The Medicare monster

If things keep going the way they are, Medicare is going to gobble us up. It’s bad enough that the direct costs of the roughly $500 billion program keep growing quickly (thanks in part to Congress’s unwillingness to hold the line), but the true impact is even worse. Consider:

  • Only about half of Medicare costs are covered by payroll taxes. The rest come from general revenues, and the proportion is ever-growing
  • A large portion of Medicaid costs –namely nursing home costs for Medicare-eligible patients– should more fairly be classified as Medicare
  • Squeezes in Medicare reimbursement mean that commercial and uninsured patients pay more than they otherwise would, in order to help hospitals and physicians make up for their lower Medicare rates
  • The dominance of Medicare as a payer retards the rate of private sector innovation. As one health plan CEO told me, whenever they try a new payment scheme to induce behavior change, the hospitals just convert it back into Medicare equivalents, defeating the purpose. Since Medicare is the largest customer, it’s not completely irrational for hospitals to do that

What’s to be done? I don’t have a comprehensive solution, but here are a couple of ideas that are too radical even to be considered right now, never mind put into place:

  • Make Medicare means tested. Let richer people pay the full cost (or almost) if they want to participate; institute a sliding scale for everyone else based on income and assets
  • Let doctors and hospitals charge whatever they want, but require them to charge everyone  –Medicare, Medicaid, commercial insurers, and individuals– the same amount. Payers would be able to dictate the amounts they reimburse but they wouldn’t be able to forbid balance billing. In fact it would be required

What would this accomplish?

  • It would reduce Medicare’s impact on the system and (could) spur private sector innovation
  • It would end discrimination against those less able to pay, such as individuals and small businesses, while removing an unneeded subsidy from the well-off elderly
  • It would give providers responsibility for setting their own rates, letting those who want to compete on price and efficiency do so
  • It would encourage commercial plans to add value through network management, disease management, and so on rather than price negotiations

Of course there would be plenty of challenges in actually pulling this off, even if it made it past the formidable forces arrayed against any such move!

July 11, 2008

14 thoughts on “The Medicare monster”

  1. I recently put up a post explaining the Medicare puzzle, since I think many people don’t understand that Medicare is actually a combination of different programs, some of which are offered at no cost to those eligible, and some of which require contribution. However, all require the patient to pay some significant costs on their own. You can read my What’s Covered Under Medicare post at

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  3. Well said, indeed. The only thought I have is that removing the Medicare price controls seems more likely to make the budgetary crisis worse. Even if we adjusted our fee schedule way down, the cost for services would still go way up. This problem would be much worse in markets (like ours) where there is only one dominant player and thus no meaningful incentive to compete on cost.

  4. Thanks for this post. You may not realize it, but these two “radical” steps are simply unknown to most people outside the business, including me. Your post goes a long way in educating us.

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