Although you wouldn't know it from last year's campaign rhetoric, most
Democrats and Republicans in Washington now agree on a basic approach
to Medicare reform and on the need to expand the program's benefits, especially
for prescription drugs. This year, the new administration should rise
above the usual partisanship, offer to share credit with its political
opponents, and close the deal for a durable new Medicare.
To finish the job, we must expand benefits and create a new, market-based
approach to how Medicare actually delivers benefits. The solution must
address the program's four big problems:
1) Medicare's fee-for-service benefits are inflexible and out of date.
Most seniors face large out-of-pocket costs for prescription drugs and
other items not covered by the traditional fee-for-service program; many
purchase additional insurance to fill in the gaps in Medicare's benefits,
sometimes at great expense.
2) Medicare's system for HMOs is on the verge of collapse. About 1 in
6 Medicare beneficiaries has joined an HMO to get better benefits and
avoid high out-of-pocket costs. But Medicare's system for HMOs is similar
to its administration of the fee-for-service program: a bewildering array
of government-set prices and a dense thicket of regulations. Faced with
lower reimbursements and higher costs, many HMOs are slashing benefits
or dropping Medicare participation altogether.
3) Medicare's fee-setting and regulatory approaches are inefficient and
stifle innovation. Medicare's inadequate fee-for-service program and its
dysfunctional system for HMOs are not the result of bureaucratic ineptitude
or bad motives. They are the inevitable and direct result of how Medicare
is structured. The way Medicare currently works, Congress is required
to dictate virtually all of Medicare's fees and rules. The Department
of Health and Human Services (HHS), which administers Medicare, adds layer
upon layer of regulations in an increasingly futile attempt to apply those
fees and rules to a fluid, constantly changing health sector.
4) Medicare's costs will mushroom when the baby boomers retire. The
backdrop for any Medicare reforms, including adding needed (but expensive)
new benefits, is the fact that as 70 million baby boomers retire, high
Medicare spending is likely to crowd out other government initiatives,
prompting a return to deficits, or forcing tax increases. Without reform,
Medicare spending could easily jump from more than 10 percent of the federal
budget today to 30 percent of the budget by 2030. Combined with Social
Security and Medicaid (a program for the poor, including many elderly
people in nursing homes), the total cost of entitlement programs for the
baby boomers could starve other important functions -- such as education,
research, even defense.
The first two problems -- inadequate benefits and insufficient choices
-- directly hurt seniors. Seniors are less concerned about the third problem
-- Medicare's administrative inefficiency and structural obsolescence --
though it is the root cause of the first two. Furthermore, Medicare's
internal inefficiency contributes to its high costs, which should never
be far from policymakers' minds.
The bottom line is that Medicare's creaky internal workings are no longer
politically acceptable. Medicare was designed in the 1960s, yet its benefits
have not kept up with medical advances and seniors' needs precisely because
of its top-down government controls and old-fashioned administration.
Old Medicare is like an old car: powerful, but inefficient and always
in need of maintenance. Old Medicare was not designed for modern benefits
or competitive approaches, just like the average 1960s-era car was not
designed for modern features like air bags or fuel injection or state-of-the-art
emissions controls.
The good news is that during the 2000 presidential campaign, both candidates
agreed on steps to build a new Medicare that would give more power to
seniors, not bureaucrats. On the campaign trail, Al Gore stressed prescription
drugs and George W. Bush emphasized reform. But beneath the rhetoric both
candidates proposed to combine new benefits like prescription drugs with
a new competitive system that would make the program more modern, flexible,
and efficient.
Yet while the candidates agreed on the fundamentals, their campaigns
-- as well as those in Congress -- focused on the remaining differences
between the reform plans, not on their abundant similarities. If a deal
is to be made, Republicans cannot back away from improved benefits in
Medicare. Short-term political expedients, like granting funds to the
states to aid only the neediest seniors, will not suffice. For their part,
Democrats -- historically the guardians of Medicare -- must resist the temptation
to sidestep systemic reforms and just pump money into expanded benefits
under the old program. Perpetuating the old system will turn into a political
loser very quickly if its benefits disappoint or its costs explode. To
maintain strong political support from all its stakeholders, including
beneficiaries, taxpayers, and health care providers, we should retool
Medicare for the vibrant New Economy of the new century.
