Article on Reforming Medicare
As the Congressional Budget Office’s Long-Term Budget Outlook shows, Medicare is not fiscally sustainable in its current form. Under plausible assumptions about government revenues, continuation on the current path of health care entitlement spending will lead the debt held by the public to exceed 100% of GDP by 2021 and approach 190% by 2035. This “fiscal gap” cannot be closed through revenue increases. At current spending levels, even the increases in taxes on high-income individuals proposed by the Obama administration (through the estate tax, top income tax rates, capital gains and dividend taxes, and re-imposition of the phase-outs of itemized deductions and personal exemptions) will not stop U.S. debt levels from rising at an increasing rate.
There are three schools of thought on how to reform the program. The first would transform it into a marketplace of regulated, private plans with government-provided subsidies for the premiums. This “premium support” model has been proposed most recently by Senator Ron Wyden and Congressman Paul Ryan, but versions of it have been suggested by Alain Enthoven, Gail Wilensky, the Domenici-Rivlin Debt Reduction Task Force, and the National Bipartisan Commission on the Future of Medicare. The second would empower an independent commission to issue recommendations for reform that would be required to be implemented if Congress fails to achieve savings targets. President Obama and the Congress adopted this model in the recent health reform law through their creation of the Independent Payment Advisory Board (IPAB). The third would leave the program basically as it is, and seek to control spending by changing the way that it pays doctors and hospitals. These payment reforms, known as “bundled payment,” involve consolidating payments for an “episode of care,” for example, the hospital charges, surgeon’s fees, and follow-up visits for a hip replacement. The idea behind bundling is to create incentives for providers to manage care better, which would ultimately lead to better value.
Proponents of the first two approaches emphasize the role of public choice failures. According to their reasoning, Medicare spending benefits doctors, hospitals, other health care providers, and the elderly (who are identifiable and organized) but hurts future taxpayers (who are neither) in the form of increased public debt that must ultimately be repaid. As a consequence, politicians seeking re-election have the incentive to expand the program beyond the point that would be in the long-run public interest.
These approaches see premium support and IPAB as mechanisms to commit Congress to limit spending by delegating responsibility for particular cuts to an entity that is less subject to political pressure. In the case of premium support, the institution is the market. The magnitude of and the formula behind the support payment would be determined through the political process, but decisions about which benefits and/or payment rates to cut would be determined by supply and demand (although subject to significant political oversight through regulation). In the case of IPAB, the institution is the appointed board. Recommendations made by the board would move to Congress for fast-track consideration, and if Congress does not act, would be required to be implemented by the Secretary of Health & Human Services.
Proponents of the third approach emphasize technical flaws in traditional Medicare’s reimbursement rules, which reward providers for delivering services rather than value for money. This view has more confidence in traditional Medicare’s ability to adapt to a more constrained future and/or less confidence in premium support and IPAB as commitment devices.
Because each approach has strengths and weaknesses, the choice between them involves a series of trade-offs. This Article describes the terms of these trade-offs and evaluates how the three approaches are likely to perform. It proceeds in four parts. Part II describes the first set of trade-offs, between premium support and IPAB on one hand, and bundled payment on the other. Premium support and IPAB involve broad changes to the Medicare program; bundled payment is more narrow but targeted. Part II explains why broad, fundamental reform is necessary to make the program sustainable. It also explains why successful reform must be able to precommit to spending limits. It therefore favors premium support and IPAB over bundled payment alone (although, as discussed below, bundled payment reforms are likely to be complementary and should therefore be part of either premium support or IPAB).
Parts III and IV explore the second set of trade-offs, between premium support and IPAB. Part III documents why IPAB is unlikely to commit Medicare to a sustainable spending path, why premium support is more likely to do so, and other advantages of premium support. Part IV describes the key drawback of premium support: It may allow providers greater ability to exercise market power, market power that is currently checked by traditional Medicare’s ability to bargain on a nationwide, take-it-or-leave it basis.
Part V concludes. It acknowledges that neither premium support nor IPAB may provide sufficient political cover to enforce sustainable spending limits; that bundled payments have the potential to improve Medicare’s efficiency; and that the drawbacks of premium support are nontrivial. Because bundled payments have been unable to achieve savings of the magnitude necessary to close the fiscal gap, and IPAB carries a greater risk of allowing the fiscal gap to widen to unacceptable levels, Part V concludes that fundamental change in the form of premium support is the best alternative, even if its prospects for success are uncertain.