Published October 19, 2007
Senator Hillary Clinton has it exactly backwards. Government-run Medicare is not the solution to what ails health care. It’s a big part of the problem.
In the reform plan she unveiled last month, Clinton proposed creating a new insurance option for Americans under age 65 that is “similar to Medicare.” If a worker doesn’t like his employer plan or other private-insurance options, she promised, he will be able to sign up for this new government-run insurance plan.
This is not a new idea. During the 1993-1994 health-care debate, it was dubbed “Medicare for All” and was pushed by single-payer advocates in Congress as an alternative to the original Clinton plan.
Clinton has now embraced and updated the idea — enrollment would be voluntary, not mandatory as it was in the 1990’s version — but the effect would be the same: more bureaucratic control of health-care arrangements, with lower quality, less innovation, more inefficiency, and still rapidly rising costs. Indeed, the irony of Medicare is that the program’s complex and burdensome payment regulations, aimed at controlling costs, actually drive up costs for the program — and everyone else who pays for health care too.
Government-run Medicare is 1960’s-style fee-for-service insurance. No attempt is made to manage the use of services with a network of affiliated providers or other mechanisms. The only way to controls costs in this kind of insurance is to require enrollees to pay for some of the costs when they get health care, thus discouraging unnecessary use, or to cut the payment rates per service. Predictably, politicians have preferred to cut payments rates rather than impose cost-sharing on beneficiaries. Today, most Medicare fee-for-service enrollees pay little or nothing at the point of service.
The result? An explosion in demand. The Medicare Payment Advisory Commission (MedPAC) reports that the average Medicare beneficiary used 30 percent more physician services in 2005 than they did just five years earlier. Spending for physician-administered tests went up 46 percent during this period, while use of CT scans and MRIs went up 61 percent.
To combat the costs of rising service use, Medicare administrators have tried just about every trick in the price control playbook. Indeed, the care and feeding of the payment systems for hospitals, physicians, physical therapists, nursing homes, labs, home health agencies and many others is now an all-consuming, all-year enterprise for the Medicare bureaucracy. Not surprisingly, doctors, hospitals, and other service providers have engaged their own small army of advocates to watch the bureaucracy’s every move and respond as necessary to protect their financial interests.
More often than not, it’s the health-care service providers who come out ahead in this struggle. Politicians and program officials do not want to be accused of disrupting how or where seniors get care. So, naturally, service providers use exactly that threat — closed facilities and reduced access — to extract payment rate concessions. And so, despite the issuance of mountains of payment rules by the bureaucracy, Medicare’s costs continue to rise as rapidly as ever, with no end in sight.
Medicare’s price controls not only don’t work to control costs, they also undermine the incentive for true, cost-reducing innovation. New types of organizations (like integrated hospital-physician efforts), pricing approaches (like a single bundled payment for a full episode of care), and ways of taking care of a patient (like over the internet and phone) are simply not accommodated by the program’s inflexible payment rules. Doctors and hospitals are thus understandably reluctant to invest in new, consumer-friendly and cost-effective approaches to providing care which will only pay off in the unlikely event Medicare officials will accommodate the change within a reasonable time frame. The result is that today’s costly system for delivering services is virtually frozen in place — for all users of U.S. health care, not just Medicare beneficiaries.
If Clinton succeeded in creating a new Medicare-like insurance option for working-age households, there is no reason to believe the results would differ from the four-decade experience of current Medicare. Many workers would enroll in the new government-run insurance because the price control system and other rules would shield them from high cost-sharing. With prices artificially low, demand for services would be high, and the government would respond with flawed and clumsy attempts to keep a lid on costs with tighter payment rates and more regulation. All the while, service providers would become resigned to working the payment regulator for higher fees instead of searching for better and less expensive ways of providing care.
What’s needed is a Medicare reform which deregulates consumption and fosters competition and cost-cutting innovation while ensuring reliable insurance for enrollees.
Reformers should look to the design of the new drug benefit for how to get started. For drug coverage, the government relies on price competition, not price controls, to keep overall costs in check. The Medicare program pays 65 percent of the weighted-average of the bids submitted by the competing insurance plans. The beneficiary then pays all of the difference between the Medicare payment and the actual premium charged by the insurance plan they have chosen.
The competition for drug benefit enrollees is not distorted by the presence of government-run insurance with regulated pricing. Drug plan sponsors are all private insurers competing on exactly the same terms: their ability, using only private-sector tools and innovation, to put together an attractive combination of covered drugs, price per prescription, and beneficiary cost-sharing — at the lowest possible premium.
The results have been promising — and unheard of in health care. Beneficiary premiums fell from 2006 to 2007, and Medicare officials announced in August that the average monthly premium for 2008 will be just $2 higher than it was in 2006 — and 40-percent below original projections.
Despite these clearly favorable results, Clinton wants to impose government-dictated prices on drugs too. And yet she insists she no longer supports “government-run health care.” If she really meant it, she would be trying to make the rest of Medicare look more like the new drug benefit instead of the other way around.
— James C. Capretta is a fellow at the Ethics and Public Policy Center. He is also a health-policy and research consultant.