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Medicare: Options for the Long Term

Testimony before the Committee on Finance Subcommittee on Health The United States Senate Hearing on Medicare Long-Term Changes

Medicare outlays are projected to grow more rapidly over the next 30 years than the economy, the federal budget, and tax revenues from payroll taxes, premiums, and general revenues that support Medicare. As a result, as currently structured, Medicare will consume an increasing share of the Gross Domestic Product and the federal budget.

None of the proposals currently under consideration by the Congress would assure the adequacy of Medicare financing over the next 30 years. However, slowing the growth in Medicare outlays through such provisions as tightening provider payment rates represents important short-term action to bring Medicare spending closer to rates of economic and budgetary growth.

It would be a mistake to lock in long-term changes in Medicare now. The health system is in a state of enormous flux. It takes time for important health institutions to adapt to these changes, and it takes time to develop sound policies for adapting Medicare to changes in the private sector. Important questions remain unanswered on the long-term ability of managed care to deliver quality health services to elderly and disabled Americans while achieving economies.

No solution should ever lose sight of Medicare's goals--providing health and economic security to older Americans. Before we act, we should remember that before Medicare, half of the elderly were uninsured--and just one serious illness away from financial ruin. It is Medicare which has changed that grim picture, by improving access to care, and contributing to better health and longer lives, while offering financial security.

The way to save the program is not by taking away the protections it offers. Reducing its benefits, exposing vulnerable beneficiaries to added financial burdens, and restricting access to quality health services, would not fix Medicare's problem, but would undermine the program's fundamental purpose instead.


The Congressional Budget Office estimates that Medicare net outlays will grow at 8.7 percent annually between 1997 and 2002, while the Gross Domestic Product (GDP), and the payroll taxes that finance Part A of Medicare, will only grow at a 5 percent rate. By the year 2030, Medicare, if it continues on its current course, will represent 7.1 percent of GDP, up from 2.4 percent today.

For Medicare not to grow as a percent of GDP, real Medicare expenditures per beneficiary (adjusted for inflation) would have to stay constant or decline slightly given the growth in beneficiary population. Such a decline is historically unprecedented and would likely jeopardize beneficiary access to quality health care.

While health spending in the private sector has slowed in the last three years, it is not declining in real terms. Nor are the reasons for the slowdown clear. A recent National Bureau of Economic Research study concludes that managed care enrollment does not explain the change. Whatever its cause, the slowdown may be temporary. Studies have shown that the transition to managed care results in, at best, one-time savings. One can hope this time is different, but hopes are often at odds with reality. The safest guess is that real health expenditures will grow between the historical rate of 4.5 percent and our current low of 2.7 percent. That means it will cost more money, not less, to provide for our growing numbers of elderly Americans.


The choices we make depend upon our commitment to preserve Medicare and the use of our economic and budgetary resources. The principal choices and their consequences are as follows:

Eligibility--Raising the age of eligibility to 67 or 70 would increase the number of uninsured, since employer retiree plans are rapidly dropping their benefits. Only one-third of retirees now have such coverage, with those who retire before age 65 already at risk. Raising the beneficiary age would simply put greater numbers of retirees at risk.

Means-testing eligibility for Medicare also has its downside. Three-quarters of all beneficiaries have incomes below $25,000, and they already spend on average 21 percent of their income on health care. Denying eligibility to beneficiaries with incomes over, say, $75,000, would not save substantial sums. Means-testing premiums beginning at higher incomes would not bring in substantial revenues since so few recipients have high incomes, and would be costly to administer.

Reducing Effective Benefits--Medicare benefits are already less generous than employer plans: there is no ceiling on on-of-pocket expenses, most prescription drugs are not included, and cost-sharing for preventive services such as mammograms limits access. By definition, any increase in cost-sharing falls upon those who use services the most. Since the sickest 10 percent of beneficiaries, who account for 75 percent of expenditures, already have out-of-pocket costs of $8,800, they would be least able to afford such an option.

One possibility may be to give beneficiaries the choice of a comprehensive benefits package, with little or no cost sharing--but at a higher premium. This would give beneficiaries access to more services without purchasing costly MediGap insurance to cover breaches in current Medicare benefits.

