MOFFIT: Today, on the eve of the anniversary of the
Medicare program, we are in the midst of a great national debate
over the future shape of Medicare. This debate will have a profound
influence on the quality of life of everybody in this room. So, the
question is: What will Medicare bring for the future, not only for
senior citizens, but also for the rest of us as taxpayers and
recipients of health care services?
us today are two outstanding experts, intimately familiar with the
Medicare program. Dr. Thomas Saving is a distinguished professor of
economics at Texas A&M University and a senior fellow of the
National Center for Policy Analysis. He is a public trustee of the
Social Security and Medicare trust funds, and was also a member of
the President's Commission on Social Security. He is the author of
Medicare Reform: Issues and Answers and the co-author of The
Economics of Medicare Reform.
other speaker is a great colleague. Jeff Lemieux is the senior
economist with the Progressive Policy Institute and also executive
director of a brand new think tank in Washington called
Centrist.org. He is the author of a number of centrist proposals on
health insurance coverage, Medicare reform, balanced budget issues,
and entitlement spending. In the area of Medicare reform, Jeff was
the staff economist for the National Bipartisan Commission on the
Future of Medicare headed by Senator John Breaux of Louisiana and
Congressman Bill Thomas of California.
1992 to 1998, Jeff also served as a principal analyst at the
Congressional Budget Office (CBO), where he helped to estimate the
cost of national health care reforms and the impact of Medicare
reforms, including the Balanced Budget Act of 1997.
Before his service at CBO, Jeff served as
an actuary at the Health Care Financing Administration. Previously,
he served on the staff of the DRI/McGraw Hill economic forecasting
Robert E. Moffit, Ph.D., is Director
of the Center for Health Policy Studies at The Heritage
SAVING: Jeff and I are going to address different aspects
of this issue. I am going to stress what the future of Medicare
would look like as it is currently structured, and not how we might
restructure it, although I have spent a lot of time working on that
issue. I am going to give you an idea of the shortfalls implied by
the current set of transfers to elderly citizens from workers.
of the things that we always like to do, as you know if you read
the trustees' report, is to present the shortfalls as a percent of
GDP. As a trustee I have campaigned to present the shortfalls as a
percent of federal income tax revenues because I do not believe
that many people understand what percent of GDP really means.
Certainly the 535 people on the Hill understand federal income tax
revenues. So I have translated these numbers into a percent of
federal income tax revenues, assuming that federal income tax
revenues remain at a 50-year average, which is 11 percent of
hear people questioning whether the recent tax cuts mean we have
given away the store. Rather, if we look at the past 50 years, in
spite of huge changes in the tax code, the share of federal income
taxes in GDP has remained almost constant. It is really pretty much
unaffected by changes in the tax code because reductions in
marginal tax rates have been offset by the incentive to produce
more. That is important.
The Future Tax
One of the important things about financing these programs
is getting people to work longer. By working longer, we would
increase revenue while reducing the burden placed upon the
that aside, expressing projected shortfalls in Social Security and
Medicare as a percentage of federal income tax revenues gives us an
idea of the potential impact of the funding shortfalls in these
programs. By 2026, the year that we say the Hospital Insurance (HI)
Trust Fund is going to become exhausted, we are going to be
transferring almost 30 percent of all federal income tax revenues
to Social Security and Medicare. (See Chart 1.)
I was testifying today before the Senate Special Committee on
Aging, I said that Social Security is the easy problem and we
should go ahead and solve it. Medicare is the real serious problem.
By 2042 (I chose 2026 and 2042 because those are the dates of
so-called trust fund exhaustion), the shortfalls that we as
trustees estimate imply that we are going to be transferring almost
half of all federal income tax revenues to these two programs. That
is an incredible change from the current situation where these two
together are providing net revenue to the Treasury. For the case of
Medicare alone, in 2026, one-fifth of all federal income tax
revenues are going to go to Medicare, whereas currently it is about
7 percent. (See Chart 2.)
