Reforming Medicare- Obama and Ryan have it right…and wrong. Take a look at both plans

Your going to do what to my Medicare?

Now that the debate on reforming Medicare has finally started, what do we do? First, we dismiss as either nonsense or pie in the sky both the Obama plan (if that’s what you call it) and the Ryan plan (a plan, but not a good one). The fact is both Obama and Ryan are right and both have plans that will not work.

Government run Medicare is here to stay, the public wants it to stay, and even the farthest right among us and the Tea Party know that releasing tens of millions of people to fend for themselves for health care coverage between age 65 and the hereafter is nonsense. It ain’t going to happen. No, I have not lost my mind or made a sharp turn left, I am merely drawing on nearly fifty years experience managing health benefit programs, working with employees and retirees from CEOs to laborers helping then understand and navigate their health benefits and to use them wisely.

Two elements of health care are big in the news these days, consumer driven health care and wellness and both of these are part of the approaches being proposed to deal with Medicare. Forget it. Neither will control health care costs. If anyone thinks that we can turn heavy users of health care into consumers in their old age they are as out of touch with reality as Rush Limbaugh and Paul Krugman. Has Paul Ryan ever talked to a group of people in their seventies, eighties or nineties? If you can get the private insurers to market their product at the early bird dinner or in the assisted living facility you may have something, but make sure they show up on a weekly basis.

The President must have forgotten what his own legislation does

The Obama non-plan relies on elements of PPACA that have already been counted in paying for health care reform, not sure how much more you can squeeze out of a commission making recommendations that can’t touch the fundamental elements of the problem. The idea that we can move forward with Medicare under a business as usual mentality when it comes to the beneficiaries receiving health care is ludicrous. In addition, as Professor Laurence Kotlikoff of Boston University points out, health care reform uses vouchers just as proposed under the Ryan plan. American families earning up to about $88,000 a year will receive credits toward purchasing health insurance. Are we to believe that these credits will rise at the same rate as health care (premiums)? If so, then the cost projections for PPACA must be substantially understated. If not, then the subsidized families will carry more and more of the cost of health insurance just as will Medicare beneficiaries under the Ryan plan.

On top of that while the President talks about Ryan sticking seniors with $6,000 in extra costs and giving it to the rich, his health care reform program imposes a new tax on so-called Cadillac health plans. What’s the difference? To comply with this requirement of PPACA health plans will lower the benefits thus shifting more costs to the average worker, in many cases because of their generous benefits, to government union workers.

Rush Limbaugh’s Death Panels-The Obama Plan to save money for Medicare

No, it is not a death panel as I heard Limbaugh yelling on the radio, but neither is it likely to generate much in the way of savings. Here is what the new health care law says about Medicare’s Independent Payment Advisory Board, the group of fifteen. I added the bold to point out some key points. For the most part this Board does not even deal with Parts A and B of Medicare.

Sec. 3403 as modified by Sec. 10320. Independent Payment Advisory Board.

This provision establishes an Independent Payment Advisory Board to develop and submit detailed proposals to Congress and the President to reduce Medicare spending. The Board is to consist of 15 members with expertise in health care financing, delivery, and organization. All members are to be appointed by the President and confirmed by the Senate. Proposals are to primarily focus on payments to MA and PDP plans and reimbursement rates for certain providers. The Board will be prohibited from developing proposals related to Medicare benefits, eligibility, or financing. Proposals, which will only be required in certain years, will have to meet specific savings targets. Recommendations made by the Board automatically go into effect unless Congress enacts specific legislation to prevent their implementation. The first year the Board’s proposals can take effect is 2015.

Scope of Proposals. The provision lays out a number of specific fiscal and policy criteria which the Board will be required to meet in making its recommendations. When developing and submitting proposals, the Board is required, to the extent feasible, to (1) prioritize recommendations that would extend Medicare solvency and target reductions to sources of excess cost growth; (2) include only those recommendations that improve the health care delivery system, including the promotion of integrated care, care coordination, prevention and wellness and quality improvement and protect beneficiary access to care, including in rural and frontier areas; (3) consider the effects of changes in provider and supplier payments on beneficiaries; consider the effects of proposals on any provider who has, or is projected to have, negative profit margins or payment updates; (4) consider the unique needs of individuals dually eligible for Medicare and Medicaid, and (5) include recommendations for administrative funding to carry out its recommendations.

