February 01, 2003 -- How not to fix Medicare


The American Prospect, Volume 14, Issue 2. February 1, 2003

Dr. Frist to the Rescue How not to fix Medicare, Marcia Angell M.D.

Sen. Bill Frist (R-Tenn., whom The New York Times has taken to calling
Dr. Frist), the Senate majority leader and President Bush's new
fair-haired boy, wants to fix Medicare. This is the same Bill Frist
whose father founded a for-profit hospital chain, Hospital Corporation
of America (HCA). Headed by Frist's brother, HCA merged with another
hospital chain, Columbia, to form the behemoth Columbia/HCA. After
riding high for a few years, Columbia/HCA (now again called HCA) came
crashing down when it was charged with massively defrauding Medicare
and other insurers. So far it has paid $1.7 billion in fines to settle
those charges, and its legal troubles are not over.

Not surprisingly, Bush and Frist would fix Medicare by making it more
like the fragmented, for-profit insurance system that people under 65
find increasingly unreliable, inadequate and arbitrary. If Democrats
engage this issue properly, it should be one of the epic battles of
this session of Congress.

It's not clear that Medicare needs fundamental fixing. It succeeds
very well in its main purpose, which is to provide nearly every
American over the age of 65 with a uniform package of benefits. Those
benefits cannot be taken away from anyone or reduced for any reason.
And because it is a non-profit, single-payer system, Medicare is
fairly efficient, with low overhead costs.

Still, Medicare could use some fixing at the margins. It pays doctors
too much for doing high-technology tests and procedures and too little
for examining and talking with patients. Its benefit package needs
updating to provide long-term care and drug benefits. And its finances
need overhauling. More about this shortly.

So is this the kind of fixing Sen. Frist has in mind? Not on your
life. Sen. Frist and his White House friends want the very opposite.
They want to introduce commercial competition, encourage Medicare
recipients to join managed-care plans, cap what Medicare will pay for
services and pass more of the costs on to recipients themselves. Yes,
they include a prescription-drug benefit, but apparently without any
regulation of the pharmaceutical industry's prices or of the drugs
covered. Most Republicans favor paying private insurers to offer
limited drug coverage under Medicare. Drug companies would remain free
to charge whatever they like for expensive, new brand-name drugs often
no better and sometimes worse than older, generic drugs. In other
words, Sen. Frist and the White House would introduce the blessings of
the private health market to Medicare.

Let's take a closer look at those blessings. The majority of people
under the age of 65 are covered by employer-sponsored private
insurers, mostly through investor-owned managed-care plans. Health
benefits vary widely and are often grossly inadequate. The hallmark of
this market is the extent to which health dollars are diverted from
medical care to corporate profits and overhead. Private insurers keep
an average of 14 percent of premiums for their own profits and
overhead; they outsource other tasks, such as utilization review and
case management, to other for-profit businesses that also divert money
from actual care. Compare that with the less than 3 percent overhead
costs of Medicare.

Managed-care plans maximize profits in several ways. They try to avoid
marketing their products to people likely to get sick. They cut costs
by stinting on medical services and making patients pay more out of
pocket. They usually limit the choice of doctors or charge higher
premiums for the privilege of free choice. No wonder Americans hate
managed care.

In fact, surveys have shown that Medicare is far more popular with its
recipients than the private health-care system is. Furthermore,
despite every effort to reduce costs by limiting services, private
insurance premiums are now rising at double-digit rates -- much faster
than the rate of inflation for Medicare. Why on earth would anyone
want to visit these conditions on Medicare? One might as well wish for
locusts.

Furthermore, we have had experience with pushing Medicare recipients
into private managed-care plans, and it was a disaster. In the early
1990s, Congress directed Medicare to encourage seniors to enroll in
managed-care plans as a means of containing costs. For each senior,
Medicare paid health plans 95 percent of the average Medicare costs
per beneficiary in that geographic region. If the health-plan sponsors
could provide coverage for less, they could pocket what they saved.
Seniors were lured by the promise of smaller co-payments and broader
benefits, such as coverage for prescription drugs and eyeglasses.