us now look at the way we run Medicare at the moment. Those of you
who are in the Medicare business already know that Medicare is in
deficit, because some 75 percent of Part B is already financed by a
transfer from general revenues, and the HI surplus is not big
enough to cover the Part B deficit. Now it is true that for the
past two years the transfer has been bigger than 75 percent. It is
78 percent because we have underestimated pretty consistently the
rate of growth of Part B expenditures. So we set the premium at the
beginning of the year with an estimate of what those Part B
expenditures are going to be and, as it turned out, they have been
much bigger than that for two years in a row. That might suggest
that there is something systematic going on that we would want to
of course, premium adjustments do not make the elderly happy. They
are likely to let their congressman know that they are unhappy. But
further, by 2042, again, when the Social Security trust fund is
supposedly exhausted, we will be transferring a third of all
federal income tax revenues to Medicare.
a transfer of that size is just not going to happen. And this
transfer is without prescription drugs. So I have a graph about
prescription drugs because that is the topic at issue right now.
What this graph shows you is the per capita expenditures and the
percent paid by third parties. As we have increased third-party
payments for prescription drugs, per-capita consumption has
increased dramatically. (See Chart 3.)
Thirty years ago, I would say let's take a
look at the rate of growth of expenditures for physicians,
hospitals, and prescription drugs. You could see hospitals grew the
fastest. That is when something like 80 percent of hospital costs
were paid by third parties. Physicians by that time had only maybe
40 percent and their costs grew much slower. Only about 5 or 6
percent of pharmaceuticals were paid by third parties, and they
were actually declining in price.
has all changed now because everything is pretty much third
party-paid, and therefore, patients act as if it is all free.
Medicare currently pays for about 5
percent of prescription drugs. As you are aware, there is a very
narrow range of prescription drugs that are reimbursed by Medicare
Part A. Part B, of course, would be paid by Medigap and other
things, to the extent that the patient has coverage.
Based upon the recently passed Senate Medicare Bill, the
CBO estimates Medicare would pay about 25 percent of prescription
drug costs for seniors. However, when we tried to apply the
technique used by CBO to the distribution of expenditures by
seniors, we got a number more like 42 percent instead of 25
percent. However, I am going to use CBO's number because I have not
yet resolved why our number is so much different than their
Assuming that the prescription drug bill
that ultimately passes results in Medicare paying the CBO-estimated
25 percent of seniors' prescription bills, this would increase by
20 percent the transfer that we are going to have to make in 2026
from federal income tax revenues. If you were to do what the
Democrats proposed last year, well over a third of all federal
income tax revenues would have to be transferred just to
2042, last year's Democratic proposal would result in well over
half of all federal income tax revenues being used to cover the
Medicare benefits. If you added Social Security to that, by 2026,
you can see that you are already up to more than a third of all
federal income tax revenues being transferred to Social Security
and Medicare. So we are going to go from the two programs together
making a positive contribution to Treasury revenues to taking 30
percent or a third of all federal income tax revenues.
Now, let us get to the issue of what we owe the current
participants in these two programs. Something we have done for
Social Security this year in the trustees' report, and I hope we
will do for Medicare next year, is estimate the present value of
the unfunded liability for what we refer to as the 100-year closed
group, that is, all those currently 15 years and older. No matter
what we do to try to reform the program, we have to deal with the
debt that we owe the current participants. (See Chart 4.)
me begin by noting that if we passed the Senate prescription drug
bill, we would add $2.6 trillion to the debt that we owe the
current participants. Even without any prescription drug benefits,
what we owe current participants in Medicare net of their Medicare
tax and premium payments is $13 trillion. The prescription drug
bill is going to add 20 percent to it--and remember, that $2.6
trillion is almost the size of the outstanding federal debt right
now. So the prescription drug bill is terribly expensive in this
about the new generations? How are those who start working tomorrow
and after them going to pay off this debt? If the system really
works in the long run, the 100-year closed debt is fully paid by
the next generations. They come in and start paying taxes for a
long time before they ever collect anything. So all those taxes
that they pay are designed to pay off the debt owed to current
participants in the program.
Well, I will give you an idea of how much
future generations will contribute toward this debt. Instead of
contributing anything to paying off the $13 trillion, the new
generations are going to impose another $25 trillion in debt to the
system. So they don't contribute anything to paying it off; they
just add to the problem. The prescription drug part of that is
another $4.9 trillion.
