Medicare Advantage: A Platform for Affordable Health Reform

Medicare plans run by private insurers have lower premiums, broader benefits, and better health outcomes.

Executive Summary

Sen. Bernie Sanders claims that his plan for “Medicare for All” will eliminate the role of private insurance in the U.S. health care system. But in describing his plan, he avoids a critical fact: 22 million seniors enrolled in Medicare receive their health coverage through private insurers, through Medicare Advantage.

Fiscally sustainable Medicare reform does not involve increasing seniors’ out-of-pocket costs or reducing the scope of Medicare’s benefits. Instead, it involves reducing the underlying cost of delivering Medicare coverage, by rewarding insurers, hospitals, and doctors for competing on quality and price.

Indeed, the part of Medicare that is working best is Medicare Advantage, which deploys private insurers to provide high-quality, low-cost coverage to seniors. Medicare Advantage plans have lower costs, broader benefits, and better health outcomes than traditional, single-payer Medicare. That is why enrollment in Medicare is skyrocketing, while enrollment in traditional Medicare has declined since 2017.

Enrollment in single-payer Medicare is declining, while enrollment in privately-insured Medicare plans is rapidly growing. Over the last ten years, enrollment in Medicare Advantage and other privately-insured Medicare plans has more than doubled. Over the same period, enrollment in the traditional, fee-for-service, single-payer version of Medicare has stagnated. Indeed, enrollment in single-payer Medicare has declined since 2017. (Graphic: A. Roy / FREOPP; Source: Centers for Medicare and Medicaid Services)

The broader Medicare program, however, remains the biggest driver of the federal deficit and debt. It has always been challenging to reconcile two principal goals of Medicare policy: maintaining the reliability of Medicare for those on it today, while ensuring that health care and coverage remain affordable for every generation to come.

There is, however, good news on this front. There are ways to make Medicare Advantage plans even less expensive, with even better outcomes — all while preserving Medicare’s traditional set of covered benefits.

In other words, the path to politically and fiscally sustainable Medicare reform does not involve increasing seniors’ out-of-pocket costs or reducing the scope of Medicare’s benefits. Instead, it involves reducing the underlying cost of delivering Medicare coverage, by rewarding insurers, hospitals, and doctors for competing on quality and price.

In this paper, we propose a number of ways to build on Medicare Advantage’s success in doing just that:

• Default enrollment for the newly retired in Medicare Advantage plans with premiums that are equal to, or lower than, those of single-payer Medicare;
• Competitive bidding under which Medicare Advantage plans compete on price for seniors’ enrollment, passing the savings onto them (and taxpayers) in the form of lower premiums; and
• Modernizing coverage for low-income seniors who are dually eligible for Medicare and Medicaid, by integrating their coverage into unified, specialized Medicare Advantage plans.

We also offer ways to improve Medicare across all programs, both single-payer (Parts A and B) and market-based (Parts C and D), including:

• Reducing the cost of Medicare prescription drug coverage through international benchmarks and catastrophic coverage reform;
• Eliminate Medicare subsidies for multimillionaires, specifically those with lifetime earnings above $10 million;
• Add catastrophic coverage to traditional Medicare by replacing so-called “Medigap” plans with a more cost-effective system;
• Phase down the role of state premium and provider taxes in inflating Medicare’s costs; and
• End ethical conflicts in the way Medicare sets price controls for physician care.

We believe that these reforms, combined with others described in our broad reform plan, Medicare Advantage for All, can make health insurance affordable for every American living today, while also enabling our health care system to be fiscally sustainable for the generations to come.

Introduction

For years, Sen. Bernie Sanders (D., Vt.) has campaigned for what he calls “Medicare for All” — a proposal that would abolish private insurers and replace them with a “federally administered single-payer health care program” that would cover all forms of health care with “no more copays, no more deductibles,” and no premiums aside from substantially higher taxes. The irony of Sen. Sanders’ proposal is that it looks nothing like the actual Medicare program that seniors use today.

Indeed, the part of Medicare that is working best is Medicare Advantage, which deploys private insurers to provide high-quality, low-cost coverage to seniors.

Sen. Sanders’ plan would abolish Medicare Advantage, disrupting coverage for 22 million retirees. The best way to reform Medicare—and to provide affordable health care to every American—is to go in the opposite direction: to enact reforms that will further improve the quality and affordability of Medicare Advantage plans, and to learn from Medicare Advantage to improve the coverage that younger Americans can obtain.

Medicare’s trust fund will be insolvent by 2026

60 million Americans over the age of 65 rely on Medicare for their health insurance coverage. Ensuring that seniors can continue to rely on that coverage is an essential goal of American health care policy.

But what sounds simple in theory is difficult in reality. Over the next decade, federal spending on Medicare is set to double, from $672 billion in 2016 to $1.4 trillion in 2026. The Medicare Trustees project that the trust fund for Medicare’s hospital insurance program, Medicare Part A, will become insolvent in 2026: three years earlier than they had previously believed.

Arguably more important is Medicare’s central role in driving America’s rising federal debt; put simply, Medicare’s current structure threatens the affordability of health care for future generations. As the baby boomers retire, the program continues to accumulate deficits at an alarming pace.

Robert Reischauer, a Democratic Medicare trustee and former CBO director, has warned against fiscal complacency, because it will only make the problem worse: “The sooner that lawmakers act, the broader will be the array of policy options that they can consider, and the greater the opportunity will be to craft solutions that are both balanced and equitable.”

