Reforming Medicare: Options, Tradeoffs, and Opportunities

6. Consumer-Directed Medicare

Under consumer-directed health care, decisionmaking rests with individuals, not with the government (as in social insurance) or with health plans (as in premium support). People would pay for health care through accounts linked to highdeductible insurance plans. This reform springs from the concept of the “ownership society,” in which much of the responsibility for education, pensions, and health care would be shifted from the government to individuals.1 In the case of education , for example, parents would send their children to schools they chose and pay tuition with vouchers the government gave them. People would finance their retirement from individually owned savings accounts into which they would deposit all or part of their Social Security payroll taxes. And a consumer-directed model would replace the traditional Medicare program. In this model, high-deductible insurance coverage would be coupled with personal accounts for out-of-pocket spending. The accounts would be seeded with Medicare funding that a social insurance program would otherwise have used to pay providers directly or that premium support would have funneled to health plans. The deposit would be larger for lowincome than for high-income beneficiaries. These subsidized accounts could be used to pay a wide range of health care 92 6 Consumer-Directed Medicare Consumer-Directed Medicare 93 providers for an equally broad menu of services. Each person would have the responsibility to learn about the prices and quality of care offered in the medical marketplace. Insurers would guarantee a limit on out-of-pocket spending. They might also provide enrollees with tools to navigate the system . Insurance plans would be free to seek discounts through provider networks or formularies and could implement programs to promote disease management or prevention or to improve quality, but these services are not integral to the approach. The consumer-directed model would sharply increase the range of health care decisions made by individuals themselves rather than collectively through social insurance or by insurers. The services covered by highdeductible plans would be loosely defined. Individuals would decide how to use their personal accounts. Supporters also argue that this alternative would give consumers the incentive to use only needed care and to shop frugally. If health care spending were low, account balances would grow.2 A presumed increase in consumer price sensitivity would cause providers to curb needless use of costly procedures. This shift in incentives would allegedly dampen the “medical arms race” that results from consumer price insensitivity induced by insurance with low deductibles. The system’s advocates view Medicare as a glaring example of a “nanny state” that pays even for small outlays and thus deludes beneficiaries into believing that health care is free or nearly free. They also complain that Medicare’s undifferentiated benefits package does not accommodate the diverse insurance preferences of individuals. Critics of consumer-directed health care, in contrast, claim that its advocates overstate its benefits and understate the risk that it would reduce access to care and increase financial hardship for low-income and sick beneficiaries. To explain how consumer-directed Medicare would work, we examine the Bush administration’s medical savings account demonstration. Implemented in 2007, this demonstration allows people with high-deductible health plans to receive Medicare contributions in savings accounts.3 Origins Consumer-directed health care rests on a well-developed political philosophy that embraces private means of production and distribution and free markets.4 Societal goals are said to be best achieved through individual rather than collective action. In health care, for example, individuals empowered through accounts and information are expected to make deci- 94 Consumer-Directed Medicare sions that yield higher welfare than would result from government intervention . This view reflects a traditional American belief that people excel when they are liberated from bureaucratic restrictions and permitted to guide their own destinies and that government programs such as Medicare deny free choice and undermine personal responsibility. Proponents of this form of market competition believe that individuals’ own behavior drives and can hold down health care spending. They note that more than three-fourths of spending now derives from chronic illness, and claim that much of that spending could be prevented or managed by individuals through behavioral changes and appropriate and early use of health care.5 If people had a larger stake in the cost of their care, they might smoke or overeat less or seek health care that staves...