November/ December 2011 The Cure

The politics of debt have gotten so insane that both parties are on the verge of gutting Medicare. The moment might be right to actually fix it.

By Phillip Longman

Photo: Cosmo Condina, istockphoto.com

While the partisan gap in Washington is wider than it’s been at any time in living memory, the two parties do have one remarkable agenda in common. Both have proposed cuts in Medicare so drastic that they would have been politically suicidal a decade ago and may still be. Yet neither party is backing off.

All but six Republicans in the House of Representatives have voted to turn Medicare into a voucher program—a vision endorsed by all the GOP’s major presidential candidates as well. Under the proposal, famously crafted by Representative Paul Ryan, each senior citizen would receive only a fixed amount of money (about $8,000 on average in 2022) to spend on private health care insurance each year, regardless of what his or her health care needs and costs might actually be. The Congressional Budget Office (CBO) estimates that under the plan, seniors would pay about 68 percent of their health care costs out of their own pockets in 2030, as compared to 25 percent to 30 percent under traditional Medicare.

Democrats rightly characterize this plan as “ending Medicare as we know it,” but both President Obama and party leaders agree that deep cuts in Medicare spending must happen soon. “With an aging population and rising health care costs, we are spending too fast to sustain the program,” the president told a joint session of Congress on September 8. As part of his most recent deficit reduction plan, he has proposed $248 billion in Medicare savings over the next ten years. This includes higher copays for many beneficiaries and steep cuts in payments to providers. If you think Obama and the Democrats are bluffing, consider that the health care law they passed last year came with hundreds of millions in Medicare cuts and includes a mechanism that could cut vastly more. And though the president in September came out against Republican plans to raise the Medicare retirement age to sixty-seven, in the debt limit negotiations earlier this year he signaled his willingness to go along with it.

Then there’s the new Joint Select Committee on Deficit Reduction—aka the “super committee”—on which the president has also put his signature. By the end of the year, Congress must take an up-or-down vote on the recommendations of a majority of the committee, which are likely to include steep cuts to Medicare and, possibly, increases in the retirement age and other restrictions on eligibility. In the event the committee deadlocks, across-the-board spending cuts, including some to Medicare, go into effect.

Why are both parties declaring war on Medicare when both know that it could lead to their own political annihilation? The reason is simple. While both Democrats and Republicans fear the wrath of the AARP and the exploding ranks of hard-pressed seniors—to say nothing of lobbies like the American Hospital Association—Medicare’s relentless squeeze on the budget seems to party leaders to give them no choice but to attack the program’s spending regardless of the political cost. Medicare’s ever-expanding claims on the treasury threaten to crowd out nearly every other priority on either party’s agenda, from bullet trains and decent public schools to, yes, avoiding future tax increases and draconian cuts in the military.

The U.S. wouldn’t even face a structural deficit, much less have to endure the downgrading of its credit rating, were it not for the cost of Medicare (and, to a lesser extent, Medicaid). Just the projected increase in the cost of these two programs over the next twenty years is equivalent to doubling the Pentagon’s current budget, and there is no end in sight after that. By contrast, Social Security will rise only gradually, from 4.8 percent of GDP to 6.1 percent in 2035, and then taper off as the large Baby Boom generation passes. Meanwhile, according to the same CBO projection, all other government programs—the military, the courts, farm subsidies, Amtrak, infrastructure spending, education, and so on—are on course to shrink dramatically as a share of the economy, from 12.3 percent of GDP in 2011 to 8.5 percent in 2035. As others have observed, the federal government is not so gradually being transformed into a giant, and insolvent, health insurance company.

We can at least be thankful that both parties are sane enough to recognize the problem and brave enough to offer politically courageous proposals to solve it. But here’s the bad news: neither side’s solution is likely to work. The GOP’s privatization plan won’t actually cut health care costs, but merely shifts them to individuals. Meanwhile, the Democrats’ ideas, though offering more in the way of actual reform, are unlikely to bend the cost curve anywhere near far enough. Moreover, by focusing so much on cutting reimbursement rates to doctors without directly attacking the colossal inefficiency of the U.S. health care system, the Democrats’ approach runs the very real risk that it will lead to a severe shortage of doctors willing to treat Medicare patients.

Here’s a better idea—one that offers a relatively painless and proven fix that will also vastly improve the quality of U.S. health care. Approximately a third of all Medicare spending goes for unnecessary surgeries, redundant testing, and other forms of overtreatment, according to well-accepted estimates. The largest single reason for this extraordinary volume of wasteful and often dangerous overtreatment is Medicare’s use of the “fee-for-service” method of compensating health care providers that dominates U.S. medicine, under which doctors and hospitals are rewarded according to how many procedures and tests they perform. To fix this, the federal government should do the following: announce a day certain and near when Medicare will be out of the business of subsidizing profitdriven, fee-for-service medicine.

Going forward, Medicare should instead contract exclusively with health care providers like the Mayo Clinic, Kaiser Permanente, the Cleveland Clinic, Intermountain Health Care, the Geisinger Health System, or even the Veterans Health Administration. All these are nonprofit, mission-driven, managed care organizations widely heralded by health care experts for their combination of cost-effectiveness and high quality, including cutting-edge use of electronic medical records, adherence to protocols of care based on science, and avoidance of medical errors. Because doctors working at these institutions are not compensated on a fee-for-service basis, they are neither rewarded for performing unnecessary tests and surgeries nor penalized financially for keeping their patients well. And unlike for-profit HMOs, these institutions are not pressured by shareholders to maximize earnings through withholding appropriate care.