The New Economy is based on research and innovation; information and
empowerment; market forces; and self-adapting, self-improving, non-hierarchical
organizations. Workers are being empowered to greatly improve their productivity.
Well-informed consumers have gotten used to better products at lower prices.
In the future, seniors and taxpayers alike, accustomed to the efficiency
and transparency of other sectors of the New Economy, will demand more
value from Medicare as well, including better benefits, more choices,
and competitive premiums. Looking out into the future, the old Medicare
program will not be capable of delivering that value. It must change.
As with other sectors of the New Economy, vigorous and open competition
will be key to spurring innovation and enhancing Medicare's value to seniors
and taxpayers. Here are the major elements of a New Medicare for the New
Economy:
Competition. Medicare needs a new style of competition patterned
after the Federal Employees Health Benefits (FEHB) program to expand and
stabilize seniors' choices and to temper Medicare's future costs.
Modern benefits. We should add prescription drug benefits and
new limits on seniors' out-of-pocket costs; we should subsidize those
new benefits sufficiently to encourage most seniors to enroll.
A new attitude and process. We must change the culture of Medicare
first by establishing a new executive agency outside of HHS that is familiar
with competitive systems to oversee the new competitive approach. (For
discussion purposes, we call this new entity the Medicare Agency below).
Second, we must hammer out a new process under which HHS has the flexibility
to make the traditional fee-for-service program more modern and accountable.
Innovation and choice for drug benefits for fee-for-service
enrollees. The new Medicare Agency should have the power and financial
flexibility to guarantee that seniors enrolled in Medicare's traditional
fee-for-service program will have access to choices of affordable private
coverage for prescription drugs and other out-of-pocket costs. The Medicare
Agency must create a market for private coverage and must not dictate
prices and detailed coverage rules.
Comprehensive Medicare modernization is a relatively new idea. In 1998,
a bipartisan commission co-chaired by Sen. John Breaux (D-La.) and Rep.
Bill Thomas (R-Calif.) produced a plan to remodel Medicare based on the
federal employees' system of choices and competing health plans. In addition
to the new competitive system, the plan added benefits for prescription
drugs and limited beneficiaries' out-of-pocket costs for hospital and
physician services. To save money, however, the Commission's plan would
have raised Medicare's eligibility age and added some new beneficiary
copayments. Furthermore, it subsidized prescription drug benefits only
for beneficiaries under or just above the poverty line.
However, the Medicare Commission didn't account for the rapidly improving
budget outlook in Washington, and its plan did not spark the hoped-for
political consensus. As budget deficits switched to surpluses in 1998
and 1999, President Clinton and many in Congress refused to embrace such
penny-pinching measures.
In June 1999, the Clinton administration countered with its own reform
proposal. Clinton's proposal also embraced the FEHB as a model for competition,
but it added measures to protect traditional fee-for-service from the
full force of market prices. In so doing, it allowed the new competitive
system to save beneficiaries money, but limited the amount the government
would save. The Clinton plan also dropped the section that would raise
the eligibility age. Finally, the Clinton plan generously subsidized prescription
drug benefits for all seniors and formed the new drug benefit on the traditional
fee-for-service model, with the government poised to dictate payment policies
and rates.
Seeing an opening, Senator Breaux started working toward a compromise.
His most recent proposal, cosponsored by Sen. Bill Frist (R-Tenn.), also
drops the increased eligibility age, accepts Clinton's milder form of
competition as an interim step, and raises the subsidies for drugs to
almost three-quarters of Clinton's proposed level. Unlike Clinton's approach,
however, Breaux's plan creates a market for prescription drugs, so that
Medicare beneficiaries in the fee-for-service program would have a choice
of drug plans, and so the Congress would be more removed from the setting
of drug prices and fees.
