Issues of Concern Related to Medicare Reform

Report Health Care Reform

Issues of Concern Related to Medicare Reform

June 6, 2003 6 min read
Senior Fellow
Robert E. Moffit is a senior fellow in The Heritage Foundation's Center for Health Policy Studies.

To enact real Medicare reform Congress should:

  1. Ensure a maximum number of choices and competing plans instead of limiting the number of potential plans through a competitive bidding process;
  2. Not displace existing prescription drug plans that currently provide prescription coverage to 78 percent of seniors;
  3. Avoid importing existing Medicare price controls into a new system through "deeming".

President Bush declared in his State of the Union that he wishes to create a Medicare program that would give senior citizens the choices now available to Members of Congress and federal workers. He subsequently outlined reform that would introduce into Medicare the elements of consumer choice and market competition that are the hallmarks of the Federal Employees Health Benefits Program (FEHBP).


For real Medicare reform to take hold and be effective, reformers will have to include several specific provisions to change the structure of Medicare from a rigid system of central planning to a flexible one that encourages change, improvements and innovation in the financing and delivery of medical services.


Because this is a complex task, misunderstandings are possible, and congressional members and staff may mistakenly design provisions that differ from the FEHBP model and violate the crucial free market principles of consumer choice and competition. Three important areas to watch are:


1) The Limitation of Plans and Restriction of Choice through a process of Competitive Bidding. In the FEHBP, the government contributes a set amount to private plans chosen by federal workers and retirees. That amount represents the weighted average of the premiums of the competing health plans, and includes a dollar cap. The government does not get into the business of picking "winners or losers" among competing plans, nor does it limit the geographic areas where these plans may compete for business. All plans that satisfy the government's basic preconditions - standards relating to solvency, consumer protection, and coverage - may participate. In short, the government does not block otherwise qualified health plans from offering their services to federal workers or retirees. Through their collective decisions, consumers, not government bureaucrats, select the "winners and losers."

"Competitive bidding" has emerged as a possible key element of Medicare reform. This approach is very different from, and incompatible with, the FEHBP model. Under competitive bidding, the government accepts what it considers the best bids, and allows only a limited number of providers or suppliers to participate. This may suffice for the purchase of desks, paper clips, or stationary. But it would interfere with a system of open competition and consumer choice, and lower the overall quality of care for Medicare beneficiaries.

Consider the assessment of Lois E. Quam, CEO of Ovations, a United Health Group Company in her April 3, 2003, testimony before the Senate Finance Committee:

"Our experience has shown that competition that focuses on 'competitive bidding' tends to be process oriented, rather than results focused. Often, it serves to reduce competition and limit consumer choice. It tends to reflect the preferences of the contracting organization, which often are not aligned with those of consumers. Competition that places great emphasis on low cost most likely would result in more restrictive health care options, not unlike a staff-model HMO with limited networks, rigid medical management practices (denial of care) and fewer beneficiary options. In our estimation competitive bidding that relies on low bids or a 'winner take all' approach provides high risk for both beneficiaries and the government."

This is a correct assessment of the negative consequences that would flow from a "competitive bidding" model of reform. 

2) A Prescription Drug Provision that Would Displace Existing Private Drug Coverage. In the area of drug coverage, the legislative objective should be a transition into a system in which drug coverage is fully integrated into private health insurance plans (i.e., integrated into the coverage for physician and hospital services) and those plans must be part of a competitive system of private health plans, just like the FEHBP is today. For low-income seniors, drafters should provide subsidies to offset their drug costs.

Those who draft a new Medicare drug benefit should recognize that, to be successful, it should not displace the drug coverage Medicare beneficiaries already have. The provisions should not create perverse incentives that would cause former employers to dump retirees out of private coverage into a new federal entitlement. As the Joint Economic Committee (JEC) warned in a recent study:

"Be careful not to overly disrupt the existing market and the current means for delivering prescription drugs, and thereby threaten the drug coverage many seniors currently enjoy."

The JEC found that 78 percent of Medicare beneficiaries already have drug coverage, though the generosity of that coverage varies. Based on 2000 data, 90 percent of Medicare beneficiaries with Medicare +Choice, employer coverage or other insurance enjoyed some type of prescription drug coverage.

Short of a fully integrated system, the next best option for current Medicare beneficiaries is to target direct assistance to low income seniors who lack access to drug coverage through former employers, or who cannot afford private health coverage, or who are ineligible for Medicaid coverage. As David Walker, Comptroller General of the United States, recently advised Congress

"…[T]he addition of a benefit that has the potential to be extremely expensive - such as prescription drug coverage - should be focused on meeting the needs deemed to be of highest priority."

Significantly, Walker said a Medicare prescription drug benefit should "to the extent possible, [avoid] the substitution of public for private insurance coverage.

The best proposal yet unveiled to accomplish this transition is the proposed prescription drug discount card tied to a generous federal subsidy and private sector catastrophic coverage. These funds could be deposited in a Medicare drug account. Such a proposal has been developed by health policy analysts at the American Enterprise Institute and the Galen Institute, and PricewaterhouseCoopers[1] estimates it would increase Medicare expenditures by $302 billion over the next 10 years.

3) The Importation of Medicare Price Controls into a new System of Private Health Plans.  Historically, and unfortunately, the Federal budget process has determined the course of Medicare policy. Recent reports indicate that the Congressional Budget Office (CBO) will conclude that Medicare reform allowing seniors to choose from among competing private health plans would be "more expensive" than traditional Medicare.[2] In an effort to lower the projected "cost" of their Medicare reform proposal, some reformers may be tempted to require private sector plans that want to compete for the business of seniors to "deem" Medicare price regulations into their products.

This would be a mistake. The "aggressive pricing" system Medicare uses to control costs results in the rationing or denial of medical services, bureaucratic delays, and disincentives for physicians to accept new Medicare patients. For example:

  • According to a February 3, 2003, report piece in American Medical News, 22 percent of doctors in San Diego, California, say they will leave Medicare within one to three years.
  • Reuters News Service reported on September 5, 2002, that more than 40 percent of Medicare patients in 2001 had to wait a week or more to see a doctor, up from 34 percent in 1997.

Importing these pricing systems - known as "deemed pricing" -- into a new Medicare system of competing health plans will inevitably import these shortcomings into any reformed system as well.

Robert E. Moffit Ph. D., is director of the Center for Health Policy Studies, The Heritage Foundation.

[1]See Joseph R. Antos Ph.D. et al, " Time for A Sensible Medicare Drug Benefit," Heritage Foundation Backgrounder No.1573, July 23, 2002.
[2]However, as Joe Antos and Al Goyburu demonstrate in a recent paper, the value of coverage in private health plans exceeds that available in traditional Medicare. See Joe Antos and with Alfredo Goyburu, "Comparing Medicare with Private Health Insurance Spending," Heritage Foundation Web Memo #250, April 8, 2003.


Robert Moffit

Senior Fellow