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SENATE FINANCE COMMITTEE
on
MEDICARE REFORM
June 11, 1999
Introduction
Consumers Union(1) has serious reservations about the premium support model and its ability achieve substantial cost savings and improve the ability of Medicare to meet beneficiaries' needs. Three areas of concern are described immediately below. Consumers Union's Medicare Reform Checklist follows, with brief comments on the extent to which the Breaux-Thomas proposal addresses our concerns.
Inherent problem with the "choice" model
Proponents of the premium support concept rarely (if ever) acknowledge that the traditional fee-for-service model of Medicare provides beneficiaries with more freedom of choice of doctor than any Medicare Health Maintenance Organization or Provider Sponsored Organization ever will. "Choice of health plan" is assumed to be a good thing, by supporters of the premium support model. We are concerned because along with "choice of health plan" come many things that are not good. Of course for many beneficiaries, the immediate result of choice is confusion, especially for those who are visually or cognitively impaired. Another major concern is that when benefits vary (and they would vary considerably under the Breaux-Thomas plan), beneficiaries' health status and needs will influence the selection they make. People at highest risk of needing prescription drugs are likely to seek a plan with this coverage. People at high risk are likely to seek lower deductible plans. The phenomenon of "adverse selection," in which benefits offered affect consumers attracted greatly complicates the design of this important program.
Coverage for prescription drugs and a cap on out-of-pocket costs
The best way to avoid the problem of adverse selection, while assuring that everyone's needs are met, is to have a standard, comprehensive benefit package. Two of the early proponents of a carefully designed premium support model identified the need for a comprehensive, standard benefit package as a core ingredient (2). A modernized Medicare benefits package - one that might well eliminate the need for medigap coverage - would include prescription drugs and a cap on out-of-pocket expenditures.
Reducing the ranks of the uninsured
Congress has adopted an "incremental" strategy of health care reform, yet to date the nation seems to be moving further and further from health care coverage for all Americans (3). Medicare reform at its best should move the nation in the direction of greater health care coverage. It could do this by creating new buy-in options (carefully designed to minimize adverse selection) for people aged 55 to 64, who are not yet eligible for Medicare coverage. It would be a serious mistake if Medicare "reform" increased the number of uninsured Americans by raising the age of eligibility for Medicare to 67, as considered by the Bipartisan Medicare Commission. Many 65 and 66 year-olds have existing health conditions. Many are forced out of the work force, often before they wish to retire. It is unfair to cast them into the ranks of the uninsured just when they are unable to afford to pay the full premium for health care coverage (even if they are lucky enough to find an insurer willing to cover them.)
For Medicare reform to work, it is crucial that Congress make it clear that any insurance companies and health plans wishing to participate must play by a fair set of rules and be accountable to the interest of the public. Medicare has succeeded for over 30 years in large part because of very low administrative costs. Congress should not discard Medicare's achievements without assuring that Medicare in the future will be able to achieve low administrative costs while meeting the needs of its beneficiaries. It is unclear to us that the expected efficiency gains will be sufficient to cover new private sector administrative costs, marketing costs, and profits. If they do not, we could find that the country faces even larger fiscal challenges in the future - at a time when even more special interests have a vested stake in the "reform" efforts. It is clear that a strong federal regulatory role will be needed to hold private health plans accountable.
Medicare Reform Checklist and the Breaux-Thomas Proposal
The checklist below is a list of questions that are key to whether or not Medicare reform proposals advance the interests of consumers and the extent to which the Breaux-Thomas proposal addresses each particular concern.
1. Does the reform proposal provide relief for people in need of prescription drugs, including caps on out-of-pocket prescription drug costs?
The failure of Medicare to cover prescription drugs has been one of its most serious weaknesses. Medicare should be reformed so that prescription drugs are in reach of all Medicare beneficiaries. Co-payments should not be so high as to present financial barriers, and coverage should be deep, and should not be limited to first-dollar coverage (e.g., with a $500 cap on prescription drug benefits). The erosion of employer-based coverage for retirees, limited benefits available through medigap (in part because of adverse selection inherent in a voluntary benefit structure) argue for a universal (non means-tested, not voluntary) prescription drug benefit.
