Medicare Matters

Medicare recipient JoAnn Coffman shops for vitamins at her local drug store.

Health issue brief: Entitlement Reform Means Fixing the Broader Health System

Health care is staying front and center even as the Obama administration and Congress turn their attention from the economic recovery package to the federal budget. Medicare and Medicaid account for about one-fifth of the federal budget. And growth in both programs was outpacing growth in federal revenues and in the overall economy even before the economy plummeted. This should be no surprise. Rising health care costs are imposing the same burdens on the federal government—really, taxpayers—that American families and businesses are facing.

There is widespread consensus among policymakers that our economic stability and the future of our health care system depend on greater fiscal responsibility and slower health care cost growth. But if the federal government misinterprets “fiscal responsibility” as simply cutting Medicare spending, the result will not be lower costs—it will be inadequate protection for Medicare’s older and disabled beneficiaries or cost shifting to these vulnerable groups.

Taking sound action will require addressing what is driving Medicare costs. It’s true that Medicare’s population is growing—and that it will take a big jump when the baby boom generation begins to turn 65 in 2011—but the bulk of Medicare cost growth comes fromincreases in costs per beneficiary, rather than from the growing number of beneficiaries. In other words, it’s the cost of care—not the numbers of people receiving it—that is creating Medicare’s spending problem.

What’s more, when it comes to the cost of care, it is not that Medicare is especially wasteful or profligate—although its practices could certainly become more efficient. Medicare’s spending per person has actually grown more slowly since 1997 than private health insurance for the working-age population. Medicare and private health insurers buy health care in the same marketplace. We can only effectively address the budget problem posed by Medicare by slowing cost growth in the entire market—for everybody.

Despite a wealth of evidence to the contrary, claims are sometimes made that Medicare is too generous, that its protections should be cut back, and that its beneficiaries should bear most of its costs. Lest policymakers fall into that trap, let’s remember what Medicare does and why its protections are so important.

Medicare covers hospital and physician visits, prescription drugs, and other professional care for Americans who are eligible for Social Security: those who are 65 or older and people who receive disability benefits after a two-year waiting period. Yet Medicare’s coverage leaves significant “holes” in its protections.

Medicare, like employer-sponsored health insurance, requires beneficiaries to pay a share of their medical bills. That cost sharing is far higher for hospital and prescription drug coverage under Medicare than it is under private insurance plans for workers. Further, unlike employer-sponsored coverage, which typically sets a limit on how much beneficiaries spend each year through cost sharing, Medicare lacks any catastrophic protection. Medicare also provides limited protection for those who need care in nursing homes or personal care at home—that is, for long-term care.

Medicare beneficiaries face substantial health care expenses: on Medicare premiums for physician and other professional services, on premiums for private insurance to fill in Medicare’s gaps, on cost sharing for Medicare-covered services, and for services such as long-term care that Medicare does not cover.

Given Medicare beneficiaries’ usually low incomes and high health care needs, these expenditures pose considerable burdens. Almost half of all Medicare beneficiaries have incomes below twice the federal poverty level, and more than a third have three or more chronic conditions.

Out-of-pocket spending on health care absorbs a substantial share of Medicare beneficiaries’ incomes. The Kaiser Family Foundation analyzed the most up-to-date data and found that, “[individual] Medicare beneficiaries’ median out-of-pocket spending as a share of income increased from 11.9 percent in 1997 to 16.1 percent in 2005, including a statistically significant increase from 15.6 percent in 2004. In 2005, the 25 percent of beneficiaries with the largest burden spent nearly one-third or more (30.7 percent) of their income on health care.”

Theresearchers concluded that Medicare’s current structure and continually rising health care costs mean that, “all but the highest-income beneficiaries” face problems with affording health care. And although drug coverage was added in 2006, its high cost sharing does little to reduce out-of-pocket spending for Medicare beneficiaries.

Yet there are always proposals to cut, rather than expand, Medicare’s protections. To address just a few:

• Privatizing Medicare, as some have called it, would move Medicare from a benefit offered by public insurance to a contribution toward private insurance. Given evidence that the private sector is no more efficient at providing care than traditional Medicare—and indeed even less so—such a shift would only generate substantial Medicare savings if its “contributions” toward private insurance failed to grow with the costs of care. The result would be increased burdens on beneficiaries—not lower health care costs. This would merely be a different way to shift costs back to vulnerable populations.
• Raising the age of eligibility for Medicare would provide little benefit to Medicare’s financing and cause significant harm to its beneficiaries. Medicare beneficiaries age 65 to 67 are the least likely to be sick and therefore the least expensive. Such a change would also likely increase the number of people who lack insurance, particularly in an environment where employers are cutting back on retiree benefits.
• Cutting Medicare’s benefits would increase out-of-pocket spending that already poses substantial burdens on Medicare households. According to a new study by the Kaiser Family Foundation, health care spending in 2006 absorbed three times as much household spending for Medicare households than for working-age households—14.1 percent and 4.3 percent, respectively.

