Ryan and Rivlin are right: a “Draconian” shift to a defined contribution Medicare benefit structure may be the only “fair” way to reduce the difference between how much government funded health care people want and how much we are willing to pay for. aka addressing The Long-Term Deficit

Ryan and Rivlin are right: a “Draconian” shift to a defined contribution Medicare benefit structure may be the only “fair” way to reduce the difference between how much government funded health care people want and how much they are wiling to pay for. The difference between “want” and “willing to pay for” is the primary issue driving our long-term level of unsustainable government debt.

Yet, as recent polls demonstrate, however, the American democracy seems to be ill suited to the task of implementing a solution. Last week’s NBC/WSJ 3/3/11 poll shows a scant 18% of Americans “get” that Medicare expenditures are at the root of the long-term deficit challenge; and, 75% of us don’t support reductions to Medicare spending (see http://online.wsj.com/article/SB10001424052748704728004576176741120691736.html ).

It would be easier to think that any other approach to reducing Medicare and Medicaid costs than shifting to a defined contribution structure could have a meaningful impact on deficit reduction. It would be great if the “cost curve could be bent” by decreasing the annual increase in average costs per beneficiary through increased productivity within the medical care system. And while it is a fact that tiny dents in the deficit might be able to be made through fraud reduction and better coordination of care, the most optimistic impacts of those programs project their impact as minimal (see https://healthinsuranceandotherthoughts.wordpress.com/2010/12/29/).

Politicians can’t acknowledge that the only “way out of this” is to fundamentally change the  “circa 1965 social contract” associated with American government financing of health care for people older than age 64.  We can’t afford the amount of taxes it costs to provide unlimited state of the art health care services to every “eligible person” 65 and older for the rest of their lives.

If the above “tea-party” House Republicans were willing to voice this reality, then that would mean my theory that American Democracy is ill suited to address this issue is false. But the “taxed enough already” people seem content to focus on cutting programs that are political targets rather than deficit targets like the National Endowment for the Arts, Planned Parenthood, and the Corporation for Public Broadcasting.

Five years ago, before the Republicans aggravated the Medicare cost increase problem by adding a defined benefit for prescription drugs, the average amount Medicare paid out per beneficiary was about $8,300. The total each beneficiary spent was a little over double that amount.

At a less than real 6% annual inflation rate in payments per beneficiary, Medicare will pay out about $11,100 during 2011. That’s $11,000 each for the 35 million people in “traditional Medicare.”  And its’ even more than that on average, for the other 12 million people enrolled in various “alternative” Medicare programs like “Medicare Advantage.” As an aside, the actual Medicare payments per beneficiary inflation rate has been closer to 7% since 2006.

Actually, enrollment in Medicare Advantage (or other programs where the average amount the government pays per beneficiary is paid as a monthly “premium” to private insurance companies) isn’t inherently a bad idea. It is actually a great vehicle to shift to a defined contribution Medicare structure.

The two problems with Medicare Advantage today are: that it only applies to about a quarter of Medicare enrollees; and, that the private insurance companies are being paid, on average, more than the average cost paid for a beneficiary enrolled in “traditional Medicare”). By requiring 100% enrollment in Medicare Advantage, there could be a limit set on the growth in the average cost per beneficiary versus relying on never-implemented “cuts” in Medicare payments to health care providers.

Such a system would create an understandable discussion of a relatable number. Few people can conceive of the concept of a billion dollars, much less a trillion dollars. It all blurs after some number of millions for most folks. But numbers like $11,000 or $20,000 or $31,000, etc. are graspable by most people. And the Medicare conundrum is strategically about one issue: what will that average payment per person be, and how different will that number be from the average beneficiaries total costs?

The political problem in shifting to a defined contribution structure is that such a shift means that the health care services available to Medicare beneficiaries will vary significantly dependent upon the assets of each beneficiary; people over age 64 who have high incomes will, perhaps, continue to access any medical services they need, for the rest of their lives, as under the 1965 “whatever you need for however long you live” social contract.

But… The vast majority of people will no longer be able to have access to “state of the art medical care,” since the government will no longer “cover” the 57% of costs paid for today by Medicare and Medicaid for the average enrollee.  How much of that average cost will be paid for under a defined contribution/limited annual per beneficiary premium is the political issue of the early 21st century:

  • Can we accept that our society’s technical and scientific ability to develop medical technology and treatments far exceeds our financial ability to fund the application of that care to all people who could benefit from them?  If not, then solving the American long-term deficit threat is impossible under our democratic system.

Today, the average Medicare enrollee pays about 25% of the total annual average cost “out of pocket.” About 10 % of annual out-of-pocket costs are for  “Medigapinsurance premiums, and the remaining 15% of costs are paid out by Medicare enrollees as they experience medical events (i.e. cost-sharing and payment for non-covered services). So the real challenge is what average per beneficiary payment can we support as a society? How much are we willing to continue taxing the young to support the endless demands for medical services of the old?

