Commentary: Medicare Gets An Umbrella For An Avalanche

As Congress fiddles with the arcana of its balanced budget bill, the disagreeable prospect of a Medicare crisis already is receding from public view. And why not? The final budget likely will stave off bankruptcy of Medicare's trust fund until 2007, via some accounting sleight-of-hand and $115 billion in lower payments to providers and insurers.

Savings on that scale are no trifle--until set against the enormity of the real problem. In 2010, baby boomers will start turning 65. That aging generation, 80 million strong, could push Medicare's expenses to 14% of gross domestic product by 2030, says Sylvester J. Schieber of consultants Watson Wyatt & Co., from 2.5% today (chart).

FANTASY. Official Washington, largely incapable of contemplating a train wreck so far down the track, is praying Medicare will have found salvation by then in the form of managed care. That's a wishful fantasy. While shifting patients to health-maintenance organizations will rein in costs--as it has for business--Medicare can't realize the resulting efficiencies. To do so, Congress must create a new structure that allows, even requires, consumer choice and competition. It must force seniors, in other words, to buy health coverage like everyone else.

True, HMOs already are enrolling 90,000 to 100,000 senior citizens a month. At that rate, the Congressional Budget Office estimates, 25% of Medicare recipients will be in managed-care plans by 2002, double today's level. And HMOs should be able to reduce those seniors' medical expenses by 35% to 40%, reckons Stanford University economist Alain C. Enthoven, a high priest of the health-reform movement.

There's a catch, though. The HMO shift won't produce systemic savings because of the archaic way Medicare compensates managed-care plans. The Health Care Financing Administration, which runs Medicare, pays HMOs a fixed rate per recipient, based on a county's average medical costs. Typically, that rate is higher than the HMOs' expenses--and the HCFA requires that surpluses be returned in the form of lower premiums and extra benefits such as pharmacy coverage.

It's such goodies that lure seniors into managed care. So, while cutting payments to HMOs would reduce Medicare's tab, slashing too much will cause insurers to pull the perks. And Medicare can't afford that. It needs to shift the elderly as quickly as possible out of its traditional plan, which provides no effective checks on health spending. If it succeeds, average costs should decline--and the compensation formula will allow the HCFA to pay HMOs less. Larger managed-care populations, moreover, should produce lower medical costs even for Medicare recipients who aren't in HMOs, predicts consultant Peter D. Fox, a former HCFA official.

The HCFA acknowledges, though, that these solutions don't produce savings nearly fast enough. So Medicare is experimenting with other ideas. In Denver, it wants HMOs to bid on a contract to provide a predetermined package of benefits. It also favors legislation allowing provider groups to create their own Medicare HMOs, which could cut administrative costs.

Enthoven argues that there's a much quicker, better way. Give every senior a fixed sum, he says, and let them buy health insurance on their own. HMOs would bid for their business, offering varying benefits at different prices. If seniors wanted a plan that costs more than their Medicare subsidy, the difference would come out of their pockets. Forcing the elderly to become sharp-eyed health-care consumers would help keep a lid on rates.


Even that may not counter the impending demographic cataclysm. "All this still begs the question, what does society want?" says Bruce Merlin Fried, who directs the agency's managed-care programs. As a nation, we have yet to consider just what we're willing to pay to keep funding our seniors' medical care. As we put the question off, 80 million boomers grow older--and more vested in a system that promises unlimited doctor visits and relative security. The longer we wait, the more likely their resistance will translate into political intractability and the path to true reform will become all the more daunting.

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