Reforming Medicare: Options, Tradeoffs, and Opportunities

7. Assessing Medicare Reform: Options and Prospects

Almost everyone agrees that Medicare needs to be improved, but not on how to do it.1 Assessments of what is right and wrong with the program are numerous and con- flicting. Some argue that the program is too comprehensive, others that it is not comprehensive enough. Some suggest it pays too much for health care, others too little. Despite these differences, most reform plans are variations on the three approaches described in chapters 4, 5, and 6. The first, updated social insurance, would allow Medicare to determine benefits and payment rates. The second, premium support , would give each beneficiary a fixed amount to buy private coverage from insurers that would set benefits and provider payments . Consumer-directed Medicare, the third option, would have beneficiaries pay for care from government-supported savings accounts or out of pocket up to a high deductible, after which catastrophic insurance coverage would begin. These approaches mirror those contemplated for the reform of the entire health system. Performance of the Current System Medicare’s central objectives are to ensure affordable access to high-quality health care and at the same time control overall 115 Assessing Medicare Reform Options and Prospects 7 116 Assessing Medicare Reform Options and Prospects costs. These goals are elusive and in mutual conflict. As explained in chapter 3, Medicare does a good job of providing access to covered services. Cost sharing is modest for many services and zero for some, but potentially ruinous for those who suffer protracted hospitalizations. Coverage of some services—mental health, long-term care, and periodic physical examinations—is severely limited. However, Medicare opens the doors to virtually all health care providers in the United States. It also sustains hospitals and other providers in thinly settled areas. Medicare is unquestionably popular.2 Its beneficiaries express satisfaction with their coverage far more than do people covered by any other type of health insurance. However, Medicare has been barred from using its market power to improve the quality of care. Congress requires it to reimburse any provider with a license who serves enrollees. Medicare is therefore prohibited from forcing low-quality providers to either improve their skills or drop out of the program. Because Congress has prohibited Medicare from “interfering with the practice of medicine,” it has seldom withheld or withdrawn reimbursements for untried or ineffective procedures, or tried to induce physicians and hospitals to increase their practice of cost-effective care, or penalize them for not doing so. Some of Medicare’s quality shortcomings are endemic to the U.S. health system. Cost and use vary widely from place to place without corresponding differences in health outcomes. Most insurers pay for specific services rather than full episodes of care or outcomes. Optimal treatment of seriously ill patients—especially those with multiple conditions who account for the majority of health care spending—requires the cooperation of many practitioners, including physicians, nurses, and technicians.3 Case histories and test results must also be readily available. Well-managed integrated medical practices promote cooperation among physicians within hospitals and between providers of inpatient and outpatient care. Yet neither Medicare nor private insurers have effectively promoted such cooperative delivery of care. After a rocky start, Medicare has done about as well—or poorly—as private insurers in controlling per capita spending. Initially, the program contributed to a sharp rise in the price of all health care by covering all incurred hospital costs and paying physicians in a way that spurred fee inflation. By enabling its beneficiaries to access high-cost treatments that were previously unaffordable, it may have underwritten the cost-increasing technological revolution that has reshaped modern medical care.4 Later, Assessing Medicare Reform Options and Prospects 117 Medicare’s prospective payment systems limited the direct incentives to charge excessive fees. Some analysts attribute the sharp reduction in the duration of hospital stays to Medicare’s inpatient prospective payment system .5 By limiting prices for physician and other services, Medicare has tried to hold down the unit cost of these services as well. Indeed, Medicare has been a leader in efforts to limit the growth of health care spending. All the same, these efforts have not narrowed the margin by which health care spending outpaces income growth. Some of this margin results from a payment and coverage system that does little to discourage low-benefit care. Some occurs because Medicare...