A Medicare fix that can really work.

If the liberals on the just-dissolved National Bipartisan Commission on the Future of Medicare are to be believed, the reform plan pushed by its chairman, Democratic Senator John Breaux, and backed both by commission Republicans and by Democratic Senator Bob Kerrey, is about as evil as health policy can get. "They're jeopardizing the health and welfare of frail old people," says former Medicare program chief Bruce Vladeck. "These guys don't want to protect senior citizens from the industry," says Democratic Representative Jim McDermott of Washington. "I don't trust it," says Senator Jay Rockefeller.

But these liberals should know better. The scheme they're bashing, known as "premium support," is modeled largely on the health plan that now serves Rockefeller, McDermott, and nine million other federal workers and their family members.

Today, Medicare basically sets prices and reimburses doctors and hospitals directly for a detailed menu of services. Seniors pay premiums of $46 per month, along with a 20 percent copayment for doctors' bills and a $768 deductible for most hospital stays. Under premium support, the program would help Medicare's 39 million beneficiaries buy an insurance policy instead. Premiums would be set through competitive bids among local health plans each year; seniors would choose during an enrollment period; and, under Breaux's version, the feds would pay 88 percent of the weighted average cost of the plans selected (matching today's overall 88-12 cost split between government and retirees). If seniors preferred a plan that cost more than the federal payment to which they were entitled, they would add more out of their own pockets.

Squabbles over this idea, over what form a new drug benefit should take, and over President Clinton's call to use the surplus to bolster Medicare deadlocked the 17-member commission in early March, leaving it without the eleven votes required to make official recommendations. Although Breaux says he'll try to move a bill anyway, the standoff probably dooms any chance for legislation between now and 2001, squandering a precious chance to get ahead of Medicare's rendezvous with 77 million baby boomers a decade from now.

Though liberals will be tempted to dance on the commission's grave, they'd be wrong to do so. President Clinton's hard-won budget surpluses, after all, have finally freed Medicare from being viewed as a money pot for near-term deficit reduction, leaving both parties poised to expand a 1965-era benefit package that's stingier than 80 percent of private plans. And the experience of six million satisfied seniors already enrolled in Medicare's managed care plans suggests that, far from being a threat to retirees, the drive to bring competition to Medicare could instead be the first step on the path to universal health coverage, American style. The surest sign of this is also the debate's most delicious irony: the "premium support" Republicans fawn over today is just a different label for the "managed competition" they spat on when Ira Magaziner and Hillary Clinton peddled it in 1993.

As the commission's collapse proves, Medicare's coming overhaul will be a complex, tortuous process that raises all the big questions of self-government. Can a democracy summon the will to fix looming problems without a galvanizing crisis? Can the center govern and put flesh on "third way" reforms that harness private interest for public good? Or will the Medicare-industrial complex foil centrists with high-minded objections that mask bottom-line greed? For now, in the wake of the commission's demise, the answers turn largely on whether Bill Clinton would rather leave a bipartisan Medicare fix as part of his legacy--or use Medicare as a political club to take back Congress and elect Al Gore.

The beginning of wisdom on Medicare's woes involves a paradox: the program costs too much and covers too little. At $220 billion this year, Medicare, like U.S. health care generally, spends far more per person than do other advanced nations and without better results. Costs are slated to rise toward $3 trillion by 2030, or from 2.5 percent to six percent of GDP. Medicare's share of federal spending will thus rise from twelve percent to roughly 30 percent. How can this surge be funded? Medicare's2.9 percent payroll tax could double to keep the trust fund that covers hospital services solvent. Trillions of general revenue dollars could be diverted, stealing the equivalent of a shiny new Pentagon or ten Education Departments from our kids' discretionary budget choices each year. If you don't like these options, you're left shifting more of the burden to seniors, millions of whom will already be struggling thanks to inadequate savings and pensions, as well as Social Security benefits that (even before potential trims) almost surely won't rise as fast as health costs. For many of tomorrow's elderly, these numbers spell shrunken living standards that are hard to square with the growing rage for early retirement. Something's got to give.

Yet, as Robert Reischauer of the Brookings Institution points out, potential insolvency is only one of the "four I's" plaguing Medicare, since the program is also inadequate, inefficient, and inequitable. Unlike most private plans and public coverage across Europe, Medicare doesn't pay for prescription drugs and offers poor catastrophic coverage. As a result, two-thirds of retirees need supplementary Medigap or employer-provided "wrap-around" policies that bring yearly out-of-pocket costs to $2,600. Meanwhile, the program's unmanaged fee-forservice care spawns excessive tests and procedures, while firstdollar Medigap coverage of copayments and deductibles sends folks racing to the doc because of a sniffle. Then there's Soviet-style central pricing, which once left Florida hospitals flooded with MRIs (by over-reimbursing for the machines after actual costs had dropped), while giving anesthesiologists (paid by the hour) a stake in keeping patients under.

