"Death spiral" of traditional Medicare
Kaiser Daily Health Policy Report
June 18, 2003
House Ways and Means Panel Approves Medicare Reform Bill
The House Ways and Means Committee on June 17 voted 25-15 to approve an approximately $413 billion, 10-year bill (HR 2473) that would attempt to increase participation of private plans in Medicare and offer all beneficiaries a drug benefit, the Wall Street Journal reports (Rogers, Wall Street Journal, 6/18).
The bill also would establish direct price competition between traditional Medicare and private health plans beginning in 2010.
The House bill includes a provision that would increase payments to existing Medicare+Choice health plans up to 3% to 16% above fee-for-service payments in their area, the Journal reports. The increased payments would take effect before 2006, creating an “investment window” in which Republicans believe private plans could compete profitably but also use the increased subsidies to reduce premiums or increase benefits packages to make them more attractive to beneficiaries, according to the Journal.
http://www.kaisernetwork.org/daily_reports/rep_hpolicy_recent_rep.cfm?dr_cat=3&show=yes&dr_DateTime=18-Jun-03
Comment: The fundamental principle that competition reduces costs applies only to a truly free marketplace. Medicare and the private Medicare options do not adjust their costs based on free market forces. In this legislation, the Republicans are suggesting that a free market is created by offering more private plans, and, especially, by requiring the traditional Medicare program to compete with the private plans. But they apparently don’t really believe it.
Even the Republicans seem to understand that market competition isn’t working. Otherwise, why do they have to offer Medicare + Choice HMOs payments that are 3% to 16% above the fee-for-service payments? Every study has confirmed that the private Medicare options have cost more than the traditional program when corrections are made for the fact that the private plans have been successful in selectively marketing to a comparatively healthy subset of Medicare beneficiaries. Efforts to set up competitive Medicare models failed when no insurer would agree to participate. The reason for reinforcing the private options with larger payments is to create a larger private sector that would eventually replace the traditional program. At the current level of funding, the private Medicare sector is shrinking, rather than growing.
Why should we be concerned about giving the traditional Medicare program a stimulus to become “more efficient” by forcing it to compete with private plans? The answer is quite complex, but briefly, healthier patients would end up in the private plans, leaving chronically ill, high-cost patients in the traditional program. These higher costs, in the Republican competitive model, would be passed on to the beneficiaries in the traditional program in the form of higher premiums. This premium “death spiral” would force them out of the traditional program, destroying Medicare as we know it. A private plan Medicare system would deprive patients of choice of their physicians and hospitals, would waste resources in administrative excesses, and, perhaps worst of all, would be subjected to the political forces that would result in diminution of the public funding component of Medicare, severely impairing the equitable nature of this system. For low-income individuals, the inevitable result would be inadequate benefits and unaffordable cost sharing.
Families USA has posted an explanation of the how forcing Medicare to compete would result in the death spiral for the traditional program:
http://www.familiesusa.org/site/PageServer?pagename=Medicare_Central_private_example&JServSessionIdr007=t1imducywy.app5b