Medicare: Policy Alternatives to Address Major Financing and Delivery System Challenges
Nancy Kane
Professor of Health Management
Associate Dean for Education, Department of Health Policy and Management
Harvard School of Public Health
MEDPAC Advisory Board Member
Medicare was originally signed into law on July 30, 1965 by President Lyndon B. Johnson. In 1965, the life expectancy was 70.2 years, and the leading causes of death were acute illnesses, such as fatal heart attack, stroke, or injury. Now, in the 21st century, the healthcare needs of elders have changed. Life expectancy has increased to 77.9 years, and instead of dying from acute episodes of disease, today’s elders require management for chronic disease and often more than one disease or condition. In line with this, Medicare costs are exploding. In 2006, Medicare spending was $330 billion dollars, accounting for 12% of the federal budget. “Medicare was never designed with chronic disease in mind,” said Kane. “With current rates of growth, by 2040, and probably even earlier, the entire federal budget will be consumed with Medicare spending, Social Security spending and paying off interest on the national debt.”
With this as her backdrop, Kane turned to a discussion of the social, political, and economic constraints facing Medicare today. In 2006, Medicare was financed in almost three equal ways: federal tax revenue, employer and employee taxes, and premiums, copays and deductibles paid by beneficiaries. By 2012, over 45% of the cost for Medicare is projected to have to come from federal tax revenue. According to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, a “Medicare funding warning” should be triggered when federal tax revenue is projected to account for 45% or more of total Medicare spending for any one year within the seven-year projection period. After two consecutive funding warnings are issued, the MMA dictates that the President should propose legislation to the Congress to prevent federal tax revenue from actually accounting for 45% of program expenditures. In other words, the “45% trigger” should cause cuts in spending for Medicare.
How can we avoid the 45% trigger? Kane explored the idea of increasing employer and workers tax revenue, concluding that the payroll tax would have to be increased to 6% for that idea to work. However, employers are already dropping or cutting insurance coverage for their workers, and workers are already having trouble financing their part of their own health insurance. In addition, the ratio of elders to adults of working age has been declining steadily and is projected to continue to decline, further decreasing the impact of a higher payroll tax.
Kane next suggested that perhaps beneficiaries should be responsible for the cost, through increased premiums, copays and deductibles. Currently, Medicare costs consume about one-quarter of the average Social Security income; this is projected to rise to nearly double that by 2030. Raising costs further is simply untenable.
What might be the solution? Kane suggested that the entire Medicare payment policy would have to change. She noted that the current fee-for-service policy pays more for quantity of care regardless of value, overvalues procedures, undervalues primary care, does not support what needs to be done to manage chronic diseases, and creates conflicting incentives by having separate payment systems for hospitals and physicians.
Kane put forward a “pay-by-episode” model in which each elder would have a care manager who would coordinate every episode of illness. Medicare would pay by episode, and the care manager would coordinate how the money could be spent among physicians, hospitals and other care facilities in order to secure the best quality care. Under such a program, elders would select a “medical home” that would be held accountable and paid based on utilization and quality outcomes.