Medicare’s Hospital Insurance Trust Fund will be insolvent in 2026. The Medicare Trustees’ estimates of the solvency of Medicare’s hospital insurance (Part A) trust fund have varied over time. In its 2018 report (red line with triangles), the Trustees project that Part A will become insolvent in 2026. Without legislative changes by Congress, at that point there will be no funds to pay for seniors’ hospital expenses within the Medicare program. (Source: Congressional Research Service)

Medicare’s outdated design

In most other industrialized countries, state-funded health insurance began with the poor and was gradually extended up the income ladder. But in mid-twentieth-century America, there was still a significant stigma attached to being “on the dole,” and income tests were considered demeaning.

Policymakers who sought an expanded role for government in health care thus believed that starting with the elderly would be more politically palatable. After all, the elderly were a far more sympathetic group in the public’s eyes: older Americans had less opportunity to earn their own money to fund their health care and were therefore generally poorer than other Americans (along with being less healthy).

Being both relatively poor and relatively unhealthy, they were, in turn, less likely to have health insurance. And policymakers believed that the model of Social Security as a “self-financed” program for the elderly, paid for with a dedicated payroll tax, could easily be extended to health insurance.

But by creating a universal, single-payer health care program for every American over 65, regardless of financial or medical need, the drafters of Medicare made the program resistant to reform.

The Medicare policy trap

Princeton sociologist Paul Starr describes this feature of Medicare as a “policy trap.” In Starr’s 2011 book, Remedy and Reaction, he observes:

When America finally adopted critical tax and health-financing policies in the two decades after World War II, it ensnared itself in a policy trap, devising an increasingly costly and complicated system that has satisfied enough of the public and so enriched the health care industry as to make change extraordinarily difficult. Escaping from that policy trap has become a politically treacherous national imperative.

Today, Medicare’s finances are on autopilot. In contrast to most government programs, which are funded by explicit congressional appropriations, Medicare beneficiaries are eligible for guaranteed health benefits, regardless of their cost.

And the illusion of pre-funded benefits — the notion that Americans pay into the system while they work and then merely withdraw the funds they put in when they retire — no longer bears any relation to reality.

Medicare enrollees today receive 3 times as much in benefits as they paid in taxes. The average two-earner family that retired in 2010 will receive $397,000 in inflation-adjusted Medicare benefits over the course of their lives, net of premiums, but only paid $130,000 into the system in taxes: a ratio of 3.1 to 1. Those retiring in 2030 will receive $645,000 in benefits while paying in only $186,000: a ratio of 3.5 to 1. Future generations will not benefit from this arrangement, as it is fiscally unsustainable. (Graphic: A. Roy / FREOPP; Source: Eugene Steuerle and Caleb Quakenbush / Urban Institute)

According to calculations published in 2018 by Eugene Steuerle and Caleb Quakenbush of the Urban Institute, the average two-earner married couple retiring in 2010 had paid $130,000 in Medicare taxes while working but will receive $397,000 in inflation-adjusted benefits during retirement: a ratio of 3 to 1. A similar couple retiring in 2030 will have paid $186,000 in taxes and will receive $645,000 in inflation-adjusted benefits: a ratio of 3.5 to 1.

Medicare has become a massive — and growing — transfer of resources from younger workers to older retirees. And since the elderly are no longer the poorest Americans — on the contrary, Americans over the age of 65 are now significantly wealthier than younger Americans — Medicare is largely a transfer of resources from poorer to wealthier individuals.

Reforming Medicare with public support

It has always been challenging to reconcile two principal goals of Medicare policy: maintaining the reliability of Medicare for those on it today, while ensuring that health care and coverage remain affordable for every generation to come.

There is, however, good news on this front. Advances in the management of health care, deploying innovations in data science, have dramatically improved the quality and cost-effectiveness of Medicare Advantage plans sponsored by private insurers. There are ways to make Medicare Advantage plans even less expensive, with even better outcomes — all while preserving Medicare’s traditional set of covered benefits.

In other words, the path to politically and fiscally sustainable Medicare reform does not involve increasing seniors’ out-of-pocket costs or reducing the scope of Medicare’s benefits. Instead, it involves reducing the underlying cost of delivering Medicare coverage, by enacting reforms that reward insurers, hospitals, and doctors for competing on quality and price.

Sen. Sanders’ approach, by contrast, would require extreme increases in taxation. His plan would increase federal spending by between $28 and $44 trillion over the next ten years. By comparison, the Joint Committee on Taxation estimates that total federal tax revenue—on individuals of all incomes—over the next decade will total $35 trillion. In other words, taxes on everyone would have to double to pay for Sen. Sanders’ plan.

It is true, however, that we spend too much money subsidizing health coverage for the wealthy in America. Why is it that middle-class Americans are forced to pay taxes so that retirees worth $100 million can get government-subsidized health care?

Medicare’s kludgeocracy

Johns Hopkins political scientist Steven Teles has observed a growing phenomenon in American public policy that he calls the “kludgeocracy.” Citing the Oxford English Dictionary, he explains that “a ‘kludge’ is ‘an ill-assorted collection of parts assembled to fulfill a particular purpose’…To see policy kludges in action, one need look no further than the mind-numbing complexity of the [American] health care system.”

While kludgeocracy does certainly describe the U.S. health care system as a whole, the Medicare program is a particularly notable manifestation of one. Its four separate programs — Part A for hospital insurance, Part B for physician services, Part C for privately managed benefits, and Part D for prescription drugs — are profoundly inefficient, requiring most seniors to receive uncoordinated and costly care that can lead to suboptimal health outcomes.

The Medicare kludgeocracy has resulted in Medicare costs that far exceed those of coverage expansions in other countries. Amy Finkelstein of MIT has shown that Medicare’s impact on increased hospital spending is over six times greater than what a normal expansion of health insurance would have been expected to yield.

