Saving Medicare: premium supports. (Health Policy Update).

KEY CONCEPTS

* Bipartisan Commission on the Future of Medicare

* Federal Employee Health Benefit Program (FEHBP)

* Medicare Part A, Medicare Part B

* Medicare Plus Choice (Part C)

* Premium Support

Medicare, the universal health care program for the elderly and the disabled, is pending bankruptcy by the year 2008. Efforts to ensure its fiscal solvency are underway. The Bipartisan Commission on the Future of Medicare formed by the Balanced Budget Act of 1997 recently debated a bold new idea to transform this important program. There is some concern that this concept will not solve the problem without new funding. In addition, there are those who believe this is the time to correct one of Medicare's major flaws--the lack of a prescription benefit. Congressional action over the next several months will be critical to saving this program for future seniors.

Medicare was started in 1965 to ensure health care coverage for the elderly (people over age 65) and the disabled. Today It covers more than 38 million individuals at an annual cost of over $214 billion. Its three parts are: (1) Medicare Part A, which pays for hospital costs, (2) Medicare Part B, which covers outpatient costs, and (3) the new Medicare Part C (Medicare Plus Choice), which expands the types of health entities that beneficiaries can use to receive their care.

Part A is paid for through a trust fund primarily from payroll taxes, while Part B is covered through a combination of individual contributions such as monthly premiums, copays, and deductibles, and general federal revenues. Part C, the program's most recent addition, allows beneficiaries to use a broad array of provider-sponsored plans, Medicare preferred provider organizations, private fee-for-service plans, and medical savings accounts. These options offer beneficiaries access to many of the non-Medicare benefits traditionally offered through Medigap policies. Costs for these programs vary depending on the structure of the beneficiary contribution.

A program in trouble

Earlier predictions by leading economists suggested that the Medicare trust fund that covers Part A would become bankrupt early in the 21st century. In 1997, the Balanced Budget Act delayed the onset of this problem until the year 2008, when the number of beneficiaries will begin to rapidly grow as the baby boom generation enters senior-hood. Program growth is expected to reach 69 million by the year 2025, with annual costs for this group doubling per beneficiary to more than $3,000, Total program costs will go from 2.5 percent of gross national product to 6 percent. (1)

The Balanced Budget Act of 1997 also created a 17-member bipartisan commission to study the problem of insolvency and come up with solutions. The Commissions' debate revolved around a total restructuring in the way Medicare pays for health insurance and the addition of an outpatient prescription drug benefit.

Premium support

Committee Chairman Senator John Breaux (D-La) proposed a premium support plan much like the Federal Employees Health Benefit Plan (FEHBP) that covers 9 million federal workers. (2) This would, in effect, privatize Medicare and change it from a defined benefit to a defined contribution program. Currently Medicare provides a single benefit package that functions like an entitlement--Medicare pays for all covered benefits without a cap.

Under the proposed plan, Medicare will make a fixed fiscal contribution in the form of a voucher. Beneficiaries would then shop around for the best deal based on their medical need and price. Uncovered, additional benefits could he paid for out of pocket or offered as part of an expanded package by the insurance plan. Under this plan, annual costs to the program would be more predictable and controllable and there would be less of a tendency to mandate additional benefits. The fee-for-service program would still be available, but it is expected that the premium support would be attractive enough to draw beneficiaries away from this option, thus reducing costs.

A recent study by the Health Care Financing Administration (HCFA) actuaries showed that program costs could be reduced by 11.9 percent by the year 2030. (3) Commission staff and the Congressional Budget Office have similar projected savings. These estimates however, do not include adding an outpatient prescription drug benefit.

Additional cost savings

Under the proposal, the government would pay 88 percent of combined premium costs (Part A and Part B), and beneficiaries would be responsible for 12 percent plus any allowable co-payments and deductibles. Other issues debated included having the affluent pay more, waiving premiums for the poor (for example, contributions would range from 0 to 25 percent based on income), adding a co-payment of 10 percent for home health care visits, and increasing eligibility from age 65 to 67. This age increase would be more to match social security eligibility than to get real savings since this represents only 1 percent of program costs. All of these approaches are controversial and will be raised again in subsequent Congressional debate.

More money

President Clinton has proposed adding $700 billion to shore up the Medicare hospital trust fund program over the next 15 years. These dollars represent 15 percent of the federal budget surplus and would guarantee fund solvency until 2020. This could aid in the debate by adding new dollars for an additional drug benefit or to guarantee a baseline level of benefits. Many are worried that the President's decision to add general fund dollars will transform a program primarily funded from payroll taxes. There is also concern that these dollars will be used by policymakers to again delay the date of insolvency without dealing with structural reform.

A new benefit

Because more than 30 percent of beneficiaries pay out of pocket for prescription drugs, Congressional Democrats are pushing the concept of adding an outpatient prescription drug benefit to any Medicare reform plan. These beneficiaries currently spend about $20 billion a year on prescription drugs. While this would correct what many believe to be the most serious flaw in the program, it would be a costly addition. Recommendations to ensure this added benefit include means testing the drug benefit and requiring Medigap policies to cover prescription drugs.

Pharmaceutical companies have long resisted adding this benefit, fearing it would lead to government controls over drug prices. While this is a possibility, others think that any lost revenue would be quickly made up through the enhanced volume of sales. Recently, the Pharmaceutical Research and Manufacturers of America, the trade association that represents the pharmaceutical companies, announced that a prescription drug benefit is acceptable, but only through private-sector health plans. Democrats want this benefit to be available through both the private sector plans and traditional Medicare.

The future

Private sector health plans would be administrated by a new government agency called the Medicare Board. This board's responsibility would include negotiations over benefits as well as taking over HMO program regulation from the HCFA. Medicare fee-for-service would still be run by the HCFA, which would put it in competition with privately administered plans.

If adopted, premium support will radically change the way coverage is provided for seniors, Program crafters will have to ensure that they maintain some level of benefits and that premiums do not rise to a degree that the federal subsidiary becomes less adequate over time. There is also the risk of reduced quality through restricting provider choice or decreasing access to services. A restructured Medicare program will need to be monitored closely and controls will need to be enacted to ensure seniors receive quality services at an affordable price.

While the commission was close to agreement on many points, issues such as the outpatient drug benefit, means testing, and raising eligibility were contentious enough to became deal breakers. The commission was unable to achieve the supermajority necessary to recommend a plan to the President. Congress may still act on legislation modeled after the Chairman's plan. Some have suggested that this will occur later this year.

Conclusion

Medicare is a successful government program that has resulted in significant improvements in the health and well-being of our nation's disabled and senior citizens. It is a critical component of our health care infrastructure that we can not afford to lose. By thinking "out of the box," using new funds wisely, and looking at what makes sense medically for Medicare beneficiaries, Congress should be able to fix this problem. Now is the time for historic action to save Medicare.

References

(1.) Willensky, G.R. and Newhouse, J.P. Medicare: What's Right? What's Wrong? What's Next? Health Affairs, Vol. 18, No. 1, pp. 92-106, 1999.

(2.) Bipartisian Commission website: http://medicare.commission.gov/medicare/index.html.

(3.) Reichard, J. (Editor), HCFA pegs Breaux premium support plan savings at $372 through 2009, Medicine & Health, Vol. 53, No. 9, 1999.

Georges C. Benjamin, MD, FACP, is the Maryland Deputy Secretary for Public Health Services in Baltimore. He can be reached at 410/767-6510 or via fax at 410/767-6489 or via email at [e-mail].