As appropriate, each proposal is required to include recommendations that would reduce spending in Medicare Parts C and D. Reductions could be obtained by reducing Medicare payments for administrative expenses to MA and PDP plans, denying or removing high bids for drug coverage from the calculation of the monthly bid amount for Part D plans, and reducing performance bonuses for MA plans. Recommendations may not target the base beneficiary premium percentage or the full premium subsidy for Part D plans.

The Board is prohibited from making recommendations that would ration care, raise revenues, increase beneficiary premiums, increase beneficiary cost-sharing, restrict benefits, or modify eligibility.  Additionally, proposals submitted before December 2018 for implementation in 2020, cannot include recommendations that would reduce payments to providers and suppliers scheduled to receive a reduction in their payment updates in excess of a reduction due to productivity.

Does any of the above sound like it has a chance of saving trillions of dollars? There is as much the Board cannot recommend as it can. The weasel words contain in PPACA try as hard as possible to avoid any impact on beneficiaries. That is a dream and why the Obama plan is no plan at all of serious consequence.

Obama on Medicare reform

Already, the reforms we passed in the health care law will reduce our deficit by $1 trillion. My approach would build on these reforms. We will reduce wasteful subsidies and erroneous payments. We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency and speed generic brands of medicine onto the market. We will work with governors of both parties to demand more efficiency and accountability from Medicaid. We will change the way we pay for health care – not by procedure or the number of days spent in a hospital, but with new incentives for doctors and hospitals to prevent injuries and improve results. And we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services seniors need.

Now, we believe the reforms we’ve proposed to strengthen Medicare and Medicaid will enable us to keep these commitments to our citizens while saving us $500 billion by 2023, and an additional one trillion dollars in the decade after that. And if we’re wrong, and Medicare costs rise faster than we expect, this approach will give the independent commission the authority to make additional savings by further improving Medicare.

But let me be absolutely clear: I will preserve these health care programs as a promise we make to each other in this society. I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs. I will not tell families with children who have disabilities that they have to fend for themselves. We will reform these programs, but we will not abandon the fundamental commitment this country has kept for generations.

Consider two observations on the above. By the time we find out if they are wrong, it will be too late. On the other hand we already know they are wrong. Tightening up on the administration of Medicare is not a plan, is not new and it should be part of the ongoing administration of all such programs.

Ryan on Medicare reform

Trying to turn Medicare beneficiaries into health care consumers under the theory they if they have more skin in the game they will be mindful of what they spend and choose health care more prudently is a day-dream. People don’t think that way, especially us seniors.

There are basic flaws in the Ryan plan, but it does make one clear valid point. We are not reforming Medicare and keeping it around for future generations without some significant direct impact on individuals. It may not be vouchers, but it has to happen. As you listen to both sides of this debate at least be armed with the facts on the proposals. I have highlighted some key points of the Ryan plan that have been distorted in the media.

Medicare Payment. For future Medicare beneficiaries who are now under 55 or younger (those who first become eligible on or after 1 January 2021), the proposal creates a standard Medicare payment to be used for the purchase of private health coverage. Currently enrolled Medicare beneficiaries and those becoming eligible in the next 10 years (i.e. turning 65 by 1 January 2021) will see no changes in the current structure of their Medicare benefits. The payment will be made directly to the health plan designated by the beneficiary (similar to the administration of the refundable health care tax credit), with the beneficiary receiving any leftover amount as a payment from the health plan, or assuming financial responsibility for any difference in the payment and the total cost of the premium. This allows the Medicare beneficiary to invest the leftover amount in a Medical Savings Account [MSA] to pay for other medical expenses, or to purchase long-term care insurance.

Each Medicare beneficiary becomes eligible for the payment by enrolling in a health insurance plan. Medicare will publish an annual list of plans that are “Medicare certified.” Medicare enrollees are able to use their payment to pay for one of the Medicare certified plans, or any other plan, such as those offered by former employers or available from the private market.

When fully phased in, the average payment is $11,000 per year (the average amount Medicare currently spends per beneficiary), and is indexed for inflation by a blended rate of the CPI and the medical care component of the CPI. For affected beneficiaries, the payment replaces all components of the current Medicare Program (Medicare fee-for-service, Medicare Part B, Medicare Advantage, and Medicare Part D). Payment amounts are income-related and risk-adjusted. They also are partially geographically adjusted, with the geographic adjustment phasing out over time.

Risk Adjustment. When the plan is fully implemented, Medicare beneficiaries will receive on average the standard $11,000, with the flexibility to receive a positive adjustment of that amount based on a risk-assessment from their chosen health plan. Once enrolled, beneficiaries may complete initial health exams through their insurance plans to determine whether they are eligible to receive a higher risk-adjusted payments. Each health plan must submit to the Medicare program any necessary results of the exam for Medicare to determine an adjusted risk-assessment.