For all its spending — $808 billion in 2019 — single-payer Medicare does not provide catastrophic coverage against long-term hospitalizations. In 2019, Medicare’s Part A hospital insurance covers the first 60 days of a hospitalization, with a $1,364 deductible. The next 30 days include a coinsurance fee of $341 per day in charges for hospital stays of 61–90 days, $682 per day for hospital stays longer than 90 days, and all costs beyond a total of 60 days in the hospital beyond the 90-day stay limit. Hence, while Medicare pays for many services, seniors are still liable for catastrophic costs above those covered by Part A.

And Medicare Part B, which insures against the costs of outpatient physician care — does, in fact, charge premiums, co-pays, and deductibles. In 2019, Medicare B’s annual premium is between $1,626 and $5,526; the premium increases for those with higher incomes.

Spending on Medicare will double over the next decade. As inflation for health care products and services continues to rise faster than U.S. economic growth, federal spending on all public programs will squeeze out other important priorities like national defense and anti-poverty programs. From 2016 to 2026, federal spending on Medicare will increase from $672 billion to $1.4 trillion; combined spending on single-payer programs like Medicaid, the Children’s Health Insurance Program, and health care for veterans and active-duty military will rise from $691 billion to $1.2 trillion over the same period. (Graphic: A. Roy / FREOPP; Source: Centers for Medicare and Medicaid Services)

The emerging superiority of Medicare Advantage

There is, however, a program within Medicare that commonly offers seniors comprehensive coverage at an attractive price: Medicare Advantage, or Medicare Part C, under which seniors choose private insurance plans to deliver Medicare-sponsored services. Medicare Advantage’s premiums are often lower, despite the fact that the federal government pays insurers the same amount for Medicare Advantage that it pays for traditional, single-payer Medicare Part A and B coverage.

Indeed, often for the same cost as single-payer Medicare or less, Medicare Advantage plans frequently offer supplemental benefits that traditional Medicare doesn’t cover, such as prescription drugs, vision, dental, assisted living, and nursing home care. Indeed, in 2018, 77 percent of MA plans included vision coverage, and 62 percent included dental.

Since 2011, the Centers for Medicare and Medicaid Services have required that Medicare Advantage plans have an annual out-of-pocket limit no higher than $6,700, with an average cap of $5,187 in 2018. This means that Medicare Advantage plans provide true catastrophic coverage in a way that traditional, single-payer coverage does not.

Because Medicare Advantage delivers broader benefits than single-payer Medicare, sometimes with lower premiums, the program has become increasingly popular with seniors. Over the last decade, enrollment in Medicare Advantage and other private Medicare plans has doubled, from 10.5 million to 22.4 million, whereas enrollment in single-payer Medicare has stagnated. Indeed, over the last two years, enrollment in single-payer Medicare has actually declined, from 38.8 million in 2017 to 38.2 million in 2019.

Indeed, contrary to Sen. Sanders’ belief that Medicare is purely a single-payer program, it can be argued that Medicare Advantage is the most successful, market-oriented health insurance program in the United States.

Today, Medicare Advantage and other private plans represent 37 percent of all Medicare enrollees. More than half of newly-eligible Medicare enrollees are opting for these private plans over single-payer Medicare. Competition is robust: in 2019, there were 2,734 Medicare Advantage plans offered nationwide, up from 2,001 in 2016.

Indeed, contrary to Sen. Sanders’ belief that Medicare is purely a single-payer program, it can be argued that Medicare Advantage is the most successful, market-oriented health insurance program in the United States. Critically, in Medicare Advantage, individual retirees choose among a plethora of competing private insurance plans, with a relatively broad range of benefit options and price points. This is untrue of the much larger market for employer-sponsored health insurance, in which workers are generally forced to accept an offer of coverage that has been chosen for them by a human resources executive representing their employer’s interests.

In addition, Medicare Advantage does a much better job than employer-based insurance of dealing with hospital monopolies. Employer-based insurers, on average, pay twice as much for hospital care than does Medicare.

Medicare Advantage, by contrast, often pays less than what Medicare pays, because, in MA, out-of-network providers are paid Medicare rates: that is to say, Medicare rates are a backstop for MA plans’ negotiations with hospitals and physicians. At the same time, MA plans are free to pay more than single-payer Medicare where warranted; for example, to attract primary care and internal medicine physicians into their provider networks.

For these reasons, Medicare Advantage is a helpful way to think about reforming the way all able-bodied adults obtain health insurance.

And the benefits of Medicare Advantage for seniors are not merely in the form of low premiums and added benefits. MA plans also deliver superior health outcomes. A July 2018 study by Avalere Health found that enrollees in Medicare Advantage with chronic conditions like diabetes, high cholesterol, and high blood pressure had 29 percent fewer avoidable hospitalizations, 42 percent fewer avoidable acute hospitalizations, 23 percent fewer inpatient stays, and 33 percent fewer emergency room visits, relative to enrollees in single-payer Medicare. “MA beneficiaries received more preventive physician tests and services,” the Avalere authors noted, leading to “significantly better” health outcomes and cost savings.

The Avalere study is not the only one to find that Medicare Advantage is better across an array of dimensions. Given the clear superiority of Medicare Advantage on premiums, benefits, integration, and outcomes, the important question to ask isn’t why enrollment in Medicare Advantage is increasing, but why enrollment in Medicare Advantage is not increasing even faster.

Reforming the government’s single-payer nudge

A key reason is that the federal government steers seniors to enroll in single-payer Medicare, even though Medicare Advantage is the superior program. Seniors who receive Social Security benefits, but have failed to enroll in Medicare on their own, are automatically enrolled in Parts A and B.