Clinton's plan was essentially adopted by candidate Gore, and it is supported
by many Democrats. Breaux's most recent proposal has sparked interest
among centrist Democrats and moderate Republicans, and it was endorsed,
at least in general terms, by candidate Bush during the campaign.
Since the two sides are already very close, any remaining disputes over
formulas for competition and subsidies for new benefits should be easy
to resolve. However, sticking points remain on how the new competition
and benefits will be administered. Gore wants the competition to be administered
by HHS, while Breaux prefers a new agency. On that point Breaux is right.
The only way to resolve the most crucial outstanding issue -- ensuring
that fee-for-service enrollees will have access to drug benefits -- is
to create a new executive agency to oversee the new Medicare marketplace.
Here's the problem: market solutions for drug benefits are a much better
idea than the sort of rigid price controls that have distorted and politicized
the hospital industry and other sectors of the health economy. But how
do we ensure that solid markets will spring into existence and that all
seniors -- including those in the fee-for-service program -- will have good
choices? By definition, free markets are impossible to predict.
The Gore plan approved of market solutions for HMOs and other comprehensive
health plans, but implied that markets couldn't be made to work for drug
benefits in the fee-for-service program. That's why it put HHS in charge
of the benefit. Government control is the only way to be sure the benefit
will be there for all beneficiaries, Gore maintained.
Senator Breaux's plan relies on a new Medicare agency to run the program's
market systems, both for comprehensive plans and for extra benefits for
fee-for-service beneficiaries. He would create a mini-market of plans
specializing in drug and other extra benefits, and seniors would be able
to pick from those plans based on price and benefit levels. Markets are
the only way to ensure continuing innovation, efficiency, and dynamism
in the health industry, Breaux argues.
In general, Old Democrats prefer Gore's drug proposal, with its large
subsidies and de facto government control of drug prices and fees. In
those respects, Gore's proposal represents the classic Medicare entitlement,
with the same benefits available to all seniors and provided under strict
government dictate. Old Democrats like to say their drug benefit is "in
Medicare," meaning that it would operate just like the other parts
of Medicare's fee-for-service program.
New Democrats like Senator Breaux would add a drug benefit to Medicare,
but only in the context of market competition and choice, not direct government
management. Breaux believes HHS has distinct bureaucratic objectives --
such as protecting the fee-for-service plan from competition and enlarging
its empire of price controls and regulations -- that could thwart market
solutions to the drug question.
Fortunately, there is a bridge between the two approaches. Senator Breaux
is right to prefer competition to an HHS-administered program, but Gore
was right that full government authority is the only way to be absolutely
sure a benefit will be there for all seniors.
The essential compromise is clear: allow the government sweeping authority
to ensure drug benefits are available under any circumstance, but give
that authority to a new government agency that knows how to work with
market systems and private companies, not to HHS, which only knows price
controls and regulations. Breaux's plan should be more explicit about
exactly what tools the Medicare Agency could use to ensure that drug benefits
would be available even if markets were slow to form. The Medicare Agency
should be given full authority to share risk with private companies as
markets develop, but it should be structured so that any direct government
provision of drug benefits would be temporary -- a true last resort, not
a first option. New Democrats must be confident that the new Medicare
Agency is completely committed to market solutions, not to creeping bureaucracy
and regulations
The right mix of Medicare benefit expansions and competitive reforms
requires the best of both strong government oversight and flexible private
markets. Conservatives must agree to protect the fee-for-service program
for a time, allow the new Medicare Agency a great deal of latitude in
creating a market for drug benefits in fee-for-service, and support higher
subsidies for drugs. Liberals must acknowledge that the HHS is not suited
to run competitive systems, that market approaches must be the goal for
drug benefits, and that costs cannot be allowed to get out of hand.
The political partnership for that sort of deal is shaky, but it does
exist. By improving benefits, we can help America's seniors now. By using
market forces and competition to shore up Medicare's creaky inner workings,
we can assure seniors that we will be able to afford excellent health
benefits in Medicare for their children and grandchildren as well.
Blueprint Keywords: Extra Health Policy