Under the current system, Medicare frequently overpays for some services and beneficiaries and underpays for others. By risk-adjusting beneficiaries’ payments based on their health condition, this reform targets support to those who truly need additional help.

Income-Relating. The payment amount is modified based on income, in a manner similar to that for current Medicare Part B premium subsidies. Specifically: beneficiaries with incomes below $80,000 ($160,000 for couples) receive full standard payment amounts; beneficiaries with annual incomes between $80,000 and $200,000 ($160,000 to $400,000 for couples) receive 50 percent of the standard; and beneficiaries with incomes above $200,000 ($400,000 for couples) receive 30 percent.

Enhanced Support for Low-Income Beneficiaries. While any Medicare beneficiary, regardless of income level, is able to set up a tax-free MSA if he or she desires, the new Medicare Program establishes and funds an MSA for low-income beneficiaries. Specifically, for those who are fully “dual eligible” (eligible under current policies for both Medicare and Medicaid), and beneficiaries with incomes below 100 percent of the poverty level, the plan provides an MSA payment equal to the amount of the deductible for the average Medicare high-deductible health plan. Those with incomes between 100 percent and 150 percent of poverty receive 75 percent of the full deposit.

Retention of Medicare for Those 55 and Older. Clearly, the transition to this restructured Medicare Program should protect those at or near retirement – people who have long planned on the existing Medicare Program for their retired years. That is why the transition to the individual purchase of private health insurance applies to those eligible starting on 1 January 2021. For those eligible prior to that date (those 55 and older), the existing Medicare Program remains, and is strengthened with changes, such as income-relating of drug benefit premiums, to ensure its long-term sustainability.

Premiums continue to be based on an all-beneficiary average, so the phasing of the younger population into the new program will not increase premiums for the population continuing in the existing program. The proposal also retains the Medicare payroll tax of 2.9 percent of the Federal Insurance Contributions Act [FICA] and Self-Employed Contributions Act [SECA] payroll tax, as is the case now.

For individuals now younger than 55 only, the proposal adapts Medicare’s eligibility age to reflect Americans’ improving lifespans, raising in gradually, and in modest steps, from the current 65 to 69 years and 6 months.

Fail-Safe Mechanism. The proposal would establish a mechanism that would be activated in the Medicare trustees determined that the percentage of funding from general revenues exceeded 45 percent in the prior fiscal year. If activated, on 1 July or 2 months after the Medicare trustees’ report is released, whichever comes later, the mechanism would apply an automatic 1-percent reduction in payments for services provided in Medicare’s fee-for-service sector.

In effect the Ryan plan converts Medicare to a defined contribution arraignment (something used increasingly by large employers) and attempts to leverage the so-called buying power of beneficiaries and the competition among insurance companies. Ryan misses the point and oversimplifies the situation as much as Obama.

Here is the truth

We need to implement all the provisions of the Obama plan and more of the same. We need to recognize that Medicare is going to remain a government-run program. We need to substantially change the fee-for service payment system. We need much greater use of managed care because only such a system will better assure provision of quality, necessary and cost efficient health care to seniors. And yes, I am talking about various HMO type models such as Kaiser. In other words, we need to deemphasize Parts A and B of Medicare and emphasize well performing plans in Part C. Today we have it backward. Those beneficiaries who choose to remain in fee-for service Medicare must pay substantially more for their coverage.

Paying 25% (or less) of the cost of Medicare Part B and nothing for Part A when retired is not going to cut it in the future unless the Medicare tax on everyone is substantially increased now. Adding an extra charge on those earning over $250,000 a year as is done in PPACA may make the “wealthy” haters feel good but it does not solve the problem. Finally, Medicare must begin to act more like an insurance company with a profit motive. Before you drag out the tar and feathers, here is what I mean. The program cannot continue to simply pay virtually every claim that is submitted with no effective oversight as to medical necessity. This is especially true for Parts A and B. All the parties involved seem to know how to play the game except the people administering Medicare. All this means that we can’t have everything we want when we want it; it means some form of rationing. Any time someone is denied coverage for a service it is called rationing, so yes, we need rationing.

The Ryan plan may seem radical or “cruel” as Paul Krugman puts it, but it is that type of serious new thinking that is needed. The Obama plan may make us feel good because we are not directly involved, but it is not the solution because if we don’t change our ways, cutting payments to providers is not going to save us.


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