February 21, 2003

February 21, 2003 | Commentary on Health Care

Medicare Needs Far More Than a Facelift

Listening to the debate in Washington over Medicare, you'd think the whole issue revolved around the need for a prescription-drug benefit. But as President Bush emphasized in his State of the Union address, the problem goes much deeper. Medicare faces serious challenges, and if we don't act soon, we'll likely wind up with exploding costs, crushing taxation and lower-quality health care.

Because it's based on outdated principles of central planning and price regulation, Medicare is in a managerial crisis. The program is governed by literally tens of thousands of pages of rules, regulations, guidelines and administrative decisions that cover virtually every aspect of the financing and delivery of medical services for America's seniors.

This metastasizing regulatory growth imposes enormous administrative costs on doctors, hospitals and other health-care providers who must comply with a growing morass of Medicare paperwork. An American Medical Association survey of doctors found that more than one-third spend an hour completing Medicare paperwork for every one to four hours of patient care. A similar study for the American Hospital Association found that for every hour of care delivered to a Medicare patient, hospital officials spend roughly one half-hour or even more complying with Medicare paperwork. Yet every dollar spent coping with Medicare's bureaucracy is a dollar less for patient care.

Another organizational pathology: Medicare's complex price-control system. Over the last several years, doctors have seen lawmakers cut their reimbursements and pile on reams of regulations. More than eight out of every 10 health-care professionals say they don't consider Medicare's fee schedules "fair," according to a survey by Yankelovich Partners, a nationally prominent survey research firm. In many cases, the Medicare reimbursements don't begin to cover the cost of providing care to Medicare patients. Small wonder that more doctors aren't accepting new Medicare patients.

Medicare also faces a long-term financial crisis. The aging population will mean a doubling of the number of Medicare beneficiaries over the next three decades. As a result, a proportionately smaller base of working taxpayers will be burdened with larger payments for the progressively more expensive benefits of a rapidly growing number of retirees.

There's no question that the president and Congress must address the need for a prescription-drug benefit, particularly among poor seniors. But they also should focus their efforts on ensuring better coverage for all retirees. The best model is the Federal Employees Health Benefits Program (FEHBP), a consumer-driven system of competing private plans that covers nine million federal workers, retirees and their families.

Meanwhile, Congress could jump-start reform by taking two quick steps:

  • Allow new retirees to take their health plans into retirement as their primary coverage. At a certain date, Congress should allow new retirees who are 65 or older one of two options: enrolling in the conventional Medicare program or taking their private health plan with them into retirement, with a government contribution to offset its cost. This would not only allow for a seamless continuity of coverage and care for retirees, but would also change the fundamental dynamics of the program.

    Private plans would be under the jurisdiction of a new market-friendly agency created to administer the program, which would take on functions similar to those of the Office of Personnel Management (OPM) in the administration of the FEHBP. With a gradual phase-in of reform, Congress could monitor the new option's progress and allow for adjustments in its financing and administration.

  • Allow new retirees to take balances accumulated in health reimbursement arrangements (HRAs), flexible spending accounts (FSAs), and medical savings accounts (MSAs) into retirement to pay for medical goods and services. Millions of employees today have various health-related accounts, ones burdened with politically engineered restrictions. Congress should change the rules so that all employees and retirees would be allowed to own and maintain tax-free health-care accounts. They and their employers should be free to contribute to these accounts tax free, as well as roll over the funds in these accounts each year tax-free. Current retirees also could be allowed to participate.

New retirees should be free to use the accumulated funds in those accounts for routine medical services or the services of specialists or alternative care -- whether or not they're covered by Medicare -- as well as for prescription drugs. Such retiree health-care accounts would also let new Medicare patients maintain the personal relationship with doctors they enjoyed during their working lives. Retirees should be able to pay doctors and other health-care professionals directly from these accounts without navigating complex Medicare rules or worrying about maintaining their medical privacy or getting the treatments they need when they need them.

The expansion of health-care accounts among retirees would promote direct patient payment for routine medical services, and thus maximize the efficiency of health care delivery among Medicare beneficiaries. They would also give doctors the freedom to practice medicine without having to cope with the bizarre regulatory restrictions, costly paperwork and maddening hassles imposed by the Medicare bureaucracy and its contractors.

But we must act soon. The time for bold action on Medicare is now. Never mind giving the program a facelift. America's retirees need to have their health-care program fully rejuvenated.

Mr. Moffit is director of domestic policy studies at the Heritage Foundation.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies

Related Issues: Health Care

Originally appeared in the Wall Street Journal