The Breaux-Thomas proposal does not at this point include a universal prescription drug benefits for Medicare beneficiaries. Senator Breaux has indicated an interest in including "some kind of subsidy for all beneficiaries," but has not put forth a universal proposal. He has expressed concern(4) about displacing coverage that exists today. However, it is very important to keep in mind that today's coverage for prescription drugs is inadequate. Employer-provided prescription drug coverage for retirees is decreasing. Medigap coverage is inadequate. Because prescription drug coverage in medigap is voluntary, adverse selection leads the people most likely to need it to buy plans with prescription drug coverage. The limits on coverage is very low, and the premiums very high. Clearly, a voluntary benefit, with "first dollar" (vs. catastrophic) coverage is simply not going to meet the needs of Medicare beneficiaries. Requiring medigap policies to cover prescription drugs is not the answer; doing so will drive up premiums and create an even larger population of seniors with Medicare coverage only (without medigap or Medicaid protection). Furthermore, the non-catastrophic coverage (like that available in certain medigap policies today) is inadequate.
2. Does the reform proposal cap beneficiaries' out-of-pocket costs, providing relief for those with the highest health care costs, i.e., the sickest?
Another serious benefit deficiency of Medicare is its failure to limit beneficiaries' out-of-pocket costs after maximums are reached. While medigap and Medicaid cover gaps for many, millions of moderate income Americans are at risk of devastating out-of-pocket costs. A restructuring of benefits could provide stop-loss protection while eliminating the need for medigap coverage for some.
The Breaux-Thomas proposal does not assure that beneficiaries' out-of-pocket costs are capped though it is possible that some plans will offer such caps. Many seniors' out-of-pocket costs could increase since traditional Medicare benefits (with limits on cost-sharing) as defined in law today would not be guaranteed.
3. Does the reform proposal establish a framework (even if not fully funded at first) for addressing the growing problem of long-term care?
Nursing home care and home care for the disabled are extremely expensive and can quickly wipe out families' savings and create financial catastrophe for families. Private long-term care insurance will not be a practical solution for most families, who simply can not afford it. Recognition of the growing long-term care problem is the first step in addressing this problem, which will only grow worse over time as the population ages.
The Breaux-Thomas proposal does not establish a framework for meeting growing long-term care costs.
4. Does the reform proposal establish a framework, a beginning, for addressing the insurance needs of people who are 55-64, before they are eligible for Medicare, and begin to reduce the ranks of uninsured Americans?
Many people have existing health conditions by the time they reach 55, or develop them by the time they reach eligibility for Medicare at age 65. Ideally, Medicare coverage will be phased in to protect people in this age group (and even younger). If the age of eligibility for Medicare were increased, there would be growth in the number of uninsured Americans, as well as a missed opportunity for expanding insurance coverage for the near elderly.
Not only does the Breaux-Thomas proposal not establish a framework for addressing the insurance needs of people who are 55 to 64, but (as considered by the Commission) it would have increased the age of eligibility from 65 to 67, without providing a health insurance plan for people 55 to 67. Millions of people in this age bracket are likely to remain uninsured. Millions of people aged 65 and 66 could become uninsured. Since employed people (and spouses) 65 and 66 are now covered first by employer plans, savings (for the employed part of this age group) for the Medicare budget would be extremely modest. We are pleased that Senator Breaux and Congressman Thomas have withdrawn this provision of their initial premium support proposal.
5. Does the reform proposal put marketplace competition to work on behalf of consumers, or is marketplace competition likely to bolster profits of companies that don't best serve consumers' needs (e.g., by denying needed care, or avoiding enrolling the sickest consumers)?
Marketplace competition usually offers consumers substantial benefits such as increased choices, lower prices, and higher quality. This can only happen in the health care system if private companies are required to play by the rules established and enforced by the government. Unfortunately, when it comes to health insurance, often competition is among insurance companies who compete for the healthiest consumers and work hard to either deny coverage to the highest risks or charge them high premiums.
It is unclear to what degree market competition will benefit beneficiaries under the Breaux-Thomas proposal, and the proposal contains risks of destructive competition. Since there is not a standard benefit package, HMO's and insurance companies can compete by paring back benefits that may not be very visible. They will compete by seeking good health risks and rely on being a step ahead of the Medicare Board in assessing risks (and undermining risk adjustment). While the proposal includes subsidies that are adjusted by risk (helping to assure that the sickest will be able to get coverage), there are many questions about the authority of the Medicare Board, the benefit structures that will be offered, guarantees for the sickest, how the most vulnerable seniors (who are unable because of infirmity to comparison shop) will fare. It is unclear whether the benefits of market competition will be offset (or more than offset) by the administrative costs, marketing costs and profits that will eat into any savings. (Traditional Medicare has been able to achieve 2 to 3 % administrative costs, much lower than that of private companies). To what extent will the Areformed@ Medicare program be accountable to the public vs. the interests of the HMOs and insurance plans?
