Commentary: This Medicare Reform Is No Cure

After a decade of debate, Congress is moving to approve the biggest expansion of Medicare since the program was created 40 years ago. On June 27, the House and Senate each passed separate versions of a restructuring package and, by fall, Congress is likely to send a final bill to President George W. Bush. Supporters aren't shy about promoting its benefits, including its centerpiece -- a new prescription-drug plan projected to cost taxpayers at least $400 billion over the next decade.

Although lawmakers still must slog through scores of contentious details, they're likely to reach a compromise that finally will bring the massive federal health program for seniors into the world of modern medicine, backers say. Retirees will get some medicines paid for, a key benefit offered by nearly every private insurance plan in the U.S. but never added to Medicare. At the same time, the legislation aims to fundamentally overhaul the program by luring seniors into more efficient managed-care plans run by the private sector. The theory: The shift will improve treatment and save taxpayers money, helping to rein in ballooning Medicare costs while offsetting the expense of the drug benefit.

Those are laudable goals. Unfortunately, Congress isn't likely to achieve them. In an effort to compromise between Democratic demands for a big drug benefit and GOP efforts to open Medicare to market-based competition, lawmakers will accomplish neither. Originally, Bush wanted to require seniors to join managed-care plans in order to get drug insurance. But that approach was rejected on Capitol Hill. The likely compromise will allow retirees to switch voluntarily out of traditional fee-for-service Medicare.

Problem is, there won't be much incentive for them to do so. The GOP hopes private insurers can save enough money through managed care to eventually offer better coverage to seniors who sign up. But experts are skeptical. And insurance companies, fearing the coverage will be unprofitable, are demanding extra subsidies to participate.

Health analysts are even more doubtful that the elderly will flock to new managed-care networks. Instead, most probably will remain in traditional Medicare, producing few savings to fund drug insurance. "Everybody can claim victory, but the extent to which the damn thing works isn't clear to me," says Bruce C. Vladeck, who ran Medicare for President Clinton. Adds University of Minnesota health economist Roger Feldman, a staunch supporter of privatizing the program: "I'm disappointed. Politics has trumped reform."

It won't be the first time. Washington experimented with managed care starting in 1997 with a program called Medicare+Choice, which allowed companies to offer extra coverage to seniors who joined their plans. But federal payments to the insurers failed to keep up with double-digit cost increases, so they trimmed benefits. Eventually, many dropped the program altogether. At its peak, about 16% of retirees participated. Now, only about 11% are enrolled.

The new reforms try to avoid the pitfalls of that effort. For one, under Medicare+Choice, the government set prices it paid to insurers. The new law will let companies bid for contracts. To further encourage them to participate, the government is likely to provide extra subsidies, such as reinsurance, to protect them against losses. Insurance lobbyists are already pushing for Congress to sweeten the pot. But that would only add to the taxpayer's tab.

Before the bill is finalized, the House and Senate will have to settle two big issues: Should the government offer a backup drug plan in regions of the country where private insurers will not, and how much competition should be permitted after 2010? Still, at their core, the two versions are remarkably similar. Seniors will get a drug discount card starting next year. Beginning in 2006, they will be eligible for Medicare drug insurance. To get it, they will have to pay a monthly premium of about $35 for a benefit that will cover about 25% of their costs.

While seniors won't have to switch to managed care to get their drug benefits, most of them will have to buy the insurance from private companies. They will either get it as an add-on benefit to go with old-style Medicare, or as part of a private plan that will cover the costs of hospital and doctor care as well as drugs. "We need to keep rewarding innovation and protecting competition," Bush said in a June 23 speech on the new legislation.

But real savings will come only if seniors opt to get all of their coverage from the private sector, not just the drug benefit. Insurers say they can cut costs and improve care for Medicare patients if the government gives them the flexibility. One way to do that is through disease management, a system of identifying patients at risk for high-cost chronic illnesses and working closely with them to control their conditions before they suffer a medical crisis.

The idea has shown promise among employer-based health-care plans and it could be a big help to the elderly. After all, almost half of all Medicare funds are spent on just 5% of seniors -- 43% of whom suffer from diabetes and 59% of whom suffer from congestive heart failure. But health-care experts aren't sure that such preventive measures can work with many seniors, especially the 30% of high-cost patients suffering from impairments such as Alzheimer's disease.

Another potential advantage for private insurers is their ability to cut costs by removing high-priced, low-quality doctors and hospitals from their managed-care networks. But that would force seniors to find new doctors, something most are loath to do.

Whether such tactics work or not, the muddled compromise that is in the works on Capitol Hill means they won't be put to the test for years. At least at the outset, private plans will be limited in their ability to compete with traditional Medicare. The House bill would open the system to more competition, but not until 2010. So far, no insurer has yet committed to selling Medicare coverage. Companies worry whether they will be able to profit from the arrangement, says Edward L. Wristen, CEO of First Health Group Corp., a managed-care company based in Downers Grove, Ill.

At the same time, less than 10% of seniors are likely to join a private-sector plan, according to the nonpartisan Congressional Budget Office. Some advocates insist that as retirees see the benefits of private plans, more will make the shift. For example, the Administration's Centers for Medicare & Medicaid Services (CMS) thinks that eventually some 40% of the elderly will join the new plans. But even CMS Administrator Thomas A. Scully doubts that that will happen anytime soon. "The majority of seniors for the rest of my lifetime will be in fee-for-service Medicare," he says.

If managed care doesn't catch on, the savings will come to a paltry few billion dollars a year, the CBO estimates. Meanwhile, even skimpy drug coverage will cost the nation's taxpayers a lot more than the advertised $400 billion over a decade. Indeed, the program's tab could hit $70 billion a year by 2013. Given that the annual cost of Medicare is already expected to double by then, to a staggering $500 billion a year, the extra $70 billion would only worsen the program's fiscal woes. The legislation just delays "a serious discussion down the road about how we are going to finance Medicare," says Stuart H. Altman, a Brandeis University health policy professor.

All of this uncertainty is one reason why Urban Institute economist Marilyn Moon calls Medicare reform "faith-based health care" -- that is, a massive bet on unproved theories and wishful thinking. Privately, many lawmakers concede that the new law will fall far short of expectations on all sides. Congress will pass Medicare reform this year because it is afraid to incur the wrath of seniors if it doesn't. But don't expect this political compromise to improve the health of most retirees -- or boost the solvency of the troubled Medicare program.

By Howard Gleckman

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