Yet the least understood failing of Medicare today is its simple unfairness. In 1996, for example, Medicare spent more than $5,000 on each senior in California, Florida, Louisiana, and Pennsylvania; in Minnesota and Oregon, it spent $3,300. According to Dr. John Wennberg of Dartmouth Medical School, widely considered the nation's leading student of regional variations in health costs, only a tiny portion of these discrepancies can be explained by cost differences for supplies, wages, and the like. Instead, they're driven by local differences in the numbers of doctors and hospital beds and the associated "practice style" this creates--a self-interested case of supply driving demand. The effect has been to transform Medicare into a crazy quilt of indefensible--and, to taxpayers, invisible--cross-subsidies.

This inequity becomes clearest by looking at the way Medicare HMOs, now serving 17 percent of all beneficiaries, get paid. Despite paying lip service to reform in 1997, Congress left fees for these HMOs at 93.7 percent (down from 95 percent) of local per capita spending on fee-for-service Medicare, a formula that rewards towns like Miami and Los Angeles, where doctors historically have had a "when in doubt, do more" mentality. By eliminating excess, and then recruiting healthier, lower-cost seniors but still getting overpaid for them, these HMOs are able to offer extras like eyeglasses, dental care, and prescription drugs, and still make a killing. Everyone wins--except, of course, sicker seniors and those in counties where Medicare isn't overpaying, who, in effect, subsidize the lucky elderly.

For all the private sector's cheerleading about the market, of course, HMOs fiercely resist the competitive bidding (a la premium support) that would rationalize the system. In traditional fee-for-service Medicare, meanwhile, the amount of services and attention you get depends entirely on where you live. Perhaps because beneficiaries everywhere face identical premiums and deductibles, this variation in the actual benefits they receive hasn't caught fire politically. Most striking for the long-term-cost picture is that counties that spend three times more on Medicare as others do show no improvement in health.

Into this thicket comes premium support, versions of which have been pushed by such ideologically diverse gurus as Reischauer and his colleague Henry Aaron at the center-left Brookings Institution, Stuart Butler of the conservative Heritage Foundation, and Robert Helms at the right-leaning American Enterprise Institute. Ordinarily, such a wonky consensus might be grounds for suspicion, but, after talking with 29 commission members, policy analysts, doctors, lobbyists, and White House and congressional aides, I'm convinced the plan's pluses outweigh its risks. Skipping over some mind-twisting complexities, the debate between "premium supporters" and suspicious liberals goes something like this:

Premium Supporter: Look, it's crazy to have the government setting prices for a $200 billion business. And, as a matter of politics and common sense, how can we justify having the entire working population in a modern managed care setting, only to regress to creaky old fee-for-service at the magic age of 65? We can fix those "four I's" with a dose of competition. And it's hardly a radical change. It's working for federal employees and their families. California public employees have it, too. Surely market forces will control costs better than the bureaucracy can. Plus, with this structure, it'll be easier to means-test the premium that wealthier seniors pay, freeing up money we can target for new benefits.

Suspicious Liberal: Isn't it funny how reasonable the devil can appear? Let's take costs. Medicare has done slightly better than the private sector in controlling them the past 30 years. Give the Health Care Financing Administration (or hcfa) the tools and it'll do even better. It's crazy that hcfa is barred from things every big private firm does--like using its purchasing clout to drive harder bargains and selectively contracting with key suppliers.

PS: But Medicare's the 800-zillion-pound gorilla! It's one thing to endorse businesslike practices but quite another to let Medicare's muscle put every medical supply firm out of business.

SL: You free-marketers love keeping Medicare hamstrung, don't you? If it performed well, your industry pals would take a hit. And think how inconvenient a well-performing government agency would be for your ideological prejudices.

PS: But, on your logic, the Pentagon would be free to arm-wrestle arms suppliers into bankruptcy. Since that would hurt national security, why would hcfa's pushing medical firms to the edge be good for health?

SL: Look, my real beef is that your scheme is destined to implode. Ten percent of the seniors account for 70 percent of the costs. Once some private plans cherry-pick the young and the healthy, the rest will be stuck with sicker, older patients and go bust.