Average Medicare Cost Proportional Payment Chart

In a time of wage stagnation, increasing income inequality, and global competition with societies that spend far less per person on healthcare, can we really afford to support the taxes necessary to pay the projected-and-on-target-to-reach the $19,000 average beneficiary cost in 2020? Less than nine years away? Will our society support the taxes necessary to pay for the costs (under a 6% inflation rate) resulting in an average cost per beneficiary of $32,000 when the last of the Baby Boomers, including me, enter the program in 2029?

By 2029, there will be almost double the number of people enrolled in Medicare as there are enrolled today. So instead of $32,000 average being multiplied by 45 million, it becomes $32,000 multiplied by about 80 million. Actually, the most recent rosy projection report from the Medicare Trustees (which assumes a significant reduction in the annual average increase in the per beneficiary payout due to “productivity increases”) projects 2029 as the year the program becomes insolvent.

The last time the Medicare Trustees projected the date of insolvency was less than 5 years away, in 2017. Why the change? Doubtful projections included in the 2010 Healthcare Reform Act that assume things that have been tried before, but didn’t work, (“quality improvement” programs that may improve quality but seldom reduce real cost drivers, primary care coordination; medical homes; HMO-like structures; fraud reduction, etc. etc. etc.) will magically work because “yes we can,” or whatever. Requiring high-asset people over age 64 to pay for more of their medical costs is a politically appealing idea that should be implemented. But there just aren’t enough rich people for that change to have an appreciable impact.

The fact is that we’re at a tipping point in about five years. We like to believe that our society is based on fairness. We like to believe that “health care” is a right versus being a privilege. Now, about paying for that right. Is burdening people under age 65 with the taxes necessary to support unlimited health care services for people over 65 “fair?” What is the limit to the payroll tax we are willing to impose in order to support the 1965 “unlimited” social commitment?

For sure the idea of rich people getting “better,” or simply more “sophisticated”, or ultimately more costly medical care than the rest of us seems anathema to the concept of fairness. Yet if “equal treatment by the government” is valued, then the idea of having the government pay for the “same amount of expenditures, on average” for all eligible Americans over age 64 (as would be the case with a defined contribution-everybody-enrolls-in-Medicare-Advantage Federal policy) seems like the only “fair” way to distribute the tax dollars. Unbeknownst to most people, this is the exact structure of the Medicare D prescription drug coverage program the Republicans put into place 5 years ago.

Which brings my policy thinking on solving the long-term Medical cost driven deficit crisis into what is striking me as a peculiar alignment with the thinking advanced by the fascinating bedfellows team of Republican congressman Paul Ryan of Wisconsin, and Alice Rivlin, an economist and a CBO director under President Clinton. I find it difficult to accept that the Ryan-Rivlin team has proposed something that I think will eventually happen, whether I like it or not.

What Ryan-Rivlin doesn’t admit is that a person’s personal financial status will begin to dictate more and more, their access to certain medical technology. Counting on “the market” to empower consumers to find the best value possible for their defined-contribution payment which will “unleash a productivity revolution in health care” sounds great. What it means, though, is that rich people will get medical stuff that most people won’t be able to afford to get- aka just like the rest of our lives. But don’t think I’ve fallen for the “vast low medical care system productivity conspiracy,” I haven’t. Yet Ryan-Rivlin is a harder sell without the “productivity increase” happy-talk, so it is understandable why the “break the social contract” talk isn’t at the top of their talking points.

Economists, pundits, health care finance experts, and even politicians understand that there is no “good, happy, keep the 1965 social contract in place” solution to the Medicare cost growth conundrum. So the question becomes, what’s the most equitable and fair way to divide up the amount of money we are willing to commit to the average annual cost per Medicare beneficiary?

Devoting fewer resources to intractable wars is a good idea, but it won’t solve the Medicare cost problem; Eliminating farm subsidies to growers of low-cost high-fat agricultural products and paying subsidies that will reduce the price of healthy food is a good idea, but it won’t do it; Providing “incentives” (i.e. more money) for “keeping people well versus treating them when they are sick” is a wonderful, if hard to implement, idea, but it won’t stop the cost escalation; Practice protocols, checklists, electronic medical records, are all good ideas that should be implemented. But all that stuff can’t fundamentally change the trajectory of Medicare costs.

If we face up to the truth, Ryan-Rivlin is just a matter of time. And it’s probably nowhere near as bad as some people surmise. People don’t hate the Medicare D program. And it is basically a version of Ryan-Rivlin. Then again, for now, the defined contribution paid by the government for the drug benefit covers a high proportion of drug costs. If that number decreases, then the Republican engineered Medicare drug benefit would likely lose its popularity. Because of all the patent expirations, drug costs aren’t an immediate cost-driver, anyway.

Whatever your politics, however, the relatively near future means we will have to accept limits and we will have to accept inequality in access to medical care for our over age 64 population if we want to fix the long-term deficit problem that is threatening our solvency as a nation. See http://www.kaiserhealthnews.org/Columns/2010/November/112210capretta.aspx for a Henry J. Kaiser foundation take on Ryan-Rivlin.

Some people think Ryan/Rivlin is only palateable to the “get rid of the new deal right wing crowd.” But I think it’s the only centrist solution on any “table.”


About Benjamin D. Zelman

This entry was posted in The Health Care Cost Crisis and tagged , , , , , , , , , , , . Bookmark the permalink.

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