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The Problem With Medicare Isn’t Medicare – Part 2

The Ryan/AMA Medicare Plan
Would Accelerate Healthcare Spending

Read Part 1

medicareIt’s not that Medicare is less efficient than private insurers – as the Ryan/AMA plan for Medicare vouchers assumes; quite the opposite, in fact.

Which means that dumping future Medicare enrollees into a fragmented and inherently less efficient private insurance system would only compound the problem of unaffordable healthcare costs. It would do so by increasing the total costs of care rather than increasing the value of care received so the cost per enrollee grows more slowly.

Obamacare attempts to contain the underlying growth in medical costs, albeit insufficiently, by regulating provider payments. The Ryan/AMA plan for Medicare, on the other hand,  effectively gives up on controlling healthcare costs. It relies instead solely on free-market competition among health insurers to constrain future healthcare costs. As the chart in Part 1 demonstrates, they don’t do so well at this.

Indeed, the Ryan/AMA approach to our healthcare crisis – for Medicare and more broadly – focuses exclusively on private insurance as the vehicle for achieving cost savings. This proven failure of a strategy would affect both future Medicare enrollees who choose a private insurance plan and non-Medicare buyers of health insurance plans as well. That’s  because current constraints on costs imposed by Medicare – which private insurers now piggyback on – will be weakened and eventually eliminated.

Ignoring Provider Costs

The unspoken problem is that the vast majority of our medical costs – 80% or more – are driven by medical providers, not insurers. And as we’ve seen, private insurers have had little success to date in controlling those provider costs – far less than Medicare.

Ignoring provider costs – or relying on health insurers to negotiate them down when they’ve failed so miserably in doing so to date – is effectively giving free rein to medical providers to dictate their own pricing. This is exactly what’s been driving medical over-spending in America’s largest urban markets where dominant hospital chains are able to price-gouge based on their regional market leverage.

And with further provider consolidation underway as Accountable Care Organizations assume financial risks that turn them into quasi-insurers themselves, private insurers will have even less negotiating leverage to contain provider costs in the future.

And Dumping Them On Patients

One probable outcome if the Ryan/AMA plan were to materialize – and they’re a persistent bunch – is that younger and healthier Medicare beneficiaries will be attracted to private insurance plans, leaving older and sicker beneficiaries in traditional Medicare.

Covering an older and sicker population would accelerate traditional Medicare costs. As these costs will exceed private insurers’ costs in covering a younger and healthier Medicare population, traditional Medicare beneficiaries will end up paying much more out-of-pocket for continuing Medicare coverage.

In short, the premium-support voucher approach will shift medical costs to Medicare beneficiaries – which will be particularly onerous for the oldest and sickest patients. The $8,000 annual premium support that was envisioned under candidate Romney’s plan translates to $666 a month. That $666 a month will barely buy insurance coverage – with a $2,000 – $5,000 deductible – for a healthy 60-year old today. How much coverage will it buy for an unhealthy 80-year old ten years from now when our healthcare costs will have doubled?

Is it really responsible – or fair – to expect an 80 or 90-year old with declining mental capacity to understand the financial impact of competing health insurance plans? What kind of person would want to subject them to that – and the related surge in insurance scams that prey on seniors?

Preserving Medicare At Seniors’ Expense

Relying on free-market forces – essentially putting all your faith in insurance companies – to contain excessive medical costs will fail for all the reasons previously cited. It’s hard to believe its proponents don’t recognize they’re turning reality on its head when they say, as candidate Romney’s website stated:

“By replacing the inefficiency of the current (Medicare) system with a competitive, market-oriented system in which every provider – including the government – wants to find the most efficient way to provide high quality care, the (Romney/Ryan/AMA) plan puts the future of Medicare on a sound footing to meet the needs of future generations.”[1]

The problem here is that – as demonstrated in Part 1 of this post – Medicare is actually much more efficient than private insurance. Rather than “Replacing the inefficiency of the current (Medicare) system”, the Ryan/AMA plan actually exposes traditional Medicare to the inefficiencies of the private health insurance market.

These inefficiencies include much higher administrative costs than Medicare and the profit margins needed to satisfy shareholders.  They’re also unable to negotiate the steep discounts for medical services that Medicare is able to command with its huge share of the medical market. This latter failing is the most crucial shortcoming of this short-sighted plan that so many on the political right, and their insurance company and medical industry financiers, cling to so ferociously.

Hang On To Your Purse, Grandma
(And You, Too, Junior)

According to the non-profit Center on Budget and Policy Priorities, in 2022 – when the proposed voucher premium support plan in Congressman Ryan’s original plan would have taken effect – the combination of higher medical costs for private insurers and less financial support from Medicare would more than double the average Medicare beneficiaries’ medical costs from a projected $6,150 annually to $12,500 a year. That difference of $6,350 a year represents over $529 a month on average. For people on fixed incomes like Social Security, that kind of increase would effectively bankrupt many older Americans.

His latest budget proposal bumps this out to 2024, so the impact would be even more devastating for seniors. But Medicare itself would be better off – at the expense of its beneficiaries.

Most telling in this analysis is that in order for Medicare to save an estimated $600 a year per beneficiary, individual Medicare beneficiaries would end up spending an additional $6,350 a year – or ten times the expected government savings. Put simply, for every dollar of Medicare savings, its beneficiaries would have to fork out $10.

That huge mark-up represents the increased costs of private insurance over Medicare costs – as reflected in the earlier graph (see Part 1). This concession to private insurance inefficiencies would fall entirely on the backs of Medicare beneficiaries and their families.

And that impact would only grow over time as the value of the proposed vouchers tied to GDP growth fail to keep pace with the growth in medical spending. Wherever the precise numbers end up, it’s Medicare beneficiaries – especially older and sicker ones (which we’ll all eventually become, if we’re lucky) – and their families who’ll be left holding the bag.

More Insured Younger Patients Provide Balance

Finally, while there’s legitimate concern that slowing the growth in Medicare payments to hospitals and other non-physician providers could cause some of them to no longer accept Medicare patients, this is unlikely. These providers accepted Obamacare’s Medicare terms because they’ll be serving more privately insured patients under Obamacare to offset this.

Their bad debt for currently uninsured patients will be reduced. They’ve calculated this will more than allow them to continue serving Medicare patients indefinitely. Medicare represents 50% and more of revenues for most of these providers, meaning they’re unlikely to cut off their access.

It’s far more likely a voucher system that dilutes Medicare’s current market leverage will lead to reduced access. That’s because private insurers will have to offer increasingly restrictive provider networks to avoid being priced out-of-business.

But Medicare’s Not Perfect

Lest this be construed as a defense of traditional Medicare practices, it should be noted that there’s plenty of room for improvement in Medicare. Examples include the RVU physician compensation process discussed in another post (see “Healthcare Investment – Lipstick On a Pig“), tolerance of regional disparities in medical practices, unneeded surgeries and procedures, and fee-for-service reimbursements that are the fundamental flaw in our payment system. These combine to drive much of our medical misuse and abuse (see Our Healthcare Sucks for more on all of these).

But despite these shortcomings, Medicare remains far more efficient and capable of controlling medical costs than private insurers. The Ryan/AMA plan, however, would weaken Medicare to the point of its eventual insolvency – the long-term agenda of those advocating this selfish and inhumane proposal.

It’s drop-dead simple: you remove the single largest buyer of healthcare services from the market – and eliminate its unparalleled ability to command lower prices – and prices will skyrocket. You don’t need a PhD in economics to figure that one out.

And I suspect Congressman Ryan – and the AMA – are both fully aware of this fact.


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