March 22, 2012 / 2:26 PM / 8 years ago

Why GOP Medicare privatization is wrong approach

(Reuters) - The Republican Party doubled down on privatizing Medicare with the 2012 budget plan released yesterday by Republican Paul Ryan (R-Wisconsin). It’s their latest pitch for a reform that would let seniors shop for coverage in an insurance exchange marketplace in lieu of traditional Medicare.

House Budget Chairman Paul Ryan (R-WI) shows a copy of "The FY2013 Budget - The Path to Prosperity" during a news conference at Capitol Hill in Washington March 20, 2012. U.S. House Republicans unveiled an ambitious budget plan on Tuesday to cut taxes, slash spending and overhaul Medicare in a bid to draw a stark election-year contrast between their vision of the size and role of government and that of President Barack Obama. REUTERS/Jose Luis Magana

The Ryan plan has little chance of passage this year, but the decision by Republicans to stake out a strong position on Medicare privatization in an election year is significant. In their vision, starting in 2023, retirees would be given an allowance by the federal government to purchase medical coverage from a private insurer or traditional fee-for-service Medicare — a so-called “premium support.” Ryan has proposed several versions of this restructuring since late 2010, although the earliest versions didn’t offer traditional Medicare as a choice.

As Medicare is expected to be a primary driver of the federal deficit in the years ahead, Republicans want to cut federal government spending on it by capping outlays. It would be the health care equivalent of defined-contribution retirement plans in which employers set aside a specified amount of money each year for employees.

Republicans assert that costs can be driven down by forcing private insurers to compete against one another for seniors’ business. Expenditures are expected to rise from $585.7 billion this year to $1.03 trillion by 2021, according to the Centers for Medicare and Medicaid Service (CMS), the federal agency that administers the program.

Medicare critics often point to government bureaucracy as a principal cause of exploding cost. Yet half of the projected growth will be driven by rising enrollment as the country ages. So the most important question is how to provide healthcare to seniors with the greatest efficiency.

On that score, Medicare, as it exists now as a government entitlement program, is the clear winner. The program provides healthcare much more efficiently than private sector health plans, mainly due to the power it has to control payments made to providers.

For example, the rates paid by private insurance plans to physicians are 25 percent higher on average than those paid by Medicare to physicians, according to data from the Medicare Payment Advisory Commission (MEDPAC), an independent Congressional agency that advises lawmakers on Medicare. Average rates paid by private plans for hospital services are 40 percent higher.

Moreover, growth in Medicare’s per capita spending has slowed substantially. The rate of average annual per capita spending for the coming decade is projected to be 3.5 percent, which is in line with projected GDP growth of 3.8 percent, according to the Congressional Budget Office. That is less than the 5.4 percent rate of growth expected for private insurance plans. From 1985 to 2009, annual per capita spending growth averaged 6.7 percent.

Experts credit President Obama’s healthcare reform law for some of the moderation in per capita costs. The Affordable Care Act (ACA) cuts reimbursement rates to hospitals, skilled nursing facilities, home health services and Medicare Advantage managed care plans. Another factor is lower-than-expected spending in Medicare’s prescription drug program — the result of lower than forecast enrollment and a major patient shift to generic drugs.

Far more savings can be achieved without a major restructuring of Medicare. “There are many ways to save Medicare without turning the program upside down,” argues John Rother, president and CEO of the National Coalition on Health Care, a coalition of medical societies, businesses, unions, healthcare providers and others with a stake in healthcare reform. “We don’t need to be running a huge social experiment with the country’s most medically-vulnerable population to get costs under control.”

The federal government and individual states already are engaged in an ambitious plan to launch public insurance exchanges for the under-65 population under the ACA. Those exchanges are on track to launch in 2014, unless a Supreme Court challenge — which will be heard next week — leads to its invalidation. These exchanges aim to contain costs by allowing people to compare benefits and prices and choose plans best suited to them. The exchanges are expected to enroll 29 million people. By contrast, Medicare has 49.3 million seniors enrolled — a number that will rise to 64 million by 2021.

Henry Aaron, a healthcare expert at the Brookings Institution and one of the original architects of premium support in 1995, no longer backs the idea. He argued for caution at a recent conference sponsored by the National Academy of Social Insurance: “Let’s get the ACA exchanges up and running, see what the problems there look like and then revisit premium supports for Medicare.”

Experts point to numerous areas where Medicare spending can be reduced further without radical restructuring or sacrificing patient care. One area is payments to hospitals. “The MEDPAC research concludes it is reasonable to apply pricing pressure on hospitals,” says Dr. Robert Berenson, a Medicare expert at The Urban Institute and vice chair of MEDPAC.

Another often-cited example is better coordination of care provided to “dual eligibles” - the nine million patients who are eligible for both Medicare and Medicaid. Typically, these are low-income patients who have multiple chronic conditions, and many go to multiple healthcare providers with little coordination of care.

Savings also could be achieved by extending the prescription drug rebates available in Medicaid to dual-eligibles; shifting Medicare from volume-based to “value-based” payments, and through better control of the use of expensive new medical technologies.

(Got The author is a Reuters columnist. The opinions expressed are his own.)

Editing by Beth Pinsker Gladstone and Andrew Hay

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