PS: But we'll regulate their marketing practices--no more recruiting sessions on the third floor of walk-up buildings, where folks in wheelchairs can't go. And we'll adjust the premium the government pays each plan based on the health risk of the individual. That way, sicker seniors will have more dollars following them, making them just as attractive to health plans and ending cherry-picking in our time!

SL: On what planet? Is there any place where payments are successfully " risk adjusted" today?

PS: Well, no, but...

SL: There's a reason. It's an economist's pipe dream. And, once you've blown up today's system, and your risk adjustments go haywire, plans will go belly-up by the score, leaving seniors scrambling for coverage.

PS: That's really not likely.

SL: I'm gonna take your word? The truth is you're putting the entitlement at risk. You make nice noises now, but before long you'll cut the government contribution until it can't buy a decent benefit package. It's like welfare reform. You took away subsistence guarantees for poor kids the first chance you got. The same can happen to seniors.

PS: Calm down. There are lots more seniors than welfare kids. And they vote. Plus, if we make all insurers bid on the same basic benefit package (with extras available), they won't be able to use crafty benefit design to cherry-pick--like offering health clubs and greens' fees to draw fitter seniors.

SL: Yeah, but people who stay in fee-for-service (or FFS) get screwed by the math. If Uncle Sam's contribution is based on some blended average of FFS and cheaper new managed care plans, the FFS folks will get less than today. Millions who don't want to change their current arrangements--or who are just too confused and scared to plow through some thousand-page booklet of options--will have to pay more for the same benefits. So will folks in poor rural areas, where it's not worth it for health plans to compete with Medicare at all.

PS: But, assuming the folks who stay in traditional Medicare are sicker, the risk adjustment will raise the payments made on their behalf. Plus, we'll raise subsidies for poor seniors and make them easier to access. In general, though, if it does cost a little more for FFS, that's pretty much the idea. We want fewer people in plans that have no incentives to manage costs. That's how we got to 14 percent of GDP in the first place.

SL: If you think I'm gonna trust your lousy system to protect millions of widows living on $10,000 in Social Security from getting screwed, you're out of your mind. Maybe if the Democrats win Congress back and can control all the details, I'll consider it.

PS: Antique socialist!

SL: Industry pawn!

For a while, it looked as if the bipartisan commission on Medicare might actually break this impasse. At least a couple of the liberals warmed to the idea of premium support, assuming the government would expand all Medicare coverage to include prescription drugs, and assuming that there was a grandfather clause making sure seniors currently enrolled in fee-for-service plans could keep their current coverage without paying more. But further consensus proved elusive. And, while Congress will have a chance to move the debate forward in the next few years, it will do so only if it can get past the false choices both sides stress in the fight to frame the issue:

Markets vs. government. Sound bites aside, no one wants a "free market" in health care. With premium support, we'd replace Soviet-style price-setting with Soviet-style risk-adjusting, with health providers still trying to game the system to maximize income. Premium support also envisions a huge regulatory role for a powerful newMedicare Board to monitor health plans' marketing, finances, and quality. Remember: Even with the GOP behind it, it still owes a lot to Ira and Hillary.

Defined benefit vs. defined contribution. Liberals cry that Republicans want to "voucherize" Medicare, exposing poor seniors to heavy burdens if health costs rise faster than the vouchers' value. This charge was true--back in 1995. But even revolutionaries learn. After talking with many Republicans, I'm convinced that everyone seriously engaged in the debate wants a hybrid approach that assures the federal contribution can always buy a comprehensive benefit package. It's fair to fret that some in the GOP haven't really changed, but it doesn't matter what's in their hearts, only what's in legislation.

Trust fund "solvency." Nearly all talk of Medicare's woes involves the " solvency" of its "trust fund," set to go "broke" in 2008. One way to extend the life of a trust fund is to trim costs or raise taxes to keep projected revenues and expenses in sync. Another, however, is to cook the books, as Bill Clinton did with his latest Social Security proposal, a scheme he's also urged for Medicare.

It's a bipartisan temptation, of course. In 1997, Clinton and the GOP extended Medicare's "part A" hospital trust fund by seven years simply by declaring that certain expenses would now be accounted for in "part B" (funded mostly by general revenue). As these shenanigans suggest, defining the problem as one of restoring easily manipulated "solvency" precludes important questions of overall resource allocation. Is it wise or inevitable, for example, to let Medicare more than double to six percent of GDP at the expense of other social needs? The frustrating paradox of public finance has been that trust funds that benefit the elderly tacitly banish such questions, while being (at least until Clinton's brazen shell games) politically indispensable in forcing action that might help address them.