• Charging more to higher-income Medicare beneficiaries. Given the practices of the nongroup insurance market, excluding even the highest-income older people from Medicare eligibility would expose them to the risk of being uninsured. Although some at the top are able to pay higher premiums, the Medicare program already charges greater premiums for those making $80,000 a year or more. Generating more significant savings for Medicare would mean raising premiums for moderate-income elderly whose burdens are already substantial.
  

  The Congressional Budget Office found that if the $80,000 income threshold was lowered to $64,000, Medicare would save only $1.4 billion in 2009—or less than 0.3 percent of total Medicare spending. The Kaiser Family Foundation study cited above found that only about 15 percent of beneficiaries had per capita incomes above $41,000 per year. There are too few seniors and persons with disabilities who make enough in income to find large savings through this mechanism.

Policymakers are rightly concerned with fiscal responsibility and are also rightly concerned about rising Medicare costs. But good leadership requires that they avoid any semblance of an easy, Medicare-only fix. The right way to control Medicare costs is to have Medicare lead the way in system-wide health reform that makes the provision of health care more efficient and effective for everyone.

Senate Recovery and Reinvestment Act Sells Health Care Short

A nurse administers a vaccine. Funding eliminated from the Senate Recovery and Reinvestment Act would have provided training for and promoted jobs like this in health care.

A percentage-point increase in unemployment could raise the number of uninsured by 1.1 million. So if unemployment rates continue as economists predict—increasing from 4.6 percent in 2007 to 11.1 percent in 2010—more than 7 million people will likely lose their health insurance.

Yet the Senate American Recovery and Reinvestment Act shortchanges support for these American families who are losing their health benefits. The bill offers less than the House version for workers who are losing their jobs and may also back away from investments aimed at refocusing our health care system on promoting health and gaining better value for our dollars. Specifically, the bill:

Limits access to health insurance. The Senate bill excludes a House provision that would make Medicaid available to low-income and other unemployed workers. This provision has significant potential to secure affordable health care to people most in need and promote the jobs that deliver the care.

An amendment further weakened the Senate legislation by pulling back support for COBRA. COBRA enables workers who have lost their jobs to continue to purchase health insurance from their employers. The original Senate bill would have made COBRA more affordable by covering 65 percent of the unemployed worker’s premium, but the amendment reduced support to 50 percent. This change will deprive workers of approximately $1,800 in support for annual premiums.

Eliminates $5 billion in funding for prevention. The health care system is skewed toward high-cost treatment, and it invests too little in preventing costly disease. The Senate bill initially provided support to help move the health care system toward better health promotion with support for immunizations, screenings, and other preventive service. That support was eliminated by an amendment.

Reduces health information technology investment by $2 billion. The health care system is decades behind most American industry in implementing information technology that would minimize waste and promote quality service. Yet an amendment reducing Senate investment in health information technology effectively downgrades support for technology jobs and needed industry reform.

Reduces workforce training by $600 million. Assuring adequate numbers of primary care workers, nurses, and other health professionals is important to providing Americans with needed care. The Senate legislation, like the House bill, initially provided investments in workforce training to get more qualified workers into these positions, but an amendment eliminated this provision and missed an opportunity to expand and protect our health workforce.

Health Information Technology Belongs in the Recovery Package

A nurse at the Veterans Affairs Medical Center in Baltimore uses state of the art technology to scan a barcode before dispensing medicine.

There has been rampant misinformation about the health information technology provisions that are included in the American Recovery and Reinvestment Act. The Senate Finance Committee and others have successfully refuted these false claims.

What’s needed now is a reminder of why it is so important that Congress invest in health IT as part of the economic recovery package. As President Obama has said, investment in health IT “creates jobs right now for people to convert from a paper system to a computer system, but it also pays a long-term dividend by making the health care system more efficient.”

Why does investment in health IT belong in the economic recovery package?

• Investments that will create jobs now and support needed long-term infrastructure are exactly what we need for economic recovery. Based on experience in Massachusetts, the bill’s investment is projected to create over 200,000 jobs in training health personnel, running health systems, and producing hardware and software.
• The funding for health information technology in the recovery package is both an important stimulus and a down payment on broader health care reform.

Why do we need this federal investment?