Low income elderly and disabled beneficiaries are eligible for assistance through the Qualified Medicare Beneficiary program(QMB) which provides supplemental Medicaid coverage to pick up cost sharing and premiums, and the Specified Low Income Beneficiary program (SLMB), which picks up part B Premiums for those up to 120 percent of the poverty line. But only two-thirds of those eligible participate in QMB, while only 10 percent enroll in SLMB, figures which illustrate the need for more and better outreach. Federalizing this portion of Medicaid and raising eligibility to, say, 150 percent of the poverty line would provide better protection for low income beneficiaries.

Provider Payment Restraints--Medicare has been an innovator in provider payment. Its physician payment system is increasingly accepted as payment in full. Prospective payment to hospitals by Medicare has slowed spending appreciably. Extending these methods to those areas most rapidly growing--home health care, skilled nursing facilities, sub-acute hospital care, and hospital outpatient care should be a top priority.

Managed Care--Approximately 10 percent of Medicare beneficiaries are currently enrolled in managed care plans, a number expected to double by the year 2000. Medicare is losing almost 6 percent for each enrollee because it makes no adjustments for health status and healthier beneficiaries choose managed care while sicker beneficiaries opt for fee-for-service coverage. Before making major expansions in the kinds of managed care plans eligible to participate in Medicare, it is important to reform Medicare's managed care payment methods and institute effective quality assurance and monitoring systems.

Adjusting for health status or lowering the capitation rate for managed care plans from 95 to 90 percent of the fee-for-service cost would save Medicare outlays and improve neutrality in choices between managed care and fee-for-service care. Reducing geographic disparities in managed care payment and delinking increases over time from the fee-for-service part of Medicare are also important changes for consideration.

The evidence of poorer health outcomes for chronically ill elderly people participating in managed care makes it critical to begin immediately to establish high quality standards, and develop an effective monitoring and enforcement system. At a minimum all Medicare managed care plans should be accredited by an appropriate private accrediting organization. Patients in managed care plans should be given adequate information, along with the right to disenroll monthly. Until effective quality standards are in place, the threat of patients "voting with their feet" is an essential safeguard.

Vouchers, Medical Savings Accounts, Catastrophic Insurance--Converting Medicare from a defined benefit program to a defined contribution, as sometimes suggested, would place beneficiaries at financial risk for any extra charge hospitals and physicians might decide to assess. It would undermine the financial security Medicare is intended to provide and undermine the benefits of social insurance.


Medicare's most pressing problem, the looming insolvency of Part A, could be alleviated by moving all or part of Part A's home health care expenses or payments for graduate medical education and disproportionate share hospitals, into Part B of the program. Not only does this make sound financial sense, all the alternative options are worse. The deductible for Part A is already $736, and increasing cost-sharing would fall heavily on the sickest, oldest, and frailest beneficiaries. There is a limit to how fast the health sector can adjust to tighter provider payments, and how much they can be cut, relative to the private sector, before providers refuse to treat.

Second, the source of home health funding is not the problem. The real issues are the rapid growth of home health care and the need for improved administration of the program. This problem would be better solved by: setting guidelines for services based upon health status; establishing prospective payments among geographic regions; and examining practice differences between not-for-profit and for-profit agencies to discover why for-profits provide so many more services. Establishing standards will help lead to better control of expenditures.

Finally, reliance on payroll taxes will always lead to such fiscal crises. Over the longer term it will be important to analyze other sources of revenue, such as consumption taxes, value-added taxes, or greater taxes on the elderly through income-related premiums.

In conclusion, by working to improve benefits, protect beneficiaries, institute prospective payments, improve Medicare's managed care options, and extend the solvency of the Part A Trust Fund, the nation can buy time for an in-depth examination of Medicare's future. Medicare is a success. All options should be closely scrutinized to ensure that it remains so.

Publication Details



Medicare: Options for the Long Term, Testimony before Committee on Finance, Karen Davis, Ph.D., The Commonwealth Fund, March 1997