When the Government Runs Health Insurance

Much of the health care reform debate centers on the Democratic push to create a government-run insurance option for working age Americans and their families. But shouldn’t policymakers take a hard look at Medicare—the largest health insurance program in the country—before moving ahead to create something similar for everyone else?

Medicare, the federal health program for the elderly and disabled has strong public support, and for good reason. Medicare provides seniors with reliable health insurance. That’s no small matter.

But that does not mean that the dominant Medicare model--fee-for-service insurance, circa 1965--is working well and should be replicated elsewhere. The primary problem in health care is costly, inefficient arrangements for medical care. Medicare’s fee-for-service insurance is the support structure for this expensive status quo.

Fee-for-service insurance allows enrollees to see any licensed service provider, with no questions asked.. Its substantial cost-sharing is mostly ineffective in discouraging utilization because some 90 percent of the enrollees carry supplemental coverage that pays for what Medicare does not.

It’s not surprising, then, that Medicare’s Achilles’ heel is volume. According to the Congressional Budget Office (CBO), the real price Medicare paid for physician fees dropped between 1997 and 2005 by nearly 5 percent, but total spending rose 35 percent because of rising use and more intensive treatment per condition.

Employers have been trying for years to move away from the fee-for-service payment system and toward higher quality, lower-cost networks of providers. They are well ahead of the federal government in their disease management and wellness efforts.

But employers can only do so much when Medicare--the dominant payer in most markets--pushes in the opposite direction. Because Medicare will finance unlimited use and pay any licensed provider, many individual doctors and hospitals see no reason to give up their autonomy, which means care is all too often delivered in a fragmented, disorganized and inefficient manner. Many other types of providers--such as laboratories, home health agencies and hospices -- survive as stand-alone operations because of Medicare’s open network and provider-centric payment systems.

Besides fee-for-service arrangements, a fundamental problem with government-run insurance is politics. Obama administration officials have been promising to “bend the cost-curve” with painless reforms in Medicare that reward quality and pay for value. That sounds good, but their actions speak much louder than their words.

In June, President Obama proposed $313 billion in Medicare and Medicaid cuts over 10 years--on top of the $309 billion in his 2010 budget. Most of the budgetary savings would come from across-the-board fee cuts, with no distinctions made for quality or value. It’s less for everyone, no matter how well or badly providers treat their patients.

This is not surprising. That’s always been the way the government has run Medicare. There have been countless efforts over the years to measure quality care and set payments accordingly. Most have been tested in demonstration programs, or floated as legislative initiatives. In virtually all cases, the promise of painless cost-cutting has ultimately given way to indiscriminate price controls to meet spending targets. President Obama’s Medicare cuts are really just more of the same. They won’t “bend the cost-curve”; they will simply further widen the gap between public and private payment rates, thus shifting more costs to those who pay premiums for private insurance. Last year, experts with consulting firm Milliman estimated  (pdf) the cost shift from Medicare and Medicaid to private payers already amounts to nearly $90 billion annually.

The only durable solution is to shift control over Medicare from politicians to beneficiaries, as has occurred in the program’s new prescription drug program. The key features to such a solution are a fixed-dollar entitlement which does not rise when a beneficiary selects an expensive option and more freedom for insurers and health-care practitioners to deliver services outside of today’s fee-for-service payment arrangements. With government oversight, a marketplace filled with cost-conscious consumers would provide strong financial incentives to doctors, hospital administrators and others to reorganize themselves--without political interference--into more convenient, price competitive and higher quality systems of care. That’s the way to make the delivery system patient-centered.

Such a reform would be controversial, of course--and not easy to implement. It would need to be phased-in gradually to prevent disruption of arrangements for the oldest patients. But there really is no alternative. There are pressing problems in American health care which are traceable back to Medicare’s current design and financial incentives. In other words, health care reform should start with the insurance program the government already runs.

Roy Ramthun is President of HSA Consulting Services, LLC and a Visiting Fellow at the Council for Affordable Health Insurance. James C. Capretta is a Fellow at the Ethics and Public Policy Center and a health policy and research consultant. Both are former health care advisors to President George W. Bush.