Will Medicare as we know it persist or will it change?

Since the nomination of Congressman Paul Ryan as the vice presidential candidate of the Republican Party, Medicare has become front and center in the political discussions. To understand the dialogue requires an understanding of Medicare, how it works, where the money comes from, how it is spent and why there is such concern for its future costs. Here is an overview.

Medicare was designed in 1965 to serve as “major medical” insurance to cover the unexpected large expenses of, say, surgery or hospitalization. Individuals paid out of pocket for routine care. Medicare has morphed over the years; it now covers preventive care, screening, annual exams and most routine care. This broadening of coverage, the relentless rise of healthcare costs and huge enrollee additions by baby boomers will continue to increase Medicare expenditures.

Medicare covers about 50 million older Americans for general health care insurance and another approximately 8 million with coverage for disabilities and end stage renal disease.

Medicare pays about 75% of covered services and about half of the total costs of health care for older Americans. The remaining 25% of covered services as defined by Centers for Medicare and Medicaid Services (CMS) is paid for either via a private Medigap policy and/or out of pocket by the beneficiary. Since 2004, prescription drugs have also been covered.

Medicare is such a large part of the health care insurance market that it establishes two critical parameters for all of health care reimbursement. First, it sets the standard level for reimbursement which all other insurers ultimately follow.

Second, Medicare does not pay it full share of the costs it does cover. Basically it pays some percentage below actual costs leading the providers – hospitals, doctors, or other  – to cost shift, i.e., charge their other patients who have commercial insurance a higher amount than costs to make up for what they did not receive from Medicare. What this means for the young person who has either a company sponsored health insurance plan or buys it directly in the individual market, is that he or she paying a “Medicare tax” over what the insurance would have otherwise cost. This is on top of the Medicare Trust Fund tax of 2.9%.

Government estimates are that Medicare will increase its expenditures over the coming decade at a rate of about 4% per annum. This is greater than both inflation and the GDP rate of growth. Medicare which now accounts for about 15% of the federal budget will rise from almost $600 billion per year now to about $1 trillion per year by 2022 – levels that will severely strain the capability of the system. Indeed, it a growth rate that is just not sustainable; it will eventually bankrupt the federal treasury.

Each of us and our employer pays 1.45% (total of 2.9% combined or for a self-employed worker) of earned income into the Medicare Trust Fund each year. Beginning in 2013, the tax will be 3.8% on earned and unearned (i.e., salary or wages plus interest, dividends and capital gains excluding interest on municipal bonds) income above $200,000 for a single person and $250,000 for a married couple. The money paid in is not invested and set aside for use when the individual reaches 65. Mostly it goes to pay for today’s beneficiaries – it is a generation transfer tax. As the population continues to age and continues to live longer, there will a relatively smaller working population to pay the annual bills. It is estimated that the current 50 million enrollees will expand to 80 million by 2030 and the ratio of workers to enrollees will drop from 3.7/1 to 2.4 /1. So the combination of rising healthcare costs, more beneficiaries living for longer times and a relative shrinking of the taxable base means that the Trust Fund will ultimately become insolvent.

Medicare enrollees tend to have chronic illnesses; 85% have at least one and 50% have three or more. Aging brings on chronic problems such as vision and hearing impairment, mobility/joint impairments and of course dementia. Additionally, enrollees also suffer from the chronic illnesses largely but not entirely the result of life styles. These include obesity, hypertension, heart disease, diabetes, chronic lung disease, cancer and many others.  Chronic diseases are inherently difficult to manage, will last a lifetime (some cancers excepted) and are expensive to treat. Chronic illness results in over 70-85% of claims paid.

But these chronic illnesses consume more than they need to for a few very clear reasons.  First has been a lack of quality preventive care and attention to wellness. Second has been the lack of careful care coordination. These patients need a full multi-disciplinary team of providers to assure complete care (e.g., the diabetic patient will need an endocrinologist, nutritionist, exercise physiologist, podiatrist, ophthalmologist and others over time). But any good team needs a quarterback and the logical choice, the primary care physician, has been marginalized by Medicare for years. The result is that PCPs only allot about 15 minutes per patient visit – not nearly enough time to deal with multiple chronic issues, multiple prescriptions let alone take the time to call a specialist to explain the rationale for a referral and seek a prompt appointment for the patient.