But look at what happened. The plans -- deliberately -- attracted
mainly the youngest and healthiest of seniors, people who cost far
less than 95 percent of the average. According to one study, Medicare
ended up paying 12 percent more for enrollees in managed-care plans
than it would have paid for the same patients outside the plans.
"Choice" was a bonanza for the managed-care companies, but not for
consumers or taxpayers. As patients aged or became seriously ill, they
often left the plans and returned to the regular Medicare system,
where coverage was usually more accessible and they could choose their
own doctors and see specialists if they wanted.

When Medicare officials grasped that they were losing money, not
saving it, on managed care, they cut back on reimbursement levels. At
that point, deprived of their excess profits, private health plans
began to bail out. Many curbed the benefits of Medicare recipients or
stopped accepting them altogether (a couple of million seniors were
simply dumped). Why would Sen. Frist, or anyone for that matter, want
to repeat that failed experiment?

The answer may lie in a conservative ideology that believes private
enterprise is always better and -- even in the face of abundant
evidence to the contrary -- more efficient in providing just about
anything, including a social service such as health care. And it may
also lie in Republican gratitude for the lavish financial support the
party receives from the health and pharmaceutical industries. But Sen.
Frist's own background is surely an important factor. His family is in
the for-profit health-care business. Although he himself is said to
have put his large interest in HCA into a blind trust (with the
approval of the Senate Select Committee on Ethics), it still remains
true that whatever is good for HCA is good for Bill Frist. And it is
undeniable that Medicare policies affect the fortunes of the company.
Yet Frist has become an important voice on health policy in the
Senate, and now that he is majority leader, his influence will grow.
It is astonishing that this obvious conflict of interest has been so
little noted.

How, then, should we shore up Medicare? its fees should be adjusted to
reward high-tech medicine less and time spent with patients more. It
needs a mechanism for discouraging physicians from providing
unnecessary services to generate more income. Other advanced countries
with single-payer systems achieve that. In Canada, for example,
doctors who are found to do much more than the average number of tests
in their specialty may have their practices reviewed.

In addition, the benefit package should be updated to reflect current
medical realities. Medicare, remember, was crafted in the mid-1960s,
when medicine was quite different. Long-term care for chronic diseases
was less important then (the focus was on acute diseases), as were
prescription drugs for outpatients (there were not many effective
drugs and they were cheap). That is why Medicare does not cover these
things. But conditions have changed. Long-term care and outpatient
prescription drugs are now not only medically necessary but also very
expensive. It makes no sense for Medicare to continue to exclude them.
However, any prescription-drug benefit would need to be restricted to
the least-expensive effective drugs and include a mechanism for
bargaining with drug companies for the best prices. Otherwise it would
be an unaffordable windfall for the pharmaceutical industry.

The funding of Medicare also needs some attention. Medicare is divided
into two parts. Part A, which covers hospital care and skilled nursing
and home health care, is funded by a 2.9 percent payroll tax. Part B,
which covers doctors' services and outpatient care, comes out of
general tax revenues and monthly payments from recipients. Those
payments, now $58.70 per month, have increased over the years. Seniors
are also responsible for substantial co-payments for services. The
result is that Medicare recipients now pay more out of pocket (in
constant dollars) for their health care than they did before Medicare
was instituted. That tends to undermine the whole purpose of the
program, which is to shield vulnerable seniors from the burdens of
illness. I would favor eliminating the monthly Part B premiums and
greatly reducing co-payments, as well as shifting more of the cost to
general federal revenue.

Whether these reforms would have a net effect of increasing or
reducing total Medicare costs is hard to say. Reducing overtreatment
by physicians would save money. On the other hand, expanding benefits,
eliminating Part B premiums and reducing co-payments would increase
costs to the program. Seniors themselves would certainly save money,
as would Medicaid, which now pays for much of long-term care. The fact
is, countries with single-payer systems get more appropriate care for
less overall money. Advances in technology and the aging population
may well raise total health-care costs over time. But that's all the
more reason to spend health dollars efficiently. And if we Americans
want to spend a little more of our gross domestic product on health
care, that's our choice.

Sen. Frist and the White House have it exactly backward. Turning
Medicare over to the private sector would duplicate all of the health
market's arbitrariness, cost shifting and inefficiency. Instead, we
should be thinking about strengthening and expanding Medicare as a
public program. After all, it's the only part of our health-care
system that works even reasonably well. And if irony were not dead, we
would surely notice how strange it is that the future of Medicare is
in the hands of someone whose family business is paying enormous fines
to settle charges of defrauding that very same program.

Marcia Angell M.D.