Between the two programs, that is Social
Security and Medicare, we owe current participants about $24.4
trillion. Adding the prescription drug provision to that will make
it $27 trillion. The future Medicare participants starting tomorrow
will cost us $25.3 trillion if we don't have prescription drugs. If
we do, that is an additional $4.9 trillion. So we are looking at
$49.6 trillion of debt for the system as a whole as it is currently
constituted, and $57 trillion if we add prescription drugs. (See
Medicare is a system out of control. Of
course, we all knew that. The way Medicare is set up and the
growing proportion of per capita income it is using pose serious
problems in financing it. I am not one of these people who argues
that the percentage of GDP that Canada and Germany consume in
health care is the nirvana of health care. I don't think that is
There is a reason why health care for the
elderly especially is rising as a percent of their income, and we
need to understand that reason. And then we somehow have to make
of the things that the Centers for Medicare & Medicaid Services
(CMS) has done is to try to control cheating in Medicare. There is
a lot of health care fraud. So we spent some time on this and
discovered, yes, there was systematic upcoding; meaning that
physicians would do one thing for you, but put down a code for
payment that is related to that but one step up, so they could get
more money back.
we have a bunch of policemen watching what is going on. If
consumers cared what it costs, they would be doing the checking for
upcoding. When your physician gave you a shot for influenza, and
said he gave you a pneumonia shot that costs twice as much, you
would complain about being double-charged.
until that happens, we cannot control these costs. It is our job to
find a way to make people care what it costs. If we cannot do that,
we cannot solve this problem. We are going to have to solve this
problem because we are not going to find this money. That means we
are going to have to take away health care in some way, or ration
it seriously--which is what other countries do, as you know--or we
will have to find another way to reform it.
is going to speak about that challenge and how we might meet it.
LEMIEUX: When the Medicare Commission tried to find
solutions in 1998 and 1999, they were primarily motivated by graphs
like those shown by Dr. Saving. The idea was that Medicare is going
to take up a larger and larger percent of GDP, and that it is
unlikely that we are going to be able to find revenues to pay for
that. So we have to find some way to slow down the growth of this
program spending, hopefully without deep and draconian benefit
cuts. Control the costs and ideally create better value.
the past five years, scholars in the health care area have also
taken a new direction. They have started to realize that if we
really want to save the U.S. health care system, if we really want
to try and get better value in health care, we need to stop keeping
the health system oriented toward what is called acute care.
other words, doctors are patching us up when we suddenly get sick
or are injured and then sending us back on our way. Our system does
that very well. But we need to pay more attention to what happens
to people with long-term or chronic illnesses, especially between
hospitalizations, between episodes of sudden illness or injury.
There are some good reasons why we should
think about chronic care as we move forward with the House and
Senate Medicare bills.
Now, here is a four-bullet description of what is going on
with the House and Senate Medicare bills. In 2004, we have a
discount card. This should help a lot of seniors. There is some
low-income assistance attached to those discount cards. Again, very
nice. Low-income seniors especially need extra help purchasing
prescriptions when they don't have other coverage.
also have an effort starting in 2004 to re-establish private plan
options. I think this is a very good idea. In the long run, the
hope is that competition between Medicare's fee-for-service system
and private plans is the best hope for slowing the growth of
spending without draconian benefit cuts, especially as Medicare
grows more capable of making decisions internally and not relying
on congressional laws and congressional micromanagement.
Democrats don't really like the idea of moving in 2010 toward a
federal employees-style premium competition. But my calculations
show that the risks of that to the fee-for-service program are
actually very low, and that this could be a very good thing. My
only regret on the 2010 premium formula is that the government-run
program probably needs more flexibility if we are going to ask it
to compete directly with private plans.
we have got the big wart on the face of this thing. The 2006
stand-alone drug benefit is something that no economist and few
health policy analysts would have designed. It looks like just the
sort of thing that is designed for political reasons, but which
analysis and economic thinking has not played into very much at
all. It's ugly.