These are the basics of Medicare and the major reasons for continuing cost escalations. The increasing costs mean that it makes little sense to promise “Medicare as we know it” to persist in its current state into the future. Change is mandatory. The question is not whether there will be change but how to make changes in a manner that protects the medical and the financial health of the beneficiaries both today and into the future while keeping the benefits affordable. The Democrats and the Republicans both agree that change is mandatory but they offer widely divergent approaches to cost containment.

Will Medicare as we know it persist or will it change?Stephen C. Schimpff is an internist, professor of medicine and public policy, former CEO of the University of Maryland Medical Center and is chair of the advisory committee for Sanovas, Inc. and the author of The Future of Medicine – Megatrends in Healthcare and The Future of Health Care Delivery- Why It Must Change and How It Will Affect You from which this post is partially adapted. 

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  • Homeless

    What you imply in that we patients that work for a living have skin in the game. Why do doctor’s treat us like leeches?

  • Dennis Byron

    Article says:

    “Medicare pays about 75% of covered services… ”

    The typical split of the CMS-specified payment for everything but an admitted in-patient hospital stay and some SNF fees is covered by Part B and is 80%/20% (except for a few random and probably not useful preventive tests). So I’m not sure where the 75/25 idea comes from. Perhaps it is some statistic that takes into account that not all doctors accept assignment and therefore get slightly higher reimbursements??? Under Part A, there is a $1156 (in 2012) deductible for inpatient-admitted hospitals stays and short SNF stays are completely free depending on how long the patient was an admitted hospital occupant. Therefore, the split for Part A much be much better than 75/25.

    Article says:

    “The remaining (percentage) of covered services… is paid for either via a private Medigap policy and/or out of pocket by the beneficiary.”

    Actually Medigap and out of pocket are the least likely sources for the remaining amount owed by the patient. Most likely is retiree healthcare insurance from a former employer. Second most likely is Part C Medicare health plans (typically HMOs; some PPOs). Third most likely is Medicaid. Only about 5% of seniors go without some sort of supplement (I include Medicaid as a supplement) although most supplements except Medigap require a co-payment.

    Article says:

    ” Since 2004, prescription drugs have also been covered.”

    Not sure what this refers to. There has been all kinds of private and state-sponsored supplemental drug coverage since forever. The Federal government started a program called Part D in 2006.

    Article says:

    “This is on top of the Medicare Trust Fund tax of 2.9%.”

    This tax and trust fund goes to cover Part A admintted inpatient and SNF services. General tax revenue plus beneficiary premiums cover Part B services on a 75/25 split. (Perhaps this is where the author was going in the earlier statistic?)

    Article says

    “Mostly it goes to pay for today’s beneficiaries..”
    Mostly it goes to China to pay interest on the national debt. The Part A Trust Fund still reflects a net inflow I think.

    Article says

    “Medicare enrollees tend to have chronic illnesses…

    Sorry, we’re old (and no one told us smoking was bad for us until we were in our 20s or older)
    Article concludes

    “The Democrats and the Republicans both agree that change is mandatory but they offer widely divergent approaches to cost containment.”

    The Democratic approach is not an approach. It is the law. It passed in 2010. It cuts out much of that preventive/coordinated care the author mentions above as good by a couple of hundred billion, arbitrarily cuts hospital/SNF payments by hundreds of billions more (but the Democrats promise us seniors that those cuts won’t affect us), and appoints a death panel to cut even more such that spending does not increase more than a half-percent over GDP after tje forst $700 billion is cut.

    The Democratic law also raises taxes as described in the middle of the article, and associates the word Medicare with those taxes, but none of that money goes to fund Medicare in any way.

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