February 08, 2015

Medicare at Fifty

The Medicare program will turn 50 this year, as a short piece in the New England Journal of Medicine reminds us. Well, not exactly—Lyndon Johnson signed the legislation into law in July, 1965, but the program didn’t actually go into effect until 1966. So I guess we have two years for the festivities. There’s a lot to celebrate—but also a lot of work to do. Maybe just as we customarily make New Year’s resolutions every January, we need to make new semicentennial resolutions for the Medicare program.

What has Medicare done right and what has it done wrong? And why should it matter so much to people over 65? How about to everyone else?

To start with the question of mattering, Medicare matters to older people because 98% of people 65 and older have health insurance coverage, thanks to Medicare. In 1962, before the institution of Medicare, only 48% of older people had medical coverage, and many of them had policies that were inadequate for their needs. It’s also important to realize that in addition to the 43.5 million older people enrolled in Medicare, 8.8 million younger individuals who are disabled are also covered by Medicare. 

But Medicare matters to everyone in the US, not just those who are elderly or disabled. It matters because Medicare spending constituted 17% of federal revenues in 2014 and with the projected growth of both the older population and the program, this is expected to reach 27% by 2050. Without substantive payment reform or changes in coverage, Medicare spending by the federal government will approach 40% of its revenues by the end of the century. This means less money for everything else that the federal government spends money on, ranging from infrastructure to education to defense.

Medicare also matters to everyone because it is a trailblazer: most private insurers follow Medicare’s lead in all sorts of critically important areas. For example, when Medicare started paying hospitals based on diagnosis-related groups in 1983, when it went from a retrospective system that essentially meant paying hospitals whatever they charged to a prospective system that paid hospitals a standard amount for a given condition, private insurance companies adopted the same strategy. When Medicare modified the way it paid physicians by going with a relative value scale, private payers followed its lead. Today, Medicare is increasingly paying for performance rather than just for services; so, too, are many private insurers. Medicare is increasingly interested in improving the quality of care, not just assuring access; the private insurers are adopting the same model.

So if Medicare is so important, what does it do well and what does it do poorly? Medicare gets a lot right, it also gets some important things wrong. Medicare fails to recognize that certain technologies such as glasses and hearing aids are as essential to optimal functioning as is the durable medical equipment (walkers, wheelchairs, commodes) that Medicare currently covers. Because Medicare covers certain things such as short term rehabilitative care in a Skilled Nursing Facility, while Medicaid covers long term residential care in a Skilled Nursing Facility, the two programs have an incentive to cost shift instead of providing seamless, integrated care.  The Medicare program is further fragmented by having separate benefits for hospital care, physician care, and medications (Medicare Part A, Medicare Part B, and Medicare Part D)—except if patients enroll in a Medicare Advantage plan (Medicare Part C), which combines all three.

Fixing what Medicare gets wrong is obviously important to the program’s beneficiaries. But it's also important to everyone else with health insurance (which, thanks to the Affordable Care Act, is an increasingly large share of the population.) There will be growing emphasis on reforming Medicare to control costs. Looked at in terms of GDP rather than federal revenues, spending on Medicare has gone from 0.5% of GDP shortly after it was introduced in 1966 to 3.5% in 2012, with projections that it will grow to 4.3% by 2022. Although the rate of rise has fallen in the last couple of years, variously attributed to the recession and to the Affordable Care Act, total spending will continue to grow in part because of the dramatic rise in the number of people over age 65. The drive to modify Medicare gives us an unprecedented opportunity: to make the program both better and leaner. We can do this, as I suggested in last week's post, by making smart tradeoffs and by introducing a new benefit midway between conventional Medicare and hospice. What better time than Medicare's 50th anniversary to make a new year's resolution--and stick to it.

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