Medicare, continued

Debates over the Medicare bill focus on two key aspects. First, it is fiscally irresponsible. Second, will the encouragement of competing private health plans raise or lower costs?

Where is Medicare cost inflation coming from?

The major elements in the Medicare program’s overall rise in costs have been increased enrollment (from 20 million beneficiaries in 1970 to 40 million this year) and the same factors that have led to increases in health care spending in the nation as a whole–most notably, the development and diffusion of new medical technology. Other contributors to cost growth have been program expansions as a result of legislative and administrative changes.

In dollar terms, inpatient hospital care accounts for the largest portion of the Medicare program’s growth. Expenditures for skilled nursing care and home health services, though constituting only 5 percent each of current program spending, have grown particularly rapidly. Real spending for those services increased at an average annual rate of about 12 percent from 1975 to 2001, compared with an average annual rate of about 7 percent for total Medicare spending.

From testimony of Douglas Holtz-Eakin, former head of the Congressional Budget Office, a well-respected economist.

It is not obvious that private insurance companies will lower these costs, at least not under current institutional structures. Here is one balanced analysis:

Whatever its faults as a heavily regulated program, Medicare is efficient at holding down costs because it can set prices, has unmatched purchasing and negotiating power because of its size and virtually no overhead. Its administrative costs are about 2 percent.

Administrative, marketing and overhead costs for private insurers were 16 percent last year, according to the government’s Centers for Medicare and Medicaid Services. They also have to set aside reserves and still make a profit.

Reischauer said private insurers can make up a great deal of those costs through market efficiencies and innovations — such as preventive care and disease management, which could be particularly important with chronically ill Medicare patients. But even then, if costs are not far below traditional Medicare or slightly above, seniors are unlikely to be attracted, he said.

This problem is what led the nonpartisan Congressional Budget Office to project that only 10 percent more seniors would enroll in managed care plans by 2010 — which would constitute an abject failure in moving seniors into a supposedly more efficient managed care plan. That figure is in stark contrast to projections by the administration of 43 percent.

In other words, the bill may not mean the end of Medicare as we know it, as some critics have charged. Here is another estimate that switches to private plans will be modest. In this regard the bill may matter less than many people think. I’ll go out on a limb and predict that we have voted in prescription drug benefits, but without fundamentally changing the system as a whole or doing anything to control costs.

What is the key problem on the cost side? Medicare, however low its overhead, serves political constituencies and cannot be expected to cut people off from emergency measures in their last year or so of life. And given the existence of the Medicare option, private health plans cannot get tough on these costs either and still draw customers. Right now, for better or worse, we have no institutional option to stop people from spending large sums of money on health care in the last year of their lives.

As for prescription drugs, the new bill will displace private alternatives over time, read this analysis:

Of the just over 40 million Medicare beneficiaries, almost half (46 percent) already have fairly comprehensive drug coverage through an employer-sponsored retirement plan. Another 29 percent of Medicare beneficiaries have some drug coverage from another private or public source. It is only the remaining 25 percent of Medicare beneficiaries (about 10 million) who have no drug coverage at all.

I will also predict that employers, seeking to cut health care costs, will withdraw these benefits over time, making the bill an even worse fiscal nightmare than has been expected.

The bottom line: Ugh. But unless we are willing to be mean and nasty to dying old people, in the interests of drastically lowering costs, we have no one to blame but ourselves for the current problems. We can, however, in addition still blame the Bush administration for political pandering and lack of fiscal discipline.

Addendum: Read this article on whether the new bill will stick, thanks to David Levy for the pointer.