• Many primary care offices and even institutions find it financially challenging to make the initial expenditures required to modernize the delivery of care. Less than 25 percent of hospitals and fewer than 20 percent of doctor’s offices currently employ health information technology systems. Federal investment is needed to jumpstart the system, moving it in the right direction.

Why do we need health IT?

• As every patient knows, today’s health care system is rife with duplication, complication, and sometimes fatal medical errors. Researchers have found that implementing health IT would improve health outcomes by providing health professionals and patients with better information, and supporting doctors in making clinical decisions together.
• Investing in health information technology will slow the growth in health care costs. Timely and accurate information will increase efficiency and, according to the Rand Corporation, can produce annual savings of $40 billion over a 15-year period.

Entitlement Reform Means Fixing the Broader Health System

Medicare and Medicaid’s Budget Challenges

In This Issue

Senior citizens participate in a yoga class in Ann Arbor, Michigan.

• What are Medicare and Medicaid?
• What is Driving Cost Growth
• Point-Counterpoint
• In the News
• The Last Word

Discussing long-term budget challenges earlier this year, President Barack Obamaremarked, “Social Security, we can solve…. The big problem is Medicare, which is unsustainable.... We can’t solve Medicare in isolation from the broader problems of the health-care system.”

The president is right. Medicare, the entitlement program that provides health coverage for seniors, presents some of the country’s most serious budget challenges. Medicare enrollment, like Social Security, will grow substantially as baby boomers start to become eligible for retirement in 2011. This demographic shift will also strain Medicaid, Medicare’s sister program for low-income families, because much of the program’s budget goes to cover seniors made destitute by the cost of long-term care.

But the far bigger challenge facing both programs is the same one that is making private insurance unaffordable for more and more businesses and individuals: rising health care costs.

Thanks largely to the introduction of new technologies, health care costs have grown an average of 9.8 percent each year—2.5 percentage points faster than the economy as a whole. This cost growth is not only putting health care increasingly out of reach for many Americans; it is a threat to our long-term economic prosperity. The Congressional Budget Office has predicted that unless we take action, health care spending could consume 49 percent of our GDP by 2082, causing wages to stagnate and depressing non-health care sectors of our economy.

Budget hawks in both parties are laying the groundwork to address Medicare and Medicaid’s fiscal problems by limiting spending on these programs. But this “solution” fails to address any of the issues that caused the dramatic increases in health costs in the first place. The vulnerable populations served by these programs are those who will be least able to find affordable coverage in the private market if federal support is taken away. More fundamentally, trimming entitlements without fixing the broader system does nothing to fix the underlying problem that jeopardizes Americans’ access to care and our nation’s long-term prosperity.

Overhauling the health care system will be both a political and fiscal challenge, but there is good news: measures such as health information technology, comparative effectiveness research, and payment structures that encourage doctors to prioritize outcomes over volume can save Americans money and improve the quality of care delivered. 

Some have suggested since the election that budget constraints may force the new president to shelve his plans for health reform. It is clear, however, that addressing our largest budget problems will have to begin with fixing our health care system.

What are Medicare and Medicaid?

Medicare and Medicaid are called “entitlements” because the government is legally obligated to cover all those who meet eligibility requirements. Medicare, which was created in 1965, provides health insurance for Americans over 65 and younger Americans with certain disabilities. In addition to covering doctors’ visits and hospital fees, Medicare began offering a prescription drug benefit in 2006.

Medicare is partly financed the same way Social Security is—dedicated payroll taxes—which means today’s workers are helping pay retirees’ costs. These taxes, also like Social Security, go into a trust fund that anticipates some of Medicare’s growing costs. The dedicated funding stream accounted for 41 percent of Medicare’s $506.8 billion budget in 2008, with an additional 39 percent allocated by Congress out of general revenues. Coverage is not free to beneficiaries, however. Not only did they pay into the system when they were working; they also pay premiums and co-pays for their benefits. Beneficiaries paid 17 percent of their costs, on average, in 2005.

Medicaid, which provides health coverage for low-income families, is structured very differently. It is administered by state governments, which pay a portion of the program’s costs with help from matching contributions from the federal government. (On average, the federal government pays 57 percent of Medicaid costs.) States have a great deal of latitude to determine who is eligible for coverage, though most states generally only make it available to low-income children and their parents. Medicare is especially important to the 10 million Americans who are in need of long-term care, which includes seniors in nursing homes and younger Americans with permanent disabilities who need support to stay in the community.

Unlike Medicare, Medicaid has no dedicated tax. Congress must appropriate its entire budget out of general revenues every year.

What is driving cost growth?