“At present,” observed Harvard’s Joseph Newhouse and Thomas McGuire in a 2014 article for the Milbank Quarterly, “if a beneficiary makes no choice when becoming eligible for Medicare, he or she is, by default, assigned to [single-payer Medicare]. This default could be changed to move some or all of the nonchoosers into MA.”

Congress could enact such a change quite simply. The Center for Medicare and Medicaid Innovation could also create a demonstration project that tests how default enrollment in Medicare Advantage affects premiums, benefits, and outcomes, relative to the status quo ante. In either case, seniors would be free to enroll in traditional, single-payer Medicare if they wished.

There is one group of seniors who have good reason to prefer single-payer Medicare: the wealthy. Single-payer Medicare, in the form of Medicare Parts A and B, operate under any willing provider rules; any hospital or physician who contracts with the Medicare program is required to accept Medicare’s government-determined fee-for-service reimbursement rates. By contrast, Medicare Advantage plans deploy provider networks which exclude high-priced facilities in order to reduce costs while preserving quality. Wealthy seniors; i.e., those who can afford single-payer Medicare premiums, have a reason to prefer the broader networks in Parts A and B.

But for nearly everyone else, there is a clear advantage to enrolling in Medicare Advantage. In 2019, 45 percent of offered plans charged premiums equal to or lower than those of single-payer Medicare; 90 percent of Medicare beneficiaries had the ability to choose a Medicare Advantage plan with no additional premium and the added benefit of prescription drug coverage.

Helping seniors reduce their Medicare premium costs

Surprisingly, few seniors choose Medicare Advantage plans whose premiums are lower than single-payer Medicare’s, even though they have a theoretical financial incentive to do so. Indeed, the Newhouse-McGuire study finds that “hardly any [seniors] are enrolled in plans that charge a negative premium.” Why? “Beneficiaries who join [negative premium] plans simply have less deducted from their Social Security checks for the Part B premium. This is likely less visible, or salient, to beneficiaries than is having to write a check for the premium.”

Because Medicare premiums are deducted from an enrollee’s Social Security account, lower premiums aren’t very noticeable. If seniors received a cash refund, instead of a smaller Social Security deduction, they may be more interested in choosing negative-premium MA plans. Congress or the Centers for Medicare and Medicaid Services (CMS) could enact such a change.

CMS could make default enrollment in MA even more advantageous by only enrolling seniors by default in MA plans whose premiums were at most equal to those of single-payer Medicare.

Lowering Medicare Advantage premiums through price competition

A complementary way to achieve the same result would be competitive bidding in Medicare Advantage. Today, the Centers for Medicare and Medicaid Services (CMS) contract with private insurers to administer Medicare Advantage plans; CMS calculates a “benchmark” for each county based on what single-payer Medicare costs there. MA plans that are able to manage care at a lower cost than the “benchmark” are able to pocket the difference.

Competitive bidding for Medicare coverage was first proposed in 2009 by Roger Feldman and Bryan Dowd of the University of Minnesota, and Robert Coulam of Simmons College, in their book Bring Market Prices to Medicare: Essential Reform at a Time of Fiscal Crisis.

“The federal contribution to premiums,” they write, “would be set to equal the lowest bid in each market area. This competitive pricing system would penalize plans that bid too high—their beneficiaries would pay higher premiums—providing an incentive for plans to offer their best prices. Meanwhile, low-bidding plans would be rewarded with increased enrollment.”

Their idea, which has been endorsed and refined by health economists from across the ideological spectrum, was to give single-payer Medicare and Medicare Advantage plans the opportunity to bid for the government’s business in every region of the country.

Significantly, in 2011, Sen. Ron Wyden (D., Ore.) and Rep. Paul Ryan (R., Wis.) put forth a proposal to introduce competitive bidding for individuals who are 55 or younger; i.e., at least 10 years away from enrolling in Medicare.

A new version of the concept, developed by Jim Capretta and others, involves enabling seniors to choose between three versions of the Medicare benefit: (1) the traditional single-payer version; (2) the basic Medicare benefit component of Medicare Advantage; and (3) Medicare Accountable Care Organizations (ACOs), under which hospitals and outpatient physician clinics collaborate to manage care.

Reforming the role of Accountable Care Organizations

While ACOs, in theory, allow for more coordinated health care between hospitals and physicians, in practice they can lead to higher health care prices, as hospitals take advantage of the ACO structure to increase their monopoly power. Physician-led ACOs, on the other hand, provide avenues for innovation and lower costs.

A study of 2.7 million patients by researchers at Harvard Medical School, led by Michael McWilliams and Michael Chernew found that “participation in shared-savings contracts by physician groups was associated with savings for Medicare that grew over the study period [2009–2015], whereas hospital-integrated ACOs did not produce savings (on average) during the same period.” Indeed, hospital-led ACOs increased Medicare spending by $111 million, whereas physician-led ACOs decreased Medicare spending by $256 million. Hence, including ACOs in a competitive bidding system would only be useful if the program were reformed to focus on physician-led ACOs.

Modernizing coverage for dual enrollees in Medicare and Medicaid

One of the most challenging aspects of the Medicare program is how it deals with nearly 11 million low-income seniors who are also enrolled in Medicaid. Because these individuals gain health coverage from two very different government programs, with overlapping benefits and differing physician networks, care for these vulnerable individuals is often of poor quality and excessive cost. Dual-eligibles often need both acute-care coverage (for conventional health care expenses, like heart attacks and stroke) and long-term care coverage (for activities of daily living, such as getting dressed in the morning or going to the bathroom), leading to even more fragmentation.