By the late 1990s, the spread of health maintenance organizations and other forms of managed care virtually eliminated health care inflation in the United States, providing a brief moment—not seen since—when the cost of health care did not outpace average wage increases. That triumph in cost containment had its downsides, to be sure, namely the corrupting entry of profit-driven institutions that undermined medical professionalism and often led to denial of needed care. But with the benefit of hindsight, we can avoid repeating those mistakes and reinvigorate the once idealistic and highly effective managed care movement by insisting that Medicare providers also be nonprofit institutions. If we have to control the cost of Medicare, why not do it this way?

Phillip Longman is a senior editor at the Washington Monthly and a lecturer at Johns Hopkins University, where he teaches health care policy. He is also a senior fellow at the New America Foundation, where Atul Gawande is a board member.


  • Jack Lohman on October 25, 2011 9:32 AM:

    Can we fix Medicare? Yes, but first we must stop politicians from taking campaign bribes from the insurance industry. See http://moneyedpoliticians.net/2011/10/17/can-we-fix-medicare/

  • Dave Roberts on October 25, 2011 12:46 PM:

    Another extraordinary diagnosis and prescription by Phillip Longman. Kudos to the Washington Monthly for continuing to provide insight without dogma.

  • kindness on October 25, 2011 1:08 PM:

    I have Kaiser. I like them a lot.

    Can someone come in and do cleanup on the spam that is the first post please?

  • Melissa on October 26, 2011 6:21 PM:

    "Going forward, Medicare should instead contract exclusively with health care providers like the Mayo Clinic, Kaiser Permanente, the Cleveland Clinic, Intermountain Health Care, the Geisinger Health System, or even the Veterans Health Administration."

    I LOVE this idea. My parents have been part of Kaiser since before I left home, about 22 years ago. Since then, their coverage, under the same plan, has expanded dramatically. Kaiser didn't used to cover glasses, hearing aids, or fertility treatments, to name a few. They do now. Unlike the plans I've been on (I would choose Kaiser in a heartbeat but there isn't one where I live)

    As for quality of care, my parents have been extremely fortunate. My dad has lived through an surgery for an aneurism, two kinds of cancer, and many other problems. They referred him out to a specialist when they needed to, and gave him excellent care otherwise. Last year, they paid for him to be in the nicest rehab place (not drugs, physical rehab) I have ever seen.

    My mother has also had good treatment for her problems, most recently breast cancer - the support group has been wonderful for her. (Her prognosis is excellent.) The only thing they haven't covered for her is a high-end osteoporosis treatment - I can't think of the name of the drug, but you have to inject it daily - and she is paying out of pocket, $10,000 for one year, and she's lucky she can stretch to afford it. But after all they've covered that doesn't seem unreasonable.

    My parents considered moving to be close to my husband and me but they didn't because it would mean they would have to leave Kaiser.

  • Rachel Karash on October 29, 2011 1:58 PM:

    Medicare doesn't have to stop reimbursing for-profit hospitals in order to stop reimbursing them on a fee-for-service basis, as it has reimbursed for-profit inpatient hospital health care providers according to the Inpatient Prospective Payment System since 1983 and has reimbursed for-profit outpatient hospital-based health care providers according to the Outpatient Prospective Payment System since 1997. The latter was part of the Balanced Budget Act, which also established PPSs for skilled nursing facilities, home health care, inpatient rehabilitation services, and outpatient rehabilitation services. As for Part B services, Medicare hasn't reimbursed those based on the charge since the passage of OBRA 1989, which established the Resource-Based Relative Value Scale (RBRVS). The Balanced Budget Refinement Act of 1999 established a PPS for long-term care hospitals.

    Inpatient psychiatric facilities are reimbursed based on the IPF PPS.

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  • Maggie Mahar on February 24, 2012 7:37 PM:

    Great piece.

    The idea of setting a target date when Medicare drops fee-for service payment is excellent.

    And I would love to see Medicare patients treated by larger, more efficient, collaborate non-profits that enjoy economies of scale as well as the market clout that comes with size.

    But in rural areas and sparsely populated states, Medicare patients will have to be cared for by smaller groups. These groups might become "virtual networks" and enjoy some economies of scale, particularly with regard to IT,
    but we can't expect that seniors in Oklahoma will be able to travel to a Kaiser, an Intermountain or a Mayo Clinic. Inevitably, in Oklahoma an institution that models itself on these institutions will be much smaller, and as a result may require more funding from Medicare.

    I would add that I don't think we should write off accountable care organizations. Some of them will work, and work well. But I would like to see them operate as non-profits. This shouldn't be that hard. Today, the vast majority of hospitals are non-profits (though admittedly, some of these non-profits seem to put profits first. Medicare will have to insist that they re-think their priorities.

    Also, since half of all seniors are living on total income of less than roughly $20,000, we really cannot expect them to pay out of pocket to go out of network. Already, the $35 co-pays that Medicare charges for specialist care is more than many can afford.

    Unless we want to set up two sharply different tiers of care--one for people who can afford to go out of network, another for people who can't--we should make sure that "in network" care is good enough to be the norm (and the gold standard) 98% of the time, except in those cicumstances where it is clear that the patient cannot get the care he needs in network. Then Medicare should cover "out of network.

    Of course, if a wealthy person wants to pay for something out of pocket that isn't covered by
    Medicare, he should be able to do that. But the vast marjority of practioners and all hospitals that want to be reimbursed by Medicare should have to meet the standards of a network (practicing evidence-based medicine,etc. and accepting the payments that Medicare offers to these network . ) Over time, as you point out, Medicare patients, like the rest, of us, will adjust to the idea that being able to choose your network is fine. You really don't need to choose an individual doctor. The days of having one doctor "my doctor" are past. In the future patients will be treated by teams of doctors and nurses who, by working together, will be able to provide better care.

    But these are quibbles. You've outlined a generous vision of where we should be heading. I hope many people read this.