Cost growth is driven by multiple factors, but experts widely agree that technology is overwhelmingly responsible. Experts who have tried to quantify its effect estimate that technology is responsible for almost two-thirds of cost growth.1 This includes everything from new drugs to advanced diagnostic devices to updated surgical techniques. Millions of lives have been saved and improved through these treatments, but they have not come cheap. And not all new technologies improve outcomes—some are no better, or sometimes even worse, than older treatments, even though they come with much higher price tags.

A report from the Kaiser Family Foundation uses the treatment of heart disease to illustrate how technology has increased costs. Coronary artery bypass surgery became more common during the 1970s. In the ‘80s, patients were prescribed beta-blockers on a long-term basis and angioplasty became widespread. The ‘90s brought us implantable defibrillators and stents to unclog arteries.

The mortality rate from heart attack fell by almost half during that 30-year period, from 345.2 per 100,000 people to only 186. And yet a new study from the New England Journal of Medicine shows that this same technology could be used more efficiently and effectively. Stents are being used in patients for whom less invasive and cheaper treatments would be more effective. We also know that many new prescription drugs are no better than generics but cost a great deal more.

“There is a ray of hope,” Peter Orszag told Congress in his former roles as director of the Congressional Budget Office when describing the strain health entitlements are putting on the federal budget. We appear to have massive opportunities to reduce health care costs,” easing the financial pressures while making health care accessible to more Americans. Orszag is currently the director of the Office of Management and Budget.

Orszag laid out four areas in which health reform could produce these savings:

• Increasing the use of health information technology and electronic medical records, which is a necessary, but not sufficient, measure to improving the quality and efficiency of the health care system.
• Expanding research on the “comparative effectiveness” of different options for treating a given medical condition, which could provide information on medical benefits as well as costs.
• Offering financial incentives for better care rather than more care—financial incentives for providers and patients currently encourage or facilitate expensive treatment and procedures, even when there is little evidence that they are more effective than existing therapies.
• Providing incentives for prevention (such as immunizations and screening tests) and healthy living (such as avoiding obesity and smoking) so that people have fewer health care problems throughout their lives.  

We do not face a choice between our personal health and our government’s fiscal health, nor must we choose between securing health care for our seniors and balancing our budget. The choice we face is to tackle the difficult problem of health reform today or jeopardize our health care system and our long-term prosperity.

For Further Reading

The Congressional Budget Office, “ The Long-Term Outlook for Health Care Spending,” November 2007.

The Kaiser Family Foundation, “ How Changes in Medical Technology Affect Health Care Costs,” March 2007.

Point-Counterpoint

POINT	COUNTERPOINT	THE BOTTOM LINE
We can’t afford to tackle health reform now while we face a looming budget crisis.	Rising health care costs are driving the growth of the Medicare and Medicaid entitlement programs, which now account for roughly 20 percent of the federal budget.	Rising health care costs are the biggest threat to the federal budget’s long-term health, and fixing the budget begins with reforming the health care system—the whole system.
The easiest solution to the health care entitlement programs’ budget problems is to limit how much the government spends.	The problems facing Medicare and Medicaid are the same ones plaguing the private health care system: rising costs.	Limiting federal heatlh care expenditures does nothing to address the underlying threat that health care costs pose to our economy.
The recession requires government to tighten its belt, and we need to cut health care spending for Medicare and Medicaid.	Elderly and low-income Americans’ need for affordable care does not diminish with an economic downturn.	If elderly and low-income families lose Medicare and Medicaid, they will likely be unable to find affordable care in the private insurance market, which is already in crisis because of rising health care costs.
Health reform is too expensive.	Rising health care costs could cause our entire economy to stagnate.	We cannot afford not to address rising health care costs, and the problem will only get more difficult the longer we wait.

In the News

“Obama Pledges Entitlement Reform”

The incoming president shares his views on the need for entitlement reform during a roundtable with editors and reporters of The Washington Post.

“Health Care Now”

Nobel-prize winning economist Paul Krugman argues in a New York Times op-ed that the economic crisis makes it more urgent than ever for the federal government to take up health reform.

“Health care: Reform will restore properity”

Congressman Jim McDermott (D-WA) explains why “our health-care financing structure is directly tied to our employment structure” in the McClatchy-Tribune.

The Last Word

“The principal driver of our long-term deficits is rising health care costs…. Rising costs for Medicare and Medicaid, in turn, reflect rising health care costs across the public and private sectors. Therefore, we need to be thinking about ways to slow overall health care cost growth, rather than just reducing the rate of growth in Medicare and Medicaid.”