The fact is that liberals don't really have an alternative to premium support. They would just keep raising taxes and premiums, use the surplus to expand benefits, then come back to the crisis in ten years--which is no solution at all. And, while their concerns about the Breaux plan are not groundless, they are overblown. For example, when it comes to risk adjustment, success doesn't depend on scientific precision; it needs simply to be good enough to discourage health plans from cherry-picking. It's also possible to define a benefit package with enough detail to avoid the voucher worry and to include drugs in ways that don't bust the budget or bring hcfa price controls. There's already bipartisan support for a patients' bill of rights that would safeguard seniors while allowing innovations in delivery of care. And we can make sure needy seniors who stay in fee-for-service don't face unaffordable burdens.

But there's a rub. Even if you think premium support assigns government a role it is likely to perform better than it does central pricing, and even if competition seems indispensable for curing many of Medicare's inequities, it's probably not possible to have the right benefits, protect needy seniors, and bank savings. To be sure, Breaux's commission put out numbers showing premium support would shave cost growth by one percent a year, but its assumptions are dubious. Even advocates admit you can't feel confident about any savings. It's a matter of faith in the long-term impact of competition. We know the alternative--unmanaged fee-for-service, with the downsides of central pricing--can't be the answer. But, since one of the chief reasons to change Medicare is to control long-term costs, doesn't this make premium support senseless?

A few years ago, I would have probably said yes. Now, humbled by the difference between the results experts often expect from policy and what actually happens, I'm less certain and less worried. No one (least of all me, as a Clinton budget aide) thought the president's 1993 economic package would lead to today's stunning surpluses. Well, surprise. Perhaps the same lesson applies here. You push policy in the right direction, hope for the best, and come back and tweak if you need to. Even if savings do occur,Medicare accounts for only one in five dollars spent on health care, meaning that, if we stay on course to hit 19 percent of GDP by 2025, we'll almost certainly need a national assault on aggregate health spending a decade hence. Liberals, paradoxically, will need to lead that charge if they want government to have cash for any other social purpose. But maybe there's more important work to do first.

That work is universal coverage. Getting a premium support structure in place is the best hope to get there because it's easy to bring new people into this system, and it's the only model where Republicans will join the cause rather than resist it. As much as liberals might wish it, they're not going to persuade Republicans to outlaw the insurance industry and adopt a Canadian-style system. It's time liberals made peace with the notion that a regulated market of competing private health plans can be the vehicle for getting everyone covered. Yes, it means that, unlike other advanced countries, we'll have billions of "health" dollars siphoned off by middlemen and marketers. But, if liberals think of it as a jobs program, they'll learn to live with it. After all, billions in "school" spending now give a livelihood to countless unneeded bureaucrats. I haven't heard a liberal complaint.

"I see it as a step toward universal coverage" is the first answer Bob Kerrey gives when asked why he's for premium support. Republican Congressman Bill Thomas of California told me he plans to introduce a universal health bill this year that fits the managed competition approach. He'd sensibly scrap today's $100 billion tax exclusion on employer-provided health care, which gives the biggest subsidies to top executives, and reallocate these sums through tax credits tilted in favor of middle- and low-income citizens. Over time, he'd require individuals, not employers, to arrange their own coverage, using these means-tested tax credits to choose among competing local plans.

Unfortunately, this pragmatic and progressive vision is either beyond the ken of liberals or has been lost in their thirst to use Medicare to win in 2000. Depressed Republicans say Clinton's no-hard-choices call for a new drug benefit funded by the surplus may be unbeatable politics, especially paired with the time-tested charge that the GOP wants to slash Medicare to fund tax cuts for the rich. The hopeful scenario is that Clinton somehow heals the wounds of the failed commission, unites his party behind a Medicare deal in the next six months, and then comes back to bash the GOP. The president says he'll offer his own plan soon, and White House aides insist Clinton wants a bill, not an issue. But the split between liberal and centrist Democrats on Medicare may make the lure of unity for 2000 more appealing than the trials of writing laws--and actually achieving liberal dreams.

Matthew Miller is a senior fellow at the Annenberg Public Policy Center at the University of Pennsylvania and a syndicated columnist.

This article originally ran in the April 12, 1999, issue of the magazine.

Jindal's Louisiana Purchase

By Jonathan Chait

Health Care And The 1994 Precedent

By Jonathan Chait

What Failure Would Cost the Democrats

By Norman Ornstein and Thomas Mann

Nice Guys Finish Last

By Noam Scheiber

Politico's Not-Very-Ethical Op-Ed

By Jonathan Chait

"Now Don't You Let The Government Get A Hold Of My Medicare."

By Dylan Matthews

Premium Idea

By Matthew Miller

Page 1