6. Does the proposal target relief to moderate income individuals and families - those whose income is too high to qualify for Medicaid yet too low to be able to afford medigap coverage?
It is these families that need the most help. They need protection against catastrophic costs. They need comprehensive prescription drug coverage. They need assistance with the high cost of long-term care.
The details provided so far do not allow firm conclusions about the impact of the Breaux-Thomas premium support plan on low-income and moderate income consumers. One of the examples used in the early discussions suggests that low income consumers might have to pay 10 percent of their premiums. Many low-income consumers face no premiums under today=s Medicare system. It is possible that the burden on low-income beneficiaries could increase under the Breaux-Thomas reform plan.
7. Does the reform proposal tap financing sources that appropriately seek revenues from those people who are able to pay?
Medicare as a social insurance program - a universal program that pools risks broadly - can be preserved while at the same time charging more to those high income beneficiaries who can afford to pay more. (The overwhelming majority of Medicare beneficiaries have moderate incomes, so there is a limit to how much money can be raised from the well-off beneficiaries). It is fair to ask higher income individuals and families to pay more, but this added contribution should not be so onerous as to discourage participation in Medicare.
The Breaux-Thomas reform proposal calls on high-income consumers to pay higher premiums than lower income consumers do. Consumers Union supports higher premiums for higher income consumers. Senator Breaux suggests that higher income beneficiaries (with income at least five times the poverty level) should pay 25 percent of the average total Part A and Part B Medicare cost, and this seems a reasonable target. (Subsidies for low-income beneficiaries should continue to come from general Medicare revenues, which include a contribution from high-income Medicare beneficiaries.)
8. Does the reform proposal assure that Medicare is universal (for the covered age group) to help achieve the highest quality and highest level of political support?
The success of Medicare to date stems largely from the fact that it has been universal. Payments have been sufficient to encourage broad participation by providers. Quality of care has been high. If provider payments were cut too severely, participation and quality would erode. The well-to-do would have a strong incentive to drop out of Medicare. The political support for a program for all seniors and disabled would erode.
The Breaux-Thomas proposal preserves Medicare as a universal system for the covered group.
9. Does the reform proposal spread risks broadly?
Broad spreading of risks, coupled with universal participation, is the key to keeping average costs down. If the private sector were allowed to select the healthy, without a reduction in their payments, the solvency of the Medicare program would be severely threatened.
The ability of the Breaux-Thomas proposal to spread risks broadly is not entirely clear. To its credit, it calls for risk adjustment. It is not clear that the government will have the ability to do this accurately in the time frame needed to implement this proposal. There is a serious risk (depending for example on design details and accountability of the Medicare Board to the public) that HMOs and insurance plans will select lower risk beneficiaries (as Medicare HMOs have done) and that risk adjustment will not be adequate to compensate for this.
10. Does the reform proposal assure that beneficiaries have the freedom to choose their own doctor?
Freedom of choice of doctor allows consumers to exert some control over their health care destiny. This freedom is very important to many consumers, and has been one of the cornerstones of the Medicare program. Many consumers wish to maintain this freedom, even if it means higher costs for them.
Uncertainties of design and implementation of the Breaux-Thomas proposal make it impossible to predict whether beneficiaries will enjoy they level of freedom of choice of doctor that they now have under traditional Medicare. It is possible that traditional Medicare will be out of reach for many beneficiaries. The plan calls for choice for low-income consumers, but there are many uncertainties about how this will translate into choice of provider and choice of plan for beneficiaries.
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(1) Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about good, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.
(2) Henry J. Aaron and Robert D. Reischauer, "The Medicare Reform Debate: What Is the Next Step?" Health Affairs, Winter 1995.
(3) For a discussion of principles that Consumers Union believes should be incorporated in incremental reform, see Blueprint for Fair Share Health Care: Incremental Steps Toward Universal Coverage, Consumers Union, May 24, 1999.
(4) See Testimony before the Senate Finance Committee, "Using the FEHBP Model to Reform Medicare," Senator John Breaux, May 26, 1999.
