The Heritage Foundation

Executive Summary #1294es on Health Care

June 14, 1999

June 14, 1999 | Executive Summary on Health Care

Executive Summary: Reorganizing the Medicare System to Ensure a Better Program for Seniors

The current discussions in Washington, D.C., about adding an outpatient prescription drug benefit to Medicare underscore how out of date the program has become. Most health insurance plans for working Americans, and even such other government-run health programs as the Federal Employees Health Benefits Program (FEHBP), routinely add new benefits and services as soon as they become widely available. Yet Medicare, a program that provides health care coverage for over 40 million senior citizens and disabled Americans, is organized and run in such a way that even the smallest changes regularly lead to political gridlock and inaction.

Recently, the National Bipartisan Commission on the Future of Medicare, chaired by Senator John Breaux (D-LA) and Representative William Thomas (R-CA), considered significant changes in the program that would improve its operation as well as its finances. Unfortunately, even though a bipartisan majority of the commission's members supported a proposal to restructure Medicare along the lines of the FEHBP--which covers about 9 million federal workers, retirees, and their dependents, including Members of Congress--the supermajority needed for a formal endorsement of the proposal fell one vote short. Nevertheless, Senator Breaux and Representative Thomas have indicated their intention to push for legislation based on the majority's view.

With some modifications, that majority proposal would provide a sound basis for structural reform of the Medicare system. Specifically:

  1. Adopting a "premium support" approach would guarantee a Medicare entitlement and introduce incentives for beneficiaries to make cost-conscious decisions.
    The Medicare commission's "premium support" proposal combines the twin objectives of assuring seniors they would have a basic package of benefits they could afford and encouraging them to pick cost-effective coverage. The degree of financial support could be refined in various ways. For example, it could be indexed to adjust for changes in medical costs, for income levels, and for high-cost medical conditions. It could be designed even as a base amount plus a percentage of a premium (a version of the FEHBP's formula).

  2. Assembling a "Benefits Board" to recommend future changes in benefits would depoliticize the process and facilitate the evolution of benefits that better mirror the private market.
    Such a semi-independent board would develop proposals each year to modify Medicare's benefits package, which then should be subject to an up-or-down vote in Congress without amendment. This is similar to the principle behind the Base Closing Commission in the 1980s. Although the bipartisan Medicare commission did not propose this change, the creation of such a board would address problems inherent in benefit modernization. For example, were such a board in place today, Congress could require it to offer proposals for adding a drug benefit to Medicare's fee-for-service program within budget constraints. Senator Bob Graham (D-FL) is developing legislation to create a similar procedure for adding a prevention benefit for the elderly, using the Institute of Medicine (IOM) as the board and "fast track" procedures for legislating the IOM's recommendations.

  3. Creating a "Medicare Board" that would manage the market of competing plans and negotiate services and prices would ensure seniors have the best benefits for the most reasonable cost.
    This responsibility should be taken away from the Health Care Financing Administration (HCFA) to remedy the current problem of having HCFA manage a market of competing plans at the same time it is developing and marketing one of those competing plans--Medicare's fee-for-service program. Such conflicting roles prevent HCFA from satisfactorily carrying out a consumer information function. For example, HCFA spent $95 million in a futile attempt to produce a consumer handbook for Medicare beneficiaries; yet a private organization, the Washington Consumers' Checkbook, completed the same task for the FEHBP with just one analyst working for two months with some clerical assistance. A Medicare Board separate from HCFA would carry out functions similar to those of the Office of Personnel Management in managing the FEHBP: It would negotiate benefits, service areas, and prices with the various plans, rather than impose regulations and price formulas as HCFA does.

  4. Empowering the traditional fee-for-service Medicare program to compete with private plans would promote innovation.
    Relieving HCFA of the responsibility of organizing the market for plans should be combined with giving it greater freedom to introduce innovation into the fee-for-service program to enable it to compete with private plans. Many municipalities and states give public agencies flexibility to compete with private bidders. Charter schools, for example, function as public competitors of private schools. Of course, HCFA should be given this freedom only if its power to organize and regulate the competitive marketplace were taken away.

The Medicare program continually faces financial problems and its benefits package is persistently out of date. It is time for Congress to recognize that this is not strictly because Medicare is a government run-program. The FEHBP is a government-run program that provides state-of-the-art benefits to federal employees with levels of efficiency that rival the best corporate plans--and far surpass Medicare. Medicare, by comparison, is highly regulated and micromanaged by Congress.

The majority of members of the National Bipartisan Commission on the Future of Medicare recently agreed that the model for restructuring Medicare should be the FEHBP. Congress would be wise to act on a modified version of the majority's proposal. If it does not act soon, the window of opportunity for reform will begin to close as the aging baby-boom generation nears retirement.

Stuart M. Butler, Ph.D., is Vice President of Domestic and Economic Policy Studies at The Heritage Foundation.

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