Dual-eligible enrollees consume more than $200 billion a year in Medicare spending, and more than $130 billion a year in Medicaid spending: approximately one-quarter of spending in the Medicare and Medicaid programs. On average, in 2013, spending on dual-eligibles cost $29,238, compared to $8,593 for conventional Medicare beneficiaries: a ratio of 3.4 to 1.

While some of this disparity can be explained by poor health status—dual-eligibles are three times as likely to be disabled as regular Medicare enrollees—much of it is driven by wasteful utilization, driven by both innocent mistakes and intentional arbitrage by some health care providers. Clay Spence and Joe Lonsdale of the Cicero Institute estimate that improved management of these patients could lead to better health outcomes and savings of over $50 billion per year:

Kenneth Thorpe has estimated that moving dual eligibles into coordinated care programs would save $10–20B a year because “well managed team based care results in lower rates of emergency room, clinic and hospital days.” Based on the early results from MMP and FIDE-SNP programs as well as our diligence on private sector companies caring for expensive, complex populations, we think this figure could easily be $50B per year or more.

As the Medicare Payment Advisory Commission (MedPAC) noted in its June 2018 report to Congress, the Center for Medicare & Medicaid Innovation (CMMI) has sponsored a number of promising pilot projects that seek to integrate coverage for dual-eligibles through specialized managed care plans. Early returns indicate that these programs are succeeding at reducing hospitalizations, readmissions, mortality, and nursing home use.

According to MedPAC, however, these demonstration projects, while promising, have been hampered by several limitations, including:

1. Unstable enrollment. Dual-eligibles have been able to enroll and disenroll from integrated plans and revert to traditional, fragmented care on a nearly unlimited basis. Of the 855,000 beneficiaries in Medicare-Medicaid Plans (MMPs) observed by MedPAC, 41 percent opted out after being passively enrolled. This has made it difficult for plans to realize savings from better-managed care.
2. Provider manipulation of enrollees. MedPAC reported that “many beneficiaries declined to participate because they…were encouraged to opt out by providers.” Providers stand to benefit from poorly managed care that leads to overutilization of unnecessary services. Hence, providers appear to be succeeding at discouraging dual-eligibles from integrated plans.
3. Disinterest at the state level. Because savings from better-managed care flow mostly to the federal government, and states manage their own Medicaid programs, states have had little incentive to reduce wasteful utilization among dual-eligible enrollees.

At this point, we know enough about managing complex patients that Congress should empower CMS and CMMI to move forward with truly integrated management of dual-eligibles, through specialized Medicare Advantage plans. The key features of such plans would include:

1. Specialized, fully integrated Medicare Advantage plans. Managing dual-eligibles with complex health problems including acute care, psychiatric disorders, and disability requires specialized, focused competency, along with the economic incentives to optimize care.
2. Integrated, pre-structured contracts. Plans that contract separately with Medicare and a state Medicaid program have difficulty coordinating coverage. Integrated, or “three-way,” contracts do better. Spence and Lonsdale suggest that such contract negotiations could be improved by enabling Medicare and Medicaid to agree on their “financial responsibilities before deciding which services to cover,” as this would “greatly simplify the planning process, saving time and money.”
3. Long-term enrollment contracts. These specialized Medicare Advantage plans will have much greater incentive to engage in preventive care and care management if they can reap the savings in lower health care utilization later on. This requires long-term contracts between the insurer and the patient. CMS should authorize specialized plans for dual-eligibles to sign long-term contracts, for as long as five years, in exchange for additional shared savings with federal and state governments.
4. Universal enrollment in integrated plans. As noted above, providers actively discourage dual-eligibles in enrolling in integrated plans, because providers benefit from wasteful utilization. Seniors, on the other hand, benefit in terms of better care management, but not in terms of out-of-pocket costs (because there aren’t any). Congress and/or CMMI should require that all dual-eligibles enroll in integrated plans.
5. Competitive bidding. As with traditional Medicare Advantage, integrated plans should compete on the basis of price to deliver the integrated dual-eligible benefit. If plans reduce utilization below the benchmark bid, they should be entitled at least half of the savings, which incentivizes them to continue to manage care after the bid has been set.

Optimizing prescription drug coverage for retirees

Prescription drug coverage is an increasingly significant driver of Medicare spending growth, especially after the enactment of Medicare Part D, Medicare’s prescription drug plan, in 2003, and the undoing of important cost controls in the Part D program by the Affordable Care Act of 2010.

Today, the usage of prescription drugs by seniors is highly fragmented. Drugs administered in the hospital setting are paid for by Medicare Part A; drugs administered by physicians in outpatient clinics, such as those requiring an intravenous infusion, are paid for by Medicare Part B; Medicare Advantage (Part C) plans reflect both of these modalities, while Medicare Part D plans cover drugs purchased at retail pharmacies like Walgreens and CVS.

As we describe in The Competition Prescription: A Market-Based Plan for Affordable Drugs, one way to reduce inefficiency in the way Medicare pays for drugs is to “migrate all prescription drug coverage to Medicare Part D, where pharmacy benefit managers negotiate drug prices on behalf of the Medicare program.” The Competition Prescription describes other avenues for reducing the high cost of prescription drugs that would aid both those on Medicare and those using private employer-sponsored or individual market coverage.

As part of a comprehensive effort to enhance the affordability of prescription drugs, in October 2018, the Trump administration released a proposal to tie the way Medicare Part B pays for physician-administered prescription drugs to an International Pricing Index (IPI) comprised of prices paid by a group of other industrialized nations: Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden, and the United Kingdom.

