Medicare Is No Model for Health Reform

Democratic leaders at both ends of Pennsylvania Avenue continue to battle over whether a new government-run health plan, modeled after the popular Medicare program for seniors, must be included in health-reform legislation.

President Barack Obama told a New Hampshire town-hall meeting last month that "if we're able to get something right like Medicare, then there should be a little more confidence that maybe the government can have a role." Did the government really get Medicare right? Here are the top 10 reasons this program should not be a model for reform, and why it would be dangerous for the federal government to be put in charge of any more of our health sector:

1) Medicare is going bankrupt. The Medicare Trustees estimate that the program will run short of money starting in 2017. Medicare will drown in a sea of red ink, with spending over the next 75 years outpacing dedicated revenues by nearly $38 trillion.

Providers could not keep their doors open without the higher payments from private insurers.

2) Private payers are bailing out Medicare. According to Milliman, an independent actuarial firm, Medicare--and to an even greater extent, Medicaid--underpays doctors and hospitals, shifting costs to private insurers. Milliman estimates that the average family in a private PPO health plan pays an additional $1,788 a year to compensate for underpayments by Medicare and Medicaid, representing a "hidden tax" on commercial payers totaling $89 billion a year.

Providers could not keep their doors open without the higher payments from private insurers. A recent letter to Congress from 13 leading health-care delivery organizations, including the Mayo Clinic, said "many providers suffer great financial losses associated with treating Medicare patients." They said that if these rates were expanded to patients who currently have private insurance, the result "will be unsustainable for even the nation's most efficient, high quality providers, eventually driving them out of the market." That means we would say goodbye to some of the best health-care systems in the country.

3) Expansion of entitlement programs threatens our economic security. Congressional Budget Office Director Douglas Elmendorf broke the bad news in July. Reform legislation before Congress would worsen the federal government's already bleak budget outlook, increase the deficit, and drive the nation more deeply into debt. Instead of bending the cost curve down, Mr. Elmendorf told senators their reform proposal would "significantly increase" costs.

4) Low administrative costs are a mirage. The claim that Medicare's administrative costs are only 3% is fantasy. If all Medicare costs—such as revenue collection, personnel and enforcement--were accounted for, its administrative expenses would be at least twice as high. And it still wouldn't be providing services private insurers do, such as nurse hotlines, decision-support tools and fraud detection, or paying the income, property and provider taxes that private plans must pay.

5) Medicare is rife with fraud. According to the FBI, between 3% and 10% of all health spending is lost to health-care fraud. Despite the president's promise this money could be recaptured to pay for his reform agenda, Congress has shown itself to be remarkably incapable of curtailing fraud and abuse in government health programs.

6) Medicare short­-changes seniors. Medicare exposes patients to unmanageable costs if they become seriously ill--even limiting the total number of days a patient may spend in the hospital. The program covers only about 50% of the health costs of seniors, and most have supplemental insurance to fill in the gaps. This is not a model for comprehensive coverage.

7) Medicare's model is obsolete. Its basic benefit structure uses a fee-for-service model designed in 1965 which has not been altered since, except to add prescription drug coverage almost 40 years later. In contrast, private plans are continually evolving. They create incentives for patients to become more informed about their health choices, and offer innovative programs for disease management, wellness and prevention, and care coordination to improve quality and save money.

8) Payments are too low. Washington decides how much doctors, hospitals and other providers will be paid down to the smallest detail, with mountains of regulation and paperwork to track the politically driven process. Medical professionals are in a perpetual battle with Congress over their payment rates, and many physicians refuse to accept new Medicare patients because payment rates are so low. With few exceptions, Medicare's solution to cost containment is the club of price-controls, not innovation and efficiency.

9) Medical decisions are made in Washington. Patients and their doctors are slowly losing the ability to decide what course of treatment is best. Medicare's decisions to cut funding for the cancer drug EPO, implantable cardiac defibrillators and virtual colonoscopies, for example, have led to epic battles between providers and politicians, while patients and their doctors watch from the sidelines. Medical decisions, which should be made by doctors and patients, are being made by politicians.

10) No one is running the show. If the government is so good at running health-care programs, why has the Obama administration not yet nominated an administrator for the Centers for Medicare and Medicaid Services? These government health programs cover 100 million American--the largest health insurance plans in the country--and yet the top office is vacant.

Medicare has undeniably guaranteed that all seniors have health coverage, even if that coverage is not as good as advertised. But the program is in trouble. Even though it has a blank check funded by federal revenues, Medicare will not be able to pay all the hospital bills that come in eight years from now. If you think that's bad, just wait until 70 million baby boomers turn 65 and drive federal budget deficits into the stratosphere.

Instead of pretending that Medicare is the best model for the country, policy makers should recognize that the program is as much in need of reform as the rest of the health system. Before we give the federal government authority over health coverage for tens of millions more Americans, shouldn't the government prove it can do a better job with the "public plan" we already have?

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI. Grace-Marie Turner is president of the Galen Institute.

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About the Author


  • Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI), where his research focuses on the economics of health policy — including the Affordable Care Act, Medicare, the uninsured, and the overall reform of the health care system and its financing. He also studies the impact of health care expenditures on federal budget policy.

    Before joining AEI, Antos was assistant director for health and human resources at the Congressional Budget Office (CBO). He has also held senior positions in the US Department of Health and Human Services, the Office of Management and Budget, and the President’s Council of Economic Advisers. He recently completed a seven-year term as health adviser to CBO, and two terms as a commissioner of the Maryland Health Services Cost Review Commission. In 2013, he was also named adjunct associate professor of emergency medicine at George Washington University.

    Antos has a Ph.D. and an M.A. in economics from the University of Rochester and a B.A. in mathematics from Cornell University.

    Follow Joseph Antos on Twitter.

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