The Medicare Muddle
By PAUL KRUGMAN
Published: March 26, 2004

In advance of Tuesday’s reports by the Social Security and Medicare trustees, some credulous journalists wrote stories based on tips from advocates of Social Security privatization, who claimed that the report would offer a radically downgraded vision of the system’s future. False alarm: projections for Social Security are about the same as last year. Projections for Medicare, however, have worsened: last year the trustees predicted that the hospital insurance trust fund would last until 2026, and now they’ve moved it back to 2019.

How should we react to this news?

It has become standard practice among privatizers to talk as if there is some program called Socialsecurity and medicare. They hope to use scary numbers about future medical costs to panic us into abandoning a retirement program that’s actually in pretty good shape. But the deteriorated outlook for Medicare says nothing, one way or another, about either the sustainability of Social Security (no problem) or the desirability of private retirement accounts (a lousy idea.)

Even on Medicare, don’t panic. It’s not like a private health plan that will go belly up when it runs out of money; it’s just a government program, albeit one supported by a dedicated tax. Nobody thinks America’s highways will be doomed if the gasoline tax, which currently pays for highway maintenance, falls short of the system’s needs — if politicians want to sustain the system, they will. The same is true of Medicare. Rising medical costs are a very big budget issue, but 2019 isn’t a drop-dead date.

The trustees’ report does, however, give one more reason to hate the prescription drug bill the administration rammed through Congress last year. If deception, intimidation, abuse of power and giveaways to drug companies aren’t enough, it turns out that the bill also squanders taxpayer money on H.M.O.’s.

A little background: conservatives have never mounted an attack on Medicare as systematic as their effort to bully the public into privatizing Social Security. They do, however, often talk about Medicare “reform.” What this amounts to, in practice, is a drive to replace the traditional system, in which Medicare pays doctors and hospitals directly, with a system in which Medicare subcontracts that role to private H.M.O.’s.

In 1997 Congress tried to take a big step in that direction, requiring Medicare to pay per-person fees to private health plans that accepted Medicare recipients. There was much talk about the magic of the marketplace: private plans, so the theory went, would be far more efficient than government bureaucrats, offering better health care at lower cost.

What actually happened was that private plans skimmed the cream, accepting only relatively healthy retirees. Yet Medicare paid them slightly more per retiree than it spent on traditional benefits. In other words, instead of saving money by subcontracting its role to private plans, Medicare was in effect required to pay H.M.O.’s a hefty subsidy.

The only thing that kept this “reform” from being a fiscal disaster was the fact that after an initial rush into the Medicare business, many H.M.O.’s pulled out again. It turns out that private plans are much less efficient than the government at providing health insurance because they have much higher overhead. Even with a heavy subsidy, they can’t compete with traditional Medicare.

There’s a lesson in this experience. Sometimes there’s no magic in the free market — in fact, it can be a hindrance. Health insurance is one place where government agencies consistently do a better job than private companies. I’ll have more to say about this when I write about the general issue of health care reform (soon, I promise!).

But whether because of ideology or because of H.M.O. campaign contributions, the people now running the country refuse to learn that lesson. As part of last year’s prescription drug bill, they tried again, offering an even bigger subsidy to private plans.

And that turns out to be an important reason for the deterioration in Medicare’s prospects: of the seven years lopped off the life of the trust fund, two are the result of increased subsidies mandated by last year’s law, mainly in the form of higher payments to H.M.O.’s.

So what did we learn this week? Social Security is in decent shape. Medicare has problems, but ill-conceived “reform” has only made those problems worse. And let’s rip up that awful prescription drug bill and start over.  

E-mail: krugman@nytimes.com

Does universal comprehensive insurance encourage unnecessary use? Evidence from Manitoba says “no”

Many argue that “free” medical care leads to unnecessary use of health resources. Evidence suggests that user fees do discourage physician use, at least by those of low socioeconomic status. In this study, we compare health care utilization and health among socioeconomic groups to determine whether people of low socioeconomic status see physicians more than would be expected given their health status

Read the full article at http://www.cmaj.ca/cgi/content/full/170/2/209?maxtoshow=&eaf

United States House of Representatives Committee on Ways and Means

Hearing on Board of Trustees 2004 Reports
March 24, 2004

Written statement of Don R. McCanne, M.D., Past-President, Physicians for a National Health Program

The 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds describes the projected imbalances between the anticipated revenues and the expected growth in expenditures of the Medicare program. The Trustees call for prompt, effective, and decisive action to address this challenge.

As expected, a highly charged political debate rages over the causes of these anticipated net deficits in Medicare funding. Although we will hear much about factors such as the generous payments to Medicare Advantage plans, and the decline in tax revenues supporting the program, one factor predominates above all others: health care costs continue to escalate well beyond the level of inflation.

Health care cost increases are related to expanding and ever more expensive technological advances, along with unrestrained expansion in the capacity of our health care delivery system. We are spending more because we find more ways to spend health care dollars, and because we continue to expand the capacity that allows us to do it.

Approaching the Medicare deficit as an isolated problem will not address the fundamental cause of health cost increases. Rather, the integrity of the Medicare program would be threatened because solutions would be narrowly directed to substantially increasing revenues and/or dramatically reducing benefits. Either a reduction in benefits or an increase in cost sharing by the beneficiary would threaten to impair access to care because of lack of affordability for the individual beneficiary. The alternative of asking taxpayers to fund the increase in Medicare costs would be problematic when considering that they would also be facing the same escalating health care costs.
PAGEBREAK
We already know that regions with higher health care capacity have increased intensity of services but without a commensurate improvement in medical outcomes. Hospitals with greater bed capacity in their intensive care units provide costly and relatively inhumane end-of-life care when less expensive and more compassionate care would be provided in a hospice environment. Physician owned specialty hospitals and medical group owned imaging systems significantly increase capacity and the level of services although there is negligible data available to demonstrate improved outcomes.

Other nations have demonstrated that planning and capital budgeting of capacity can prevent excessive utilization while ensuring adequate capacity to prevent unnecessary queues. The 15.5% of our Gross Domestic Product that we are currently spending on health care is more than enough to ensure appropriate capacity plus fund the operating expenses of our system, with the proviso that we do not waste resources on some of the current excesses of our system. Although health care planning declined after prior efforts, the current level of spending has reached a threshold that now makes it imperative.

The administrative costs of private health plans are significantly greater than those of public programs such as Medicare. But an even greater problem is the profound administrative burden placed on our health care delivery system by our fragmented system of a great multitude of private plans, large public programs, and, for some, no programs at all. In 2003 numbers, an estimated $286 billion in these administrative costs could be recovered and utilized for the deficiencies in health care coverage today. Eliminating administrative waste must be a part of our solution to rising costs.
PAGEBREAK
Although our national policies protect and promote technological development, there is a pressing need to demand value for our private and public investment. Pharmaceutical firms that develop copycat drugs merely for the purpose of restarting the patent clock should no longer be disproportionately rewarded for such non-innovative efforts. Only new products with demonstrated value should be rewarded with higher prices. Also new products developed with public funding should return that investment to the taxpayer through lower prices. We should require that new technological innovations provide both significant medical benefit and value before funding them. And there is ample evidence to demonstrate that prices are much higher in the United States than in other nations. We clearly need a method of negotiating rates and prices to be sure that we are receiving a fair value for our health care investment while allowing a fair but not excessive profit for the manufacturer or provider.

To bring the level of health care cost increases down to near the rate of inflation, we need to control capacity and pay fair prices. Medicare alone cannot have a significant influence on capacity. Although Medicare does have some regulatory control over prices, acting alone inevitably results in inequitable results through cost shifting and unfairness in pricing, while failing to control global costs. And Medicare cannot further reduce administrative waste when it is adding to the administrative burden by being an additional player in our fragmented system.

Replacing our inefficient and wasteful system of funding care with a single public payer would control costs through global budgeting, planning and budgeting of capital improvements, and negotiation of rates and prices. And with the administrative savings made possible by eliminating the waste of the private bureaucracies, we could afford to fund care for everyone while controlling costs on into the infinite horizon. Instead of limiting Medicare reform considerations to revenue increases and benefit reductions, let us adopt systemic reforms that will enable the enactment of comprehensive, affordable coverage for everyone.

Don McCanne, M.D.
Home address:
33781 Avenida Calita
San Juan Capistrano, CA 92675-4905
Telephone 949-493-3714
Fax 949-493-7985
don@mccanne.org

Physicians for a National Health Program
29 E. Madison St., #602
Chicago, IL 60602
Telephone 312-782-6006
Fax 312-782-6007
pnhp@aol.com
www.pnhp.org

United States House of Representatives Committee on Ways and Means

Hearing on Board of Trustees 2004 Reports
March 24, 2004

Written statement of Don R. McCanne, M.D., Past-President, Physicians for a National Health Program

The 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds describes the projected imbalances between the anticipated revenues and the expected growth in expenditures of the Medicare program. The Trustees call for prompt, effective, and decisive action to address this challenge.