did we get to this point? Well, for two straight elections, the
House Republicans needed some sort of decent-sounding drug benefit
to pass so that they could go home and claim they were for drug
benefits. They did not really care if it worked; they were trying
to develop something that sounded as good as possible in the
newspaper without really worrying about the consequences of how it
would work if it was actually implemented.
the Senate tried some other approaches, but they never really got
CBO and the other congressional support agencies excited about
Federal Employees Health Benefits Program-style premiums and
figuring out really what the risks and the rewards were. Nor did we
ever have much congressional support for Medigap options adding
drug benefits for people, defining contribution drug subsidies, or
catastrophic low-income plans.
when the President and the congressional leaders decided they
wanted a Medicare bill, the only thing that was really teed up were
these bills that were patterned after the House Republican bills: a
stand-alone, high-premium drug benefit, where if you have drug
spending that is zero, then you would be asked to pay a premium of
your drug spending rises, your premium would stay the same, your
benefits would gradually start to grow. If your drug spending
exceeded about $1,000, in the House plan, you would hit the
break-even point, actually between $750 and $1,000. What this would
do, all other things being equal, is cause people who expect their
drug spending to be very low to not bother. People with drug
spending that is very high would say, "Yes, I need to do this."
Senate bill is a little bit different. The break-even point is a
little bit higher and the mechanics are a little different. The
premium is about the same, but it is the same sort of plan. If you
have very little drug spending, you might not want to buy this. If
you have higher drug spending, you would.
other things being equal, what Congress will have to do to maintain
a good enrollment in this is to add money, to make sure that
virtually everyone is enrolled so that the premium doesn't start to
skyrocket, because people with low drug spending don't take it and
people with high drug do.
mean, the logical course of action for this sort of drug benefit is
to increase the benefit package, especially to fill in the
so-called doughnut hole in the middle of the benefit package where
you don't get any benefits until your catastrophic benefit kicks
in, and also to keep the premium low. If you do these two things,
then you can get high enrollment and the whole system could
Congress has done instead is to impose a late enrollment penalty.
They have said we are not going to worry about adverse selection.
We know our drug benefit is not that good and the premium is high
and a lot of people are not going to want to buy it, but we are
going to force them to buy it. We are going to put in a penalty
that says, "If you don't take this benefit now, you will pay a
higher premium if you have to get into it later."
Moreover, they have created incentives in
here for employers to force enrollees in retiree health coverage
plans to pick up this new benefit.
Designed Drug Benefit
This system was never designed to work; it was designed
for political appearances. To make this sort of drug benefit work
it is going to need more money or more government control. And to
be honest, there are a lot of Republicans who really don't care if
it is going to work. The idea is to neutralize yet another issue
for the next election.
the same token, there are a lot of Democrats who hope it fails.
Their idea is if it doesn't work very well, then great: We will get
more government control and more money in the system and we will
end up with a trillion-dollar drug benefit just like we wanted all
is what I have computed. It is a different approach from Dr.
Saving's presentation. I took the CBO estimate of the Senate bill,
and it works out virtually the same if you take the CBO estimate of
the House bill. I took a baseline of Medicare spending as a percent
of GDP and then added in the drug benefit based on the CBO cost
estimate, and extended that for an additional 17 or 18 years out to
CBO estimates, if you look at them very carefully, show not only a
big jump up in Medicare spending when the drug benefit is phased
in, but they also show a permanent accelerated growth of Medicare
spending after that point. It is not a huge acceleration--it is
about a quarter of 1 percent a year--but it is enough to make a big
difference over time.
both the House and the Senate bills, the CBO projects a permanent
acceleration of growth. If you extend this out to 2030, you will
end up having spent an extra 1 percent of GDP on this drug benefit,
compared with what the Medicare baseline would have been without
where is the conference committee likely to go with this? I don't
think anybody knows. These are two bills that are going to be very
difficult to reconcile. I think that it is very unlikely that the
House will agree to the Senate bill and allow for a compromise
based on the Senate bill that includes a lot of House Democrats
voting for the compromise and a lot of House conservatives voting
think it is also pretty unlikely that the Senate will agree to the
House bill. That would require a couple of conservative Democrats
to go with a solid Republican majority, and they have declared they
want a bipartisan approach instead.
it seems to me the only thing they could do to get this bill out of
conference is to go through item-by-item and try and split the
difference. My hunch at this point is that it will be very
difficult to do this, but if they do, the drug benefit will
probably look a little bit more like the House's drug benefit, and
that the Senate's fallback position will be sort of melded with the
House members will say that they have a fallback position: It
doesn't really have direct government control, but it has 99.9
percent government financial backing, which is virtually the same
thing. Then, finally, the premium formulas that would start in 2010
will probably be diluted down to a demonstration, which might be
very interesting. But again that delays the hope of trying to
create a competitive system in Medicare that could save some money
over the long haul.
A Better Course
Here is what I think should be done in a perfect world. In
2004, really try and get this drug discount card up and running and
make it as universal as possible, so that seniors can get at least
the promise of not being ripped off at the pharmacy. They are at
least getting some discount, some group purchasing is helping them
get a decent rate on drug purchases. Of course, beef up the
2006, instead of the stand-alone high-premium drug benefit that has
all these problems and requires all these contortions, it would be
much more stable and more controllable in the long run to just add
a catastrophic benefit to those discount cards. There is no reason
to charge a premium.
would have to happen is that members of Congress and the President
would have to go back to people and say, "Look, we tried to create
a full drug benefit. We went through all these contortions, and it
probably will not work, so we are just going to have to back off
and do a catastrophic benefit instead."
Given the budget situation over the next
five years, we are looking at very deep deficits persisting.
Therefore, many liberals who currently vilify the premium support
FEHB system are going to come back to the idea that maybe it is not
such a bad deal after all; that if we analyze it very carefully, if
we work on it very hard, we can make sure that it will not threaten
Medicare's fee-for-service program.
can actually use a premium support-style system to help get the
fee-for-service plan modernized in terms of its internal workings,
and allow people at CMS to actually run that program more like a
business for the betterment of seniors' health care and for the
betterment of chronic care.
the last thing on my list. In spite of whatever we do, we still
have to pray for the next generations. The federal budget has swung
from surpluses into deficits, where revenues have fallen from
20-and-over percent of GDP down to an expected 16.0 percent next
year according to the President's mid-session budget.
the meantime, spending, based on pressures from defense and other
areas, including Medicare, has now risen above 20 percent of GDP,
and we have deficits of about 4 percent of GDP.
isn't going to go away. Based on my best projections of a
bounce-back in revenue as a percent of GDP, with the stock market
returning to some of its vigor, and capital gains and bonuses
coming back into the economy, we are still looking at an enormous
gap between spending and revenues.
you extend this out even further to 2030, we are looking at
something that is economically untenable. As this starts to hit
home, perhaps as early as 2005 during deliberation of the Budget
Act of 2005, legislators on both sides of the aisle are going to
have to come back together and figure out how to be a little less
partisan in all these things and how to work on entitlement reform
in such a way that it doesn't seem so threatening to liberals.
is what I expect in 2005. Essentially, the era of easy choices
ends. We have been cutting taxes and raising spending now for
several years without any attention to the consequences. We can
say, well, we are trying to fight recession and do other things,
and that is all fine. But we have also done long-run things that
are going to cause budget deficits to persist throughout the
decade. The mess hits the fan in 2005, after the next presidential
have sunset provisions on tax cuts that are going to have to be
addressed. We have the entitlement programs continuing to increase.
We have appropriations problems. We have a whole host of things
that are going to cause the Budget Act of 2005 to be a really
that point, on the issue of Medicare, the whole idea of premium
support, a federal employee-style system is going to come back.
Liberals are going to say this might be better than flat-out cuts,
as we are looking forward 10 or 20 years. Hopefully, conservatives
will be able to find ways to work with liberals and make them feel
more at ease with competitive systems. Nobody thinks that revenues
are going to be able to grow to 25 percent or higher of GDP to pay
for the spending that we are to incur.
hope that the Medicare conference comes to this improved drug
benefit, compared to the ugly one that they have scheduled for
2006. Other elements of the drug bill and the Medicare bill are
fairly commendable. It is a big question whether or not the
legislators will be able to pull this out at the end of the
MOFFIT: Thank you very much, Jeff and Tom. Ladies and
gentlemen, it is time for your questions.
SPEAKER: Jeff, the Senate version closes
the "doughnut hole," so to speak. Don't you think politically, they
might shift to the Senate side because it closes that hole a bit
LEMIEUX: Well, my rationale is less logical than that. The
main flashpoint is going to be the premium support formulas in
2010. If it looks like the House is going to have to make a big
give on that and turn it into a demonstration program, then it
seems to me that the House gets its way on a lot of other things,
including the structure of the drug benefit.
structure of the House drug benefit, with bigger up-front benefits
and a larger doughnut hole is probably more appropriate if you are
trying to do a stand-alone high-premium drug benefit and entice
lots of people to join up. So for both of those reasons, it is just
sort of a balance between House gives and Senate gives. If you are
going to do things this way, it would help avert adverse selection
a little bit, get a little higher participation. That was the
reason for my hunch, not that it was better than the other.
SPEAKER: This is a question for Jeff. I
don't understand the logic behind the claim that if we move to this
competition approach, you are going to slow the increase in costs
in the Medicare program. Marilyn Moon, who has looked comparatively
at increases in costs in the private insurance market comparing it
with Medicare, finds a slower rate of growth in the Medicare
program over 30 years.
Everything that I have seen indicates that
you have higher costs in the Medicare+Choice plans than in
traditional Medicare. The recent CBO analysis says that you are
going to increase costs for the Medicare Advantage portion of the
There is a claim on the one hand that you
are going to save money by going to this approach, but then there
are a whole lot of people who say, in the same breath, that you
need to increase funding to these plans to get them in. I don't see
how you can believe both those things at the same time.
LEMIEUX: It is very easy to explain, actually. For all the
good work Marilyn has done, her piece on comparing private health
insurance premiums and Medicare costs over 30 years totally missed
the point. Neither spending growth in Medicare nor in the private
sector is exogenous, as economists would say.
Essentially, when Medicare starts to save
a bit of money in some way or another, then employers put pressure
on private insurers to save some money, too. When private insurers
are saving a lot of money in some way or another, then Congress
faces pressure to try and save money in Medicare.
Marilyn Moon said that Medicare grew
slower over 30 years. Then, Joe Antos from the American Enterprise
Institute did a study that said, "Yes, but its benefits have gone
up, so if you weigh it in that sense, the private plans have been
more efficient." There have been other studies that try to control
for these things. It is really a lot of great work by really smart
people on kind of a dumb question.
to get to the second part of your question, what goes on with
competition is more than what cost estimators can sometimes deal
with. What CBO said about this bill is, if you pay more to private
health plans, it will cost more. That makes a lot of sense.
CBO did not say in this bill, but what a lot of economists believe,
is that over time, if you create a competitive system, it will
cause changes in behavior, both at the health plan level, at the
administration of the program level, and at the consumer level.
These changes have the potential--not the certainty, but the
potential--to slow the rate of cost growth.
Economists have looked at systems like the
federal employees' plan. This is hardly perfect in its design, but
it does seem to have created a bit of market awareness, both at the
plan level, government level, and the consumer level. This has
helped keep its cost growth reasonably under control.
is something of a leap of faith to assume that competition in this
way is going to lead to a slowing of Medicare costs. There is no
objective evidence that you can really say is definitive, but it
does make a lot of economic sense to assume that this is something
that we should try before we launch into benefit cuts.
SPEAKER: In terms of trying to figure
out what the compromise might be on premium support, I don't see
that a demonstration project is going to do it. We have already
been through three demonstration projects on competitive pricing,
and the politics trumps it. Do you have any comment about that?
LEMIEUX: Some of the competitive demonstrations that were
proposed in the past had to do with private health plans competing
against one another, but there would not be any change in the
fee-for-service premium. So this would be a little different, in
that the fee-for-service would be part of the mix. So it would seem
more fair from the private health plans' point of view, so they
would not oppose it so bitterly.
course geographically, it is going to be hard to find a region to
do a demonstration, the purpose of which is to force more
competition and force more efficiencies. "Why are we forcing
efficiencies into the system in my district and not the other
how you structure that demonstration, I really don't know. But
there is a lot in this bill that, when you think through how it
would actually work in real life, is kind of fanciful.
SPEAKER: I am Joe Antos, AEI, one of
those not-so-smart people working on a dumb question.
agree with Jeff. There really is a good study that addresses the
real question fairly and directly by Michael O'Grady at the Joint
Economic Committee. He did the most accurate comparison you can
make that is policy-relevant.
compared actual Federal Employees Health Benefit Program (FEHBP)
performance with Medicare, and he also was able to tease out the
drug components. It was really a very close comparison. What he
found over the course of the past 15 or 20 years, FEHBP in fact did
better than Medicare. So, I would recommend that particular
let me try to draw both Tom and Jeff out on something that they
both said, but Tom said it very provocatively. That is, what are
the elements that you see that would actually get consumers
interested in the price of the product? We are all interested in
the quality of the product, but we don't have any handle on that.
But what about the price of the product? What are we going to do to
get consumers involved?
SAVING: I think that unless we do that, we are not going
to succeed in any way. Part of what we can do in Medicare is to
have a much better way to estimate the expected costs.
think we can give people vouchers for what their expected
expenditures are. We can allow the private insurers to bid for
those people. There is no fixed capitation. It would not be based
on age or other characteristics but on expected expenditures. So
you are all alike. I think that is one approach.
cannot do the same thing that General Motors does with cars;
everyone pays the same. Well, why should they? Why should the young
worker who has a much lower expected cost, pay the same as somebody
who is chronically ill? We have to find a way to make that work.
But until we do that, we are not going to succeed.
the second thing we have to do is to get rid of first-dollar
coverage. As long as we have first-dollar coverage, customers are
not going to care what it costs. If we are looking at prescription
drugs, and if they are not expected cost, if the chronic people are
not given a bigger voucher than everyone else, then no one else
should get into the program. We have to price it right.
know in health care we call that risk adjusting, because we don't
use the word "risk" properly. Expected value, not risk, is what we
are talking about here. Risk is something else, and we know that in
every other area of economics except in health care. In health
care, we call expected value "risk," whereas everywhere else we
call it "expected value," and risks are uncertainty around that
can separate risk from expected value, and you can buy risk
insurance and it can be separately provided; it doesn't have to be
provided by the health care industry. And it can be separately
Medicare, of course, CMS can be that provider of risk insurance.
But in the market for general health care providers, casualty
providers can provide health care risk insurance. That would really
allow someone to self-insure for the component that they now buy
from a health care provider.
Instead of what we now see, you would see
doctors, pharmaceuticals, and hospitals advertising the price. I am
dreaming of the day when I am driving to Houston and I see the big
sign that says: Come to M.D. Anderson, $99 a night, everything
don't CVS and Eckerd and Walgreens advertise Viagra at $5.95?
Nobody advertises that. Why? Because the customers do not care what
it costs. We have to make them care. Then for all the commonly used
prescriptions, like the grocery store ad, they will be putting the
ad in the paper and we will have competition.
have to have a way to make that work. Part of it can be medical
savings accounts, where people get to pocket the money at the end
of the year. It has to be their money. They have to get to keep
whatever they do not spend.
LEMIEUX: There is a distinction. I think that the idea of
trying to make consumers pay at the point of service--in the
hospital, the doctor's office, or the pharmacy--it would in fact
cause people to think carefully. But I think that a lot of
moderates and liberals in particular worry that poor people will
say, "I can't afford it," and wealthier people will say, "I can."
Unless the voucher is just right, as Dr. Saving said, we could have
some real problems.
lot of moderates and also the Heritage Foundation (I don't want to
accuse you of being moderate) have talked about price sensitivity
at the point of purchasing insurance; not so much the point of
entering the hospital or the pharmacy, but price sensitivity at the
point when you make an insurance selection.
insurance that you buy might be more or less generous, it might
have fewer or greater numbers of restrictions. But that is sort of
what the whole federal employees-style competition is about.
if people choose the type of insurance that does not cause them to
have much immediate price sensitivity, hopefully their insurer is
watching out for the prices that they face and trying to get good
deals on their behalf. In the case of people with chronic
conditions, some insurers are actually starting to learn how to
help them take better care of themselves and save money in that
rather than having consumers purchasing health services directly
and seeing the prices on the billboards, to have an agent working
on their behalf, which they choose and they face a financial
penalty if they choose an inefficient agent--that is a good
SPEAKER: Al Milliken, Washington
Independent Writers. What kind of feedback are you hearing from
consumers, particularly seniors? Do you see either party getting a
clear political advantage in the short term, specifically in
LEMIEUX: In the late 1980s, seniors who had good retiree
health coverage rebelled over the Medicare Catastrophic Coverage
Act. They didn't want to have to pay the extra surcharges that were
involved with Medicare catastrophic and prescription drugs back
then, because it would not give them anything. It was an extra fee
without any benefit.
There is a similar dynamic in these bills.
If you have good retiree coverage (perhaps you have steered your
career toward a large firm or a government employer precisely so
that you would have good retiree health benefits), you get very
little out of this.
said it flat-out: The employers have a disincentive to wrap around
the government coverage and they have a strong incentive to force
you to purchase the government coverage. CBO thinks that 32 to 37
percent of people with good retiree health coverage will lose it
under these bills if they are enacted.
There is a constituency there for
rebellion. I am not sure if it has gelled yet, or if it will, or if
it would take time after enactment for people to figure out what is
going on here. That is one of the reasons that I have described
this benefit as ugly. It was intended to look good in the
newspapers, but it has some unnoticed consequences that could hurt
its workability in the future.
way to get out of this problem, of course, is to add to the cost.
The solution to all the problems with this type of drug benefit is
to spend more money. That will be difficult in future years.
SAVING: The firms themselves have a real issue, because
retirement funding is now in a very difficult position. As you
know, all these retirement programs are underfunded. These health
care programs, with their rising costs, are also underfunded. I
suspect the firms, politically, are going to be very much in favor
of this kind of entitlement program because it is going to be a
everyone agrees, they are going to bail out of the health care
business. It would be a good thing for them to do in the sense of
portable health care. Get them out of the business, but we need tax
code changes to accompany that.
MOFFIT: I think that the rebellion is underway. It is
rather significant that you have The Wall Street Journal and The
Washington Post editorializing, within a period of a week of each
other, to stop it. The National Association of Retired Federal
Employees, the United Autoworkers Union, the AFL-CIO, and the
Heritage Foundation are all saying this is not a good drug proposal
for seniors and we ought to go back to the drawing board.
is not the political slam-dunk that some of the political geniuses
in this town thought it was a few weeks ago. The more that people
actually see the details, and how it will affect them, you are
going to see a backlash not dissimilar to the kind of backlash that
took place in 1988, with the Medicare catastrophic.
SPEAKER: On that note, can this patient
be saved? Is there anything that can be done to these two bills to
make them a net-plus rather than a net-minus?
LEMIEUX: Well, I have already said it, so I will just
quickly repeat it and then let Dr. Saving have his say. There are
lots of good things in these bills, and it is wonderful that there
has been sort of a bipartisan approach in the Senate. It is nice to
make some progress any time on health care issues that are usually
stymied by ideological gridlock.
this 2006 drug benefit is a real tough thing. It would just be so
much easier if they would scale back the promise; and say, "Listen,
we cannot afford to give you this drug benefit that we have been
promising, but what we can afford to give you is free catastrophic
can do that in such a way that it is controllable. It doesn't hurt
retiree coverage; it is just less than what people are expecting.
So, the politicians have to go back and scale it back. I think if
they did that, they could come up with a system that makes a lot of
SAVING: I agree with some of that. The problem is that
these bills started out as prescription drug bills instead of
Medicare reform bills. What we need is Medicare reform that
combines Part A and Part B, while including prescription drugs. And
we need to go back to the drawing board.
legislation is a very bad idea. The catastrophic part doesn't
affect enough seniors. If you go back to just catastrophic, you
only pick up some 15 percent of seniors.You want to pick up the
voters and you don't get very many.
the idea is to reform Medicare. We ought to get after that. Throw
this thing out and go back to Medicare reform that would include