictable number of them are going to have something catastrophic happen, and it is not considered good public policy to simply let them die because they were unlucky.  In effect, in the US, Medicaid becomes the insurer of last resort.  The individual mandate, in place in Massachusetts and due to be implemented in the Administration’s PPACA program, addresses this problem by requiring all patients to acquire private insurance through regulated insurance exchanges.

But the other three systems operate in other parts of the OECD each work much better than the US, delivering better mortality and morbidity performance at roughly half the cost:


USA, health care price per person, per year, 2008:             $7,538

UK, health care price per person, per year, 2008:                $3,129

Germany, health care price per person, per year,  2008:     $3,737

Percent of GDP Spent

USA, health care as a percent of GDP, 2008:                         16.0%

UK, health care as a percent of GDP, 2008:                            8.7%

Germany, health care as a percent of GDP, 2008:                 10.5%

As the population of the US ages, these costs are expected to grow at an annual rate in the high single digits, about 8 or 9 percent a year. So although it is obvious from these numbers that the real problem is that the US health care system sucks–that there is a major failure of system design–the focus has been on the Medicare program, using the aging population as a justification for changing how Medicare works.

“Reforming” Medicare

In 1995, Henry Aaron and R. D. Reischauer proposed a basic reform to Medicare designed to stop the runaway growth in costs.

Five central facts will shape the debate on the future of Medicare. First, Medicare enjoys overwhelming support among the American electorate, a popularity that is well deserved because the program has achieved all of its
designers’ major objectives. Second, the cost of providing Medicare benefits is projected to rise very rapidly and will exceed projected revenues by ever larger amounts. Third, legislative reform of the entire health care system is
now off the political agenda and likely will remain so for years to come. Fourth, there exists a strong and broad consensus against raising taxes. Fifth, dramatic changes are taking place in the way health care is financed
and delivered for the non-Medicare population

Their way of addressing this problem was a policy change they called “premium support.”

We propose converting Medicare from a “service reimbursement” system into a “premium support” system. Rather than paying for all services on a stipulated menu, Medicare would pay a defined sum toward the purchase of an insurance policy that provided a defined set of services. As with private insurance for the working population, plans could reimburse any provider the patient chooses on a fee-forservice basis (the current method Medicare uses for most beneficiaries), contract with a PPO, or operate through an HMO. Plans could manage care in any of the ways now in use or that might arise in the future. All Medicare beneficiaries ultimately would receive a predetermined amount to be applied to the purchase of a health plan providing defined services

How would this lower costs? That’s pretty simple. By setting the “defined sum” low enough to reduce government expenditures. But does that really lower costs? Or does it just divide them up differently, so that the patients are paying more of the bills themselves, either through direct payment for uncovered services or through the purchase of insurance that is greater than the “defined sum”?

In fact, the idea is that by making the patients pay more for provider services, they will buy less. They will stop “over-utilizing” health care services.  Any proposal that intends to reduce costs by limiting “utilization” is a bad proposal. For instance, Bowles-Simpson, like Aaron’s 1995 proposal makes MediGap insurance illegal, so that participants will have to pay more out of pocket on every encounter; MediGap insurance covers copayments and deductibles.  Likewise, the GOP budget proposal, and Aaron’s premium support plan also are designed to shift more of the cost of care onto the Medicare participants.

And it’s not unreasonable, given the history of  the administration’s deep concern for “stakeholders” like pharmaceutical companies and managed care providers, that we should be concerned that, sometime in 2013, the Obama administration reluctantly concludes that a premium support program is the only way to save the US from the horrors of budget deficits.

One Response to Policy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: