Medicare catastrophic coverage: a postmortem.

Medicare Catastrophic Coverage: A Postmortem 

As we move beyond the 1980s, it is worth reflecting on the rise and fall of the Medicare Catastrophic Coverage Act of 1988 (P.L. 100-360). Hailed by nearly everyone at its passage as both sensible and needed, it died less than two years later without ever becoming viable. Attacked vigorously by the elderly whom it was designed to serve, the measure finally succumbed to political pressure and passed from the scene, except for some items relating to Medicaid, on the first day of this year. This article examines the Act and the circumstances that led to its demise.

On January 1, 1989, a phase-in of additional Part A and Part B benefits began that would have put all aspects of the Medicare Catastrophic Coverage Act of 1988 (MCCA) in place by 1992, representing the first significant expansion of Medicare benefits in more than 20 years. On January 1, 1990, the Donnelly-Archer amendment terminated all but the Medicaid provisions of the Act. What had been viewed with pride a little more than one year ago by both Congress and the administration that had proposed it is gone, with few mourners, namely various skilled nursing facilities (SNFs), a few Fortune 500 companies, most state governments, and the administration, which lost the near-term deficit reduction effects of the program. The clear cause of death was the massive opposition (for, as we shall see, not particularly rational reasons) of virtually all of the people the MCCA had been designed to benefit. Also contributing to the demise were (1) the consistent opposition of the pharmaceutical industry and (2) a 650 percent error in the estimation of the costs of one portion of MCCA benefits. Even though these two items were not the primary reasons for repeal of the Act, they are worthy of some comment before analyzing the major forces at work. The estimation error provides a textbook example of the practical difficulties of designing centrally planned economic regulation. Prior to January 1, 1988 (and again as of January 1, 1990), Medicare Part A provided coverage for services in an SNF upon certification by a physician that the care was needed following a medically necessary hospitalization of at least three days' duration. Medicare then paid for the first 20 days of SNF care and, after a daily copayment, for the balance of days 21 through 100. MCCA eliminated the requirement for prior hospitalization, required a smaller daily copayment for the first eight days, and paid in full for days 9 through 150. The original Congressional Budget Office estimate for the incremental cost of these features of MCCA for the first five years was $1.8 billion. That estimate was revised this past summer to $13.5 billion, reflecting actual usage of the benefit in ways unanticipated in Washington. The $1.8 billion properly reflected the change in copayment, the extension from 100 to 150 days, and the additional beneficiaries who would now enter SNFs without three days' prior hospitalization. What was omitted was the $11.7 billion that would be claimed by Medicare beneficiaries already occupying SNF beds, the vast majority of whom were being paid for by Medicaid. Under most state Medicaid programs, the SNF collects the beneficiary's Social Security check and applies it to the amount Medicaid allows. Medicaid pays the SNF any difference. Under MCCA, the SNF patient's physician simply certified that the care being given was medically necessary, and the patient, without a hospital stay, was covered for 150 days by Medicare, which paid the SNF a rate significantly higher than Medicaid had been paying (with the SNF absorbing the eight days of copayment). Further, the patient now kept his or her monthly Social Security check. For these five months, no Medicaid funds were required. After five months, the patient had accumulated five months' of Social Security checks in the bank, plus interest. That money could then be spent for SNF care (at the ordinary charge rate). Indeed, the funds had to be spent before the patient could requalify for Medicaid. If, for example, it took two and one-quarter Social Security checks to pay one month's SNF charges, the SNF would have a charge-paying patient for an additional four months, during which time, again, no Medicaid funds would be used. This extended length of coverage exists because the patient would continue to collect Social Security checks while spending the previously accumulated funds. (Five prior months on Medicare plus four months paying charges equals nine months of Social Security checks, divided by two and one-quarter equals four months of charge-paying capacity.) After nine months, and with no personal funds remaining, the patient was eligible to return to coverage funded by Medicaid. Three months later, however, a new benefit year would begin under MCCA, so it would have been possible to repeat the entire process. Not only were SNFs pleased, but so were state Medicaid programs, which had just saved 75 percent of their annual costs for the patient in this example. On the other hand, the people in Washington were less happy. Not only was there regulatory egg on their faces, but there also was the small matter of the additional $11.7 billion. The posture of the pharmaceutical industry was always crystal clear. It had opposed MCCA in 1988 and continued its opposition in 1989. MCCA included an outpatient prescription drug benefit beginning in 1990 that would have paid for all such prescriptions after a prescription deductible of $550 (independent of the regular Part B deductible and rising in subsequent years). The pharmaceutical industry simply must be credited with significantly greater political sophistication than hospitals or physicians. What the government pays for, it eventually regulates. Unlike hospitals and physicians, who embraced federal payments for a large portion of their output and who are or are soon to be subject to Medicare price setting by the federal government, the pharmaceutical industry decided quite logically that it would prefer to have no federal payment and no federal regulation of its prices. But the pharmaceutical industry opposition and the misestimated costs of SNF care get little of the credit for the repeal, according to sources in Washington. The bulk of that credit belongs to Medicare beneficiaries and enrollees and simply reflects the unacceptability to them of MCCA's financing mechanism. (Unknown is whether their reaction to the financing would have been different had payment for long-term custodial care, what they most wanted, been included in MCCA.) In essence, all of MCCA financing was to come from the approximately 32 million persons eligible for its benefits. Thirty-seven percent of the financing was in the form of an add-on to the Part B premium paid by or for every enrollee ($4/month in 1989), with the remaining 63 percent to come from a surcharge applicable to that cohort of Part A beneficiaries who pay income taxes. Thus, while "budget neutral" from a federal fiscal perspective, MCCA involved significant wealth transfer within the target population. The first level of wealth transfer was from "rich" beneficiaries paying the surtax to "poor" beneficiaries not paying the surtax. The second level resulted from the structuring of MCCA benefits to be truly consistent with the concept of "catastrophic," i.e., only a small proportion of the beneficiaries having catastrophic expenses would actually collect, creating a further wealth transfer within the risk pool. As a result, the average actuarial value was not a particularly good measure for the individual beneficiary because fewer than 25 percent of all beneficiaries would actually collect any MCCA benefits in a given year. This second type of wealth transfer was less predictable than the transfer via the surtax, so, not surprisingly, it was those subject to the surtax who quickly organized and vigorously worked for repeal of MCCA, in the process generating significant media attention. This group's position that "We're not our brothers' keepers" did little for its sympathy rating and, for all the media coverage, was at most only contributory to the repeal. A more telling argument was also advanced against MCCA by various Medicare beneficiaries. (The groups of persons making these various arguments are not mutually exclusive but are treated as distinct groups for purposes of separating the various political positions.) This group argued that, although it might not have to pay the income tax surcharge, it did have to pay the extra Part B premium. This was grossly inequitable, the group said, because there was no quid pro quo--they would receive zero economic benefit from MCCA, because MCCA promised them nothing they did not already have. The group consisted of individuals who had retired after many years with employers who already provided everything contained in MCCA to their retirees. The only effect of MCCA was to shift the cost of care covered by MCCA from the employers to Medicare beneficiaries and enrollees. This argument generated a much higher sympathy rating and was heard in Washington. For all its logic, neither it by itself nor even in combination with the antisurtax argument, say sources, would have resulted in repeal. It was a third line of attack, completely lacking in an economic basis, that ultimately made the difference. And it was made even by those beneficiaries who might not have had to pay the surtax, didn't already have the benefits from another source (or who had Medigap policies and would have saved more in reduced Medigap premiums than MCCA would have cost them), and acknowledged that MCCA did contain collectible benefits with clear actuarial value to them (derived from those not meeting the catastrophic threshold). These beneficiaries accosted members of Congress in town meetings in their home districts, especially over Thanksgiving; rose up and threatened members of Congress with future defeat at the polls; and blocked Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, from getting to his car and later pelted the car with eggs. These beneficiaries apparently believed all that Lyndon Johnson and the Congress told them in 1965, and now they said it back to the Congress: "Health care is a right. This care was promised to us. We've worked all our lives for it. We've already paid for it. We are entitled to it. If you don't have the money to pay for it, then get it, not from us, but from the rest of society." This thinking was no more logical in 1989 than it was in 1965, but it was equally persuasive; politically created expectations returned to haunt the creators. All in all, a sobering experience for the Congress.

Hugh W. Long, PhD, is Associate Professor of Health Care Management, A.B. Freeman School of Business, Tulane University, New Orleans, La.