Peter Orszag, Senate Budget Committee testimony before his confirmation as director of the White House Office of Management and Budget, January 13, 2009.

One Step Closer to Better Health Care

Nurse Lucy Stufflebeam records a patient's heartbeat using a "home telecare" device. Video monitoring is just one form of information technology that can help promote wellness and reduce health care costs.

A centerpiece of the Obama administration's fiscal year 2010 budget, which was released this morning, is $634 billion over 10 years dedicated to health reform in the form of a reserve fund, giving health care advocates much to celebrate. During the presidential campaign, President Obama promised to seriously tackle health reform. This budget demonstrates his determination to deliver on this promise. The health reform reserve fund is a pool of funds explicitly dedicated to the investments in expanded coverage and health system infrastructure we need to improve the American health care system. The administration has identified significant savings in the Medicare and Medicaid programs and specific new sources of revenue for this purpose.

No less important than the reserve fund itself is the savings that flow into it. The administration has identified inefficiencies and overpayments in the Medicare program, and additional savings in the Medicaid program, to cover $317 billion of this fund. These reforms include important changes in Medicare’s payments to private health insurance plans, new incentives to improve quality of care, and more efficient payment systems for patients who need hospital care and post-hospitalization services. They will improve state Medicaid programs’ purchasing power on prescription drugs and provide greater access to generic medications. These changes will result in meaningful savings. More importantly, these changes will strengthen the Medicare program’s long-term financial position, and, through Medicare’s leadership, pave the way for improved efficiency and quality in the entire health care system.

The administration is also making important investments in proven strategies for improving health and wellness. For instance, the budget contains a proposal for a new Nurse Home Visitation program for new parents, which builds on a multiyear demonstration project that has shown its ability to improve health outcomes and reduce child abuse and neglect. Similarly, the administration has committed to using evidence-based approaches to reducing teen pregnancy, including the provision of medically accurate and age-appropriate information to sexually-active youth.

The budget proposal, however, is just a beginning. This budget must be followed by health reform legislation that makes affordable, comprehensive coverage available to everyone. CAP has long advocated for reforms that build on the vital foundation of the Medicaid and SCHIP programs, use the market leverage of group purchasing to achieve reasonable insurance rates for individuals and small businesses, and provide financial help for individuals and families who cannot afford coverage on their own.

Expanded coverage is a worthy goal on its own merits. The financial insecurity, delayed care, and poorer outcomes experienced by people without health insurance create a moral imperative for change. But covering more Americans is also a key component of cost containment. As long as our health care system excludes 16 percent of the population, promising approaches to cost control—such as improved information, enhanced use of technology, and greater utilization of preventive services—will fail to reduce costs.

Health reform must also build on the budget’s first steps at improving quality and efficiency, and reorient health care spending toward prevention, improved access to primary care, and better care coordination for people with chronic diseases. By reforming provider payments, making targeted investments in the health care workforce, rewarding high quality care and improved provider performance, and investing in health care infrastructure—in concert with expanded coverage—we can achieve our ultimate goals of improved health and financial security for all Americans.

Health Reform in an Aging America

Caren-Marie Bowman, left, a volunteer counselor helps Pauline Chase, 78, sign up for her Medicare Part D prescription plan in Concord, NH. We cannot achieve health or fiscal security unless health and entitlement reform efforts address the need for affordable long-term care.

CAPAF's Judy Feder Testifies Before the Senate Special Committee on Aging. (CAPAF).

I am pleased to testify before you today on the need for public action to improve long-term care services and supports. I know you share my view that the nation’s economic stability depends on the well-being of its families and that support for people impaired in the tasks of daily life is vital to that well-being. Sadly, that support is sorely lacking under current policies.

Both during the presidential campaign and since the election of President Obama, we’ve heard much about the need for health reform as critical to restoring prosperity for families and the nation’s economic and fiscal health. Not only is health reform essential to assure affordable health care for all of us; it is also essential to slowing cost growth in our health entitlement programs, Medicare and Medicaid.

However, we cannot achieve health or fiscal security unless health and entitlement reform address the need for affordable long-term care. People with health problems that create both acute and long-term care needs do not distinguish between the two when it comes to finding or paying for care: Both threaten their health and financial well-being. Our current entitlement programs serve people who need both sets of services. About 16 percent of Medicare beneficiaries are eligible for both Medicare and Medicaid—dual eligibles—more than half ofwhom need long-term care. More than a third of Medicaid expenditures are devoted to long-term care services—at home and in the community as well as in nursing homes. We cannot effectively address the needs of people served by these entitlement programs—or their costs—without addressing responsibility for financing long-term care.