The New York Analysis of Policy and Government continues its review of the disappointment to users of Medicare, and its pending insolvency.
Despite what many believe to be less than ideal coverage, the system itself will soon face bankruptcy. The Urban Institute suggests inefficiency as a key reason:
“Fee for service Medicare, which enrolls some 85 percent of all participants, lacks strong incentives either for beneficiaries to seek or providers to supply only cost-effective care or, for that matter, only care that has a reasonable chance of improving health outcomes. Of course, many private sector health plans also suffer from this deficiency. Medicare, however, faces another challenge —setting its payments at the right level—that does not bedevil private plans to the same degree. The program pays for thousands of medical services delivered by hundreds of thousands of providers and suppliers operating in hundreds of separate market areas. Because it must operate throughout this very diverse nation, it is impossible to set uniform payment rates that will be efficient everywhere. Some providers are overpaid, others are undercompensated. Because the consequences of underpayment are so serious—denial of access to needed services for a vulnerable population—and because political pressures can affect payment policies, overpayments (rather than under payments) tend to be the norm. Of course, all complex systems tolerate some inefficiency because the costs of wringing out the excess exceeds the gain. But the level of inefficiency accepted in Medicare is higher than that in private sector plans because Medicare, being a government program, has objectives other than efficiency, such as ensuring that certain types of providers survive in rural areas. As reform options that promise improved efficiency are debated, it will be important to consider whether and how these other goals of the Medicare program will be met under a restructured system.”
In a 2011 National Affairs examination, Avik Roy wrote “Medicare’s woes are partly demographic. In 2030, when the last of the Baby Boomers retires, there will be 77 million people on Medicare, up from 47 million today. But there will be fewer working people funding the benefits of this much larger retiree population: In 2030, there will be 2.3 workers per retiree, compared to 3.4 today and about 4 when the program was created. But a bigger part of Medicare’s troubles is the rapid inflation of health-care costs. In 2010, the per capita cost of providing health-care services in America increased by 6.1%, according to Standard & Poor’s, while overall inflation increased by only 1.5%. Over the past decade, health-care inflation has risen 48%, while inflation in the broader economy has increased by only 26%, according to the Department of Labor…
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First, other government agencies help administer the Medicare program. The Internal Revenue Service collects the taxes that fund the program; the Social Security Administration helps collect some of the premiums paid by beneficiaries (which are deducted from Social Security checks); the Department of Health and Human Services helps to manage accounting, auditing, and fraud issues and pays for marketing costs, building costs, and more. Private insurers obviously don’t have this kind of outside or off-budget help. Medicare’s administration is also tax-exempt, whereas insurers must pay state excise taxes on the premiums they charge; the tax is counted as an administrative cost. In addition, Medicare’s massive size leads to economies of scale that private insurers could also achieve, if not exceed, were they equally large.
But most important, because Medicare patients are older, they are substantially sicker than the average insured patient — driving up the denominator of such calculations significantly. For example: If two patients cost $30 each to manage, but the first requires $100 of health expenditures and the second, much sicker patient requires $1,000, the first patient’s insurance will have an administrative-cost ratio of 30%, but the second’s will have a ratio of only 3%. This hardly means the second patient’s insurance is more efficient — administratively, the patients are identical. Instead, the more favorable figure is produced by the second patient’s more severe illness.
The Report Concludes Tomorrow
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