In response, we proposed an alternative benchmark: the Market-Based International Index. The MBII excludes industrialized countries with little room for market-based pricing, due to an absence of private insurance and the presence of regulated drug prices, but yields a pricing benchmark that is similar to that of the IPI.

The Market-Based International Index (MBII). President Trump’s proposed International Pricing Index (IPI) underemphasizes or excludes countries with market-based health care systems, such as the Netherlands and Switzerland, along with countries with free (i.e., unregulated) drug pricing, such as Denmark and Singapore. The Market-Based International Index bases its benchmark on these market-based countries. (Source: FREOPP

Ending ethical conflicts with Medicare’s physician price controls

Few people are aware of the unusual — and ethically questionable — way in which Medicare determines the rates it pays for certain physician services.

Because the problem of cost overruns became apparent so soon after Medicare’s enactment, almost every president after Lyndon Johnson tried his hand at restraining the program’s growing expense. In 1983, under Ronald Reagan, the Health Care Financing Administration—the predecessor to today’s Centers for Medicare and Medicaid Services—imposed a “prospective payment system” whereby hospitals and physicians would be reimbursed at a set rate for a specific diagnosis: Medicare’s first price controls.

But after a few years, hospitals and physicians grew wise to the new system, and found ways to shift patients from poorly paying “diagnosis-related groups” to higher-paying ones — a practice called “upcoding.” So in 1988, a team led by William Hsiao, an economist at the Harvard School of Public Health, proposed a new system of price controls for Medicare called the Resource-Based Relative Value Scale or RBRVS. Hsiao invented a complex formula that combined the time, effort, judgment, skill, and stress of addressing a specific medical problem (the “physician work” factor) with local medical-practice costs and related considerations. The formula was adopted by Congress as part of the 1989 budget deal in an effort to manage Medicare’s costs. But few of Hsiao’s factors had anything to do with the way in which economies normally price goods and services, and the RBRVS system has done little to improve the economic value of health-care decisions or Medicare’s finances.

Since 1991, an obscure organization called the American Medical Association/Specialty Society Relative Value Scale Update Committee, or “RUC,” effectively runs the system envisioned by Hsiao to set Medicare’s payment rates to physicians. RUC is comprised of representatives from the American Medical Association and specialty physician societies, such as the American Academy of Orthopaedic Surgeons, and, in the AMA’s own description, “provides a vital opportunity for the medical profession to continue to shape its own payment environment.”

RUC meetings are conducted in secret, and embody a clear conflict of interest, in which elite leaders of physician groups advocate for increases in Medicare’s payments to them. While CMS is not required by law to adhere to RUC’s recommendations, in practice CMS defers to RUC. According to the U.S. Government Accountability Office, between 2011 and 2015, CMS accepted RUC’s recommendations 69 percent of the time. GAO concluded that the RUC system and CMS’ process “cast doubt on whether it can ensure accurate Medicare payment rates and a transparent process.”

In some years the acceptance rate has been as high as 95 percent. In 2017, then-Health and Human Services Secretary Tom Price proposed accepting nearly all of RUC’s recommendations, leading the Medicare Payment Advisory Commission to issue an unusual letter warning that such deference would lead to excessive payments to a physician for work they did not do.

A 2013 investigation by Peter Whoriskey and Dan Keating of the Washington Post found that physicians on the RUC committee, and the organizations they represented, were routinely exaggerating the “work units” that various medical services entailed, so as to extract higher reimbursement rates from Medicare. For example, the official RUC estimate is that a colonoscopy takes 75 minutes, whereas in reality, they take about half that time (emphasis added):

It turns out that the nation’s system for estimating the value of a doctor’s services, a critical piece of U.S. health-care economics, is fraught with inaccuracies that appear to be inflating the value of many procedures:

To determine how long a procedure takes, the AMA relies on surveys of doctors conducted by the associations representing specialists and primary care physicians. The doctors who fill out the surveys are informed that the reason for the survey is to set pay. Increasingly, the survey estimates have been found so improbable that the AMA has had to significantly lower them, according to federal documents.

The AMA committee, in conjunction with Medicare, has been seven times as likely to raise estimates of work value than to lower them, according to a Post analysis of federal records for 5,700 procedures. This happened despite productivity and technology advances that should have cut the time required.

If AMA estimates of time are correct, hundreds of doctors are working improbable hours, according to an analysis of records from surgery centers in Florida and Pennsylvania. In some specialties, more than one in five doctors would have to have been working more than 12 hours on average on a single day — much longer than the 10 hours or so a typical surgery center is open.

Florida records show 78 doctors — gastroenterologists, ophthalmologists, orthopedic surgeons and others — who performed at least 24 hours worth of procedures on an average workday.

“What started as an advisory group has taken on a life of its own,” observed Tom Scully, who ran CMS from 2001 to 2004. “The idea that $100 billion in federal spending is based on fixed prices that go through an industry trade association in a process that is not open to the public is pretty wild…The concept of having the AMA run the process of fixing prices for Medicare was crazy from the beginning. It was a fundamental mistake.”

William Hsiao, the inventor of RUC, has his regrets. “The AMA fought very hard to take over this updating process,” he told the Post, calling the current RUC price schedule “distorted.” “I said this had to be done by an impartial group of people. This is highly political.”

While the conflicts of interest lead to prices in many cases that are markedly higher than they would be in a true market, RUC also has a tendency to undervalue certain medical services, particularly those involving primary care or care coordination. As Maura Calsyn and Madeline Twomey of the Center for American Progress observe, “many cognitive services are increasingly difficult and labor-intensive, for both primary care physicians and specialists whose practices are not procedure-intensive…a meeting between an oncologist and her patient to discuss end-of-life wishes can require as much skill, expertise, and judgment as an endotracheal intubation in an emergency room.”

