The Insurance Value of Medicare

By Katherine Baicker, Ph.D., and Helen Levy, Ph.D.
The New England Journal of Medicine, October 31, 2012

Medicare is an insurance program. The reason we have health insurance at all is not that health care is expensive, but rather that there is great uncertainty about who will need very expensive and potentially lifesaving care and when they will need it. Medicare should give beneficiaries not just access to medical care, but also protection from the risk of catastrophic spending. At the same time, Medicare — like any good insurance — should not cover so much care so generously that beneficiaries end up consuming too much care of questionable value and driving up costs for everyone. Thus, setting cost sharing for Medicare beneficiaries is a balancing act: too little cost sharing means patients have no incentive to spend Medicare dollars wisely; too much means Medicare fails to perform its insurance function.

How well does Medicare do at this balancing act? Not very. Medicare by itself offers only limited protection against economic ruin. The basic benefit lacks a cap on out-of-pocket spending, so beneficiaries are exposed to the risk of open-ended cost sharing that can generate substantial financial strain (or deplete assets for surviving spouses). Moreover, the odds of facing a catastrophic expense mount over time.

Beneficiaries without any supplemental coverage thus do not have enough insurance and face too much risk. This risk is one reason that 90% of beneficiaries obtain some other type of insurance (e.g., retiree health benefits, Medigap, Medicare Advantage, or Medicaid). But beneficiaries with generous supplemental coverage probably have too much insurance. “Too much insurance” may seem like a nonsensical concept, but there is ample evidence that when copayments are lower, patients consume more care, much of which is of questionable benefit to health. The systemwide effects are considerable: the increasing prevalence of health insurance in the United States is estimated to be responsible for about half the increase in per capita health care spending between 1950 and 1990. Having little or no cost sharing may lead enrollees to consume low-value care and drive up the cost of Medicare for everyone.

Nonpartisan and bipartisan groups such as the Congressional Budget Office, the National Commission on Fiscal Responsibility and Reform (also known as the Bowles–Simpson Commission), and the Medicare Payment Advisory Commission have advanced proposals that would address the imbalance in risk facing beneficiaries in the current Medicare program. Although these groups do not propose exactly the same fixes, some of the basic ideas are the same: First, put a cap on the out-of-pocket spending that beneficiaries are responsible for — as most private plans already do — so that those with no other coverage are protected from catastrophic costs. Second, restrict “first-dollar coverage” (coverage with no cost sharing by beneficiaries) in Medicare supplemental insurance, either by banning it or by imposing a surcharge on plans that provide it.

These proposals are controversial. Placing a cap on beneficiary cost sharing would increase program spending at a time when there is intense pressure to cut spending. Restricting first-dollar supplemental coverage would cut program spending but is politically unpopular because it requires lawmakers to tell most beneficiaries that they cannot have the insurance (often private insurance) they are used to having. Furthermore, crude cost sharing that ignores the differences in health benefits produced by different types of care could reduce consumption of highly effective care as much as it reduces consumption of low-value care, especially for low-income populations. Nonetheless, striking a better balance between spreading risk and promoting efficiency would make Medicare a better insurance program.

Medicare was always intended not just to increase access to care but to protect the elderly from financial ruin. As President Lyndon Johnson said when signing Medicare into law in 1965, “No longer will illness crush and destroy the savings that [older Americans] have so carefully put away over a lifetime so that they might enjoy dignity in their later years.”

Although cost sharing is a topic that we have covered before, Katherine Baicker, coauthor of this NEJM article, is very influential in the policy arena, and the issue is sure to be addressed further as politicians look for cost savings in health care, especially as they seek bipartisan solutions to reduce government spending on the Medicare “entitlement.” Both Barack Obama and Mitt Romney have indicated that Medicare entitlement reform will be on the agenda regardless of who is elected as president.

So what is the purpose of a public insurance program such as Medicare? That’s easy. It is or should be designed to ensure that beneficiaries receive the health care that they need when they need it, without having to face a financial hardship. The most effective design to accomplish this would be to cover all necessary medical costs with no cost sharing whatsoever. Financial barriers to health care would be eliminated.

But some say that  the purpose of insurance is to protect against catastrophic losses only, and that it is not intended to protect against routine expenses. The problem with this definition is that far too many individuals do not have enough disposable income to pay those routine expenses, so high-deductible coverage often defeats the goals of ensuring access and preventing financial hardship in the face of medical need.

What about a lower deductible and other forms of cost sharing such as copayments and coinsurance? Same thing. There are still too many who do not have enough disposable income to pay their share plus their other bills.

Let’s go back to what the purpose of a public health insurance program should be. It should remove financial barriers to care. Does cost sharing enhance this function? No, just the opposite. Cost sharing deliberately introduces financial barriers to care. Why? As Baicker and Levy state in this article, “Medicare — like any good insurance — should not cover so much care so generously that beneficiaries end up consuming too much care of questionable value and driving up costs for everyone.” This disregards the fact that it is almost impossible for patients and even doctors to segregate out which care is “questionable.”

Thus the intent of cost sharing is to control spending, not to improve access nor to protect personal finances, both of which it can worsen. The question then arises, is there any better way of controlling spending, especially by methods that would be even more effective? Of course. Simplify administration, establish global budgets, use regional planning to budget capital improvements, reinforce the primary care infrastructure, and switch to administered pricing to ensure fairness. In other words, change to a single payer financing system. Other nations have proven that you do not need cost sharing to control spending.

Though Medicare pays only about half of health care costs on average for seniors, many soften the blow through the use supplemental plans such as Medigap, retiree health benefit programs, or Medicare Advantage. These authors and many others contend that patients must be exposed to first dollar coverage (remember: to control spending, not to improve access nor financial security), and this should be done by either banning supplemental coverage or by penalizing it with surcharges, presumably to be paid by the beneficiaries.

This concept is now so prevalent that we can fully anticipate that it will be part of the entitlement reform that our politicians are clamoring for. Medicare coverage is already inadequate, and they want patients to have even greater exposure to health care costs. Instead, we need to eliminate deductibles and coinsurance from Medicare to ensure both access and financial security. Switching to a single payer improved Medicare that covers everyone is the Medicare entitlement reform that we really need, not just for our seniors but for the rest of us as well.