As expected, a highly charged political debate rages over the causes of these anticipated net deficits in Medicare funding. Although we will hear much about factors such as the generous payments to Medicare Advantage plans, and the decline in tax revenues supporting the program, one factor predominates above all others: health care costs continue to escalate well beyond the level of inflation.

Health care cost increases are related to expanding and ever more expensive technological advances, along with unrestrained expansion in the capacity of our health care delivery system. We are spending more because we find more ways to spend health care dollars, and because we continue to expand the capacity that allows us to do it.

Approaching the Medicare deficit as an isolated problem will not address the fundamental cause of health cost increases. Rather, the integrity of the Medicare program would be threatened because solutions would be narrowly directed to substantially increasing revenues and/or dramatically reducing benefits. Either a reduction in benefits or an increase in cost sharing by the beneficiary would threaten to impair access to care because of lack of affordability for the individual beneficiary. The alternative of asking taxpayers to fund the increase in Medicare costs would be problematic when considering that they would also be facing the same escalating health care costs.
PAGEBREAK
We already know that regions with higher health care capacity have increased intensity of services but without a commensurate improvement in medical outcomes. Hospitals with greater bed capacity in their intensive care units provide costly and relatively inhumane end-of-life care when less expensive and more compassionate care would be provided in a hospice environment. Physician owned specialty hospitals and medical group owned imaging systems significantly increase capacity and the level of services although there is negligible data available to demonstrate improved outcomes.

Other nations have demonstrated that planning and capital budgeting of capacity can prevent excessive utilization while ensuring adequate capacity to prevent unnecessary queues. The 15.5% of our Gross Domestic Product that we are currently spending on health care is more than enough to ensure appropriate capacity plus fund the operating expenses of our system, with the proviso that we do not waste resources on some of the current excesses of our system. Although health care planning declined after prior efforts, the current level of spending has reached a threshold that now makes it imperative.

The administrative costs of private health plans are significantly greater than those of public programs such as Medicare. But an even greater problem is the profound administrative burden placed on our health care delivery system by our fragmented system of a great multitude of private plans, large public programs, and, for some, no programs at all. In 2003 numbers, an estimated $286 billion in these administrative costs could be recovered and utilized for the deficiencies in health care coverage today. Eliminating administrative waste must be a part of our solution to rising costs.
PAGEBREAK
Although our national policies protect and promote technological development, there is a pressing need to demand value for our private and public investment. Pharmaceutical firms that develop copycat drugs merely for the purpose of restarting the patent clock should no longer be disproportionately rewarded for such non-innovative efforts. Only new products with demonstrated value should be rewarded with higher prices. Also new products developed with public funding should return that investment to the taxpayer through lower prices. We should require that new technological innovations provide both significant medical benefit and value before funding them. And there is ample evidence to demonstrate that prices are much higher in the United States than in other nations. We clearly need a method of negotiating rates and prices to be sure that we are receiving a fair value for our health care investment while allowing a fair but not excessive profit for the manufacturer or provider.

To bring the level of health care cost increases down to near the rate of inflation, we need to control capacity and pay fair prices. Medicare alone cannot have a significant influence on capacity. Although Medicare does have some regulatory control over prices, acting alone inevitably results in inequitable results through cost shifting and unfairness in pricing, while failing to control global costs. And Medicare cannot further reduce administrative waste when it is adding to the administrative burden by being an additional player in our fragmented system.

Replacing our inefficient and wasteful system of funding care with a single public payer would control costs through global budgeting, planning and budgeting of capital improvements, and negotiation of rates and prices. And with the administrative savings made possible by eliminating the waste of the private bureaucracies, we could afford to fund care for everyone while controlling costs on into the infinite horizon. Instead of limiting Medicare reform considerations to revenue increases and benefit reductions, let us adopt systemic reforms that will enable the enactment of comprehensive, affordable coverage for everyone.

Don McCanne, M.D.
Home address:
33781 Avenida Calita
San Juan Capistrano, CA 92675-4905
Telephone 949-493-3714
Fax 949-493-7985
don@mccanne.org

Physicians for a National Health Program
29 E. Madison St., #602
Chicago, IL 60602
Telephone 312-782-6006
Fax 312-782-6007
pnhp@aol.com
www.pnhp.org