There is a legitimate role for physician feedback in the way Medicare sets its payment rates. But the RUC system is a clear case of self-dealing, in which physicians advance their own economic interests, in secret, at taxpayers’ expense. Congress and CMS should consider one or more options to balance this ethical conflict with more impartial methods:

1. Market-based pricing through Medicare Advantage. As more seniors enroll in Medicare Advantage, the single-payer Medicare program could do more to base its prices off of average rates established by Medicare Advantage plans. This approach could be strengthened by moving to default enrollment in Medicare Advantage, as proposed above. Today, prices flow in the other direction: insurers base their payment rates off of Medicare’s rates; i.e., RUC. But if RUC’s role were eliminated, insurers would rely more on market-based price negotiation with physicians.
2. Independent research. Congress should appropriate $20 million per year, perhaps through the Patient-Centered Outcomes Research Institute, to develop market-based methods for determining physician payment rates.
3. Market-based international indices. Much like with physician-administered drugs in Medicare Part B, Medicare could examine what private insurers pay for physician services in other countries, such as Switzerland, the Netherlands, and Germany.
4. An alternative committee to RUC. CMS could assemble a separate committee, composed of payors, actuaries, and economists, to provide impartial advice on Medicare’s physician payment rates. In the past, MedPAC has recommended that CMS “establish a standing panel of experts to identify overvalued services and to review recommendations from the RUC.” Ideally, CMS should go farther, establishing an independent committee whose recommendations are given at least equal weight, if not greater weight, than those from physicians with conflicts of interest.
5. Index per-enrollee Medicare physician spending to CPI. In theory, CMS is supposed to apply a budget-neutrality formula to the RUC recommendations, such that increased payments in some areas is balanced out by reduced spending in others. In reality, as Kathleen Haddad has noted in Health Affairs, “CMS has been opaque in its application of the budget-neutrality requirement.” Congress could require that CMS develop a physician payment system that caps per-enrollee physician spending at consumer inflation.

Eliminating Medicare subsidies for multimillionaires

At a time when Medicare is overwhelming the federal budget, it makes no sense that lower-income Americans are paying taxes so that multimillionaires can receive government subsidies to enroll in Medicare. Rep. Bruce Westerman (R., Ark.) has proposed a wide-ranging health reform proposal, the Fair Care Act of 2019, which includes a provision to eliminate eligibility for Medicare Parts B and D, and for Medigap, for individuals whose lifetime earnings have exceeded $10 million. This simple rule could reduce Medicare spending by over $50 billion over a decade, helping to extend the solvency of the program for other retirees.

Equally as important, this change could turbocharge entrepreneurial innovation in health care coverage and delivery. High net worth Americans over 65 are an ideal cohort upon whom to test new health care models, the best of which can then be adapted by insurers in Medicare Advantage, the employer-sponsored market, and the individual insurance market.

Bipartisan reforms of the traditional Medicare program

There are additional, incremental, bipartisan reforms that Congress should consider to reduce the underlying costs of the Medicare benefit. Two Obama-era proposals — the Simpson-Bowles National Commission on Fiscal Responsibility and Reform, published in 2010; and a bipartisan proposal from former U.S. senators Joe Lieberman of Connecticut and Tom Coburn of Oklahoma; published in 2011 — provide an attractive starting point:

1. Reduce Medicare subsidies for hospitals’ uncollected bills. As the Simpson-Bowles commission noted: “Currently, Medicare reimburses hospitals and other providers for unpaid deductibles and copays owed by beneficiaries. We recommend gradually putting an end to this practice, which is not mirrored in the private sector.” As a complement to this initiative, Congress should ensure that hospitals have the necessary freedoms to collect unpaid bills that exist in other industries such as credit cards and telecommunications. We estimate 30-year savings from this provision as $128 billion.
2. Exempt Part C and Part D plans from state and local sales and premium taxes. State governments frequently apply sales and premium taxes to privately administered health plans, including Medicare Part C and Part D plans, driving up their cost. Congress should exempt all health insurance plans from such taxes, by gradually phasing out their safe harbor.
3. Replace Medicare’s cost-sharing kludge with a unified annual deductible; reform Medigap insurance plans. The Lieberman-Coburn proposal notes the value of combining Medicare Parts A and B into a single insurance product for hospital and medical care, and capping the amount of money that a Medicare enrollee would have to spend out of pocket in a given year. We estimate 30-year savings from this reform of approximately $635 billion, especially if paired with reforms of so-called “Medigap” plans. (Medigap plans have proven difficult to reform, because a single organization — the AARP — generates billions of dollars in royalty fees from them. In 2017, AARP received $627 million in Medigap royalties, more than twice the $301 million the organization received in membership dues.) The Congressional Budget Office has also analyzed the potential of bundling payments for inpatient care and 90 days of post-acute outpatient care. We estimate 30-year savings from this reform of approximately $410 billion.
4. Introduce additional means-testing into Medicare Part D premiums. Introducing additional means-testing into the Medicare prescription-drug benefit, also known as Part D, could yield 30-year savings of $211 billion.
5. Reduce waste, fraud, and abuse. The U.S. Government Accountability Office estimates that as much as 10 percent of Medicare spending was improper in 2009. Harvard fraud expert Malcolm Sparrow has testified that “loss rates due to fraud and abuse could be 10 percent, or 20 percent, or even 30 percent in some segments.” In 2012, Stephen Parente and colleagues at Fortel Analytics took a set of algorithms designed by scientists in 1993 to achieve real-time fraud prevention in the credit-card industry, and applied them to Medicare. By analyzing Medicare claims representing 20 percent of all enrollees — and 100 percent of enrollees for a 3 percent sample of all national Medicare providers — they estimated that their approach would have reduced 2009 Medicare waste by $20.7 billion in Medicare Part A, $18.1 billion in Medicare Part B, and $17.5 billion in retrospective recovery.
6. Restore the ability of seniors to opt out of Medicare and purchase private health coverage. In 1993, the Clinton administration passed a regulation requiring Medicare-eligible retirees to enroll in the program, or forfeit their Social Security benefits. In 2012, the rule was upheld in a 2–1 decision by the U.S. Court of Appeals for the District of Columbia; though the plaintiffs appealed to the Supreme Court, the high court declined to hear the case. In 2011, then Sen. Jim DeMint of South Carolina, Sen. Mike Lee of Utah, and others introduced legislation to guarantee that seniors could opt out of Medicare and retain their Social Security benefits, “in accordance with a process determined by the Secretary” of Health and Human Services.
7. Restore the pre-ACA tax subsidy for employer-sponsored retiree coverage. The Medicare Modernization Act of 2003 — which created the Part D prescription-drug benefit — carved out a tax exclusion for employer-sponsored retiree prescription-drug coverage. The carve-out amounted to an effective subsidy of 28 percent of retiree prescription-drug costs, with a cap of $1,677 per beneficiary in 2010. This provision was included in the MMA to encourage employers to continue to provide privately sponsored prescription-drug coverage, instead of dropping seniors’ drug coverage onto Medicare. The ACA repealed this subsidy in order to recapture $5.4 billion in federal revenue over ten years, according to the Joint Committee on Taxation. The subsidy should be fully restored, in order to encourage more employers to sponsor retiree health benefits.
8. Address the physician shortage through additional graduate medical education funding and visa expansion. According to the Association of American Medical Colleges, in 2020 the United States will face a shortage of more than 91,500 physicians. The group estimates that by 2025 the physician shortage will increase to 130,600. This shortage has been exacerbated by the Balanced Budget Act of 1997, which capped the number of federally funded residency positions at 26,000. Catherine Dower, of the University of California at San Francisco, estimates that the federal government spent more than $11.5 billion on graduate medical education in 2012, of which $9.5 billion came from Medicare and $2 billion from Medicaid. Other federal and state agencies, such as the Defense Department, the Department of Veterans Affairs, and the National Institutes of Health also fund graduate medical education. Congress should eliminate the physician shortage projected by the AAMC in the following ways: (1) by increasing federal funding of graduate medical education by $6 billion a year starting in 2016, contingent on a corresponding increase in residency and internship slots; (2) by separating federal funding of graduate medical education out from Medicare, Medicaid, and other agencies into a discrete congressional appropriation; and (3) by expanding the number of foreign visas for immigrant physicians who have passed U.S. medical board licensing examinations.
9. Reform Disproportionate Share Hospital (DSH) payments to hospitals serving low-income patients. The Medicare and Medicaid programs provide more than $20 billion a year in supplemental payments to hospitals that serve indigent individuals, including the uninsured. In this way, Congress compensates hospitals for the mandate under the Emergency Medical Treatment and Active Labor Act of 1986 that requires hospitals to provide emergency care to anyone they admit, irrespective of immigration status or ability to pay. Among the many problems with DSH is that the money goes to hospitals using a complex formula that does not accurately represent which hospitals need the financial assistance, leading to waste, fraud, and abuse. A way to fix this would be to move to a claims-based system in which hospitals would bill the federal government, on a claim-by-claim basis using Medicaid rates, for emergency care delivered to uninsured and indigent patients, using current DSH funding levels as a global budget. By moving to a claims-based system, hospitals and the government could identify patients who are eligible for assistance with health insurance premiums, and enroll them in coverage. Such a system would also clearly align DSH funding with institutions that treat a high proportion of the uninsured.

Matching Medicare subsidies to modern life expectancy

When Medicare was enacted, in 1965, the average life expectancy at birth was 70.2 years. In other words, it was anticipated that Medicare would cover an average person’s health expenditures for the last 5.2 years of his life. While life expectancy has declined since 2014, when it peaked at 78.9 years, in 2016, the average American lived to the age of 78.6. Medicare thus covered the last 13.6 years of his life — a 162% increase in the coverage period relative to 1965.

Unlike Social Security, whose eligibility is being gradually raised to 67 from 65 under reforms enacted in 1983, Medicare has never been adjusted for life expectancy. As the Congressional Budget Office observes, a similar adjustment to Medicare “would help Medicare return its focus to the population it originally served—people in their last years of life—and support the services most needed by that group.” Importantly, under such a reform, low-income individuals would continue to be eligible for subsidized individual market coverage under the exchanges established by the Affordable Care Act. They could also remain in the workforce and continue to obtain coverage through employer-sponsored insurance.

An alternative—but economically equivalent—version of this reform would be to maintain Medicare’s eligibility age at 65, but require the 65- and 66-year-olds of the future to enroll in Medicare Advantage, with means-tested premium subsidies that align with those in the individual market.

The net effect of this change — especially in future decades — is to focus the federal government’s financial resources on providing a comprehensive, modern, private-sector health insurance benefit to low-income retirees of the future, while preserving Medicare for those who are currently enrolled in the program. It encourages those who are willing and able to remain in the workforce, enhancing economic growth, tax revenue, and productivity. And it provides a modern insurance benefit, with catastrophic protection and coordinated care, to those who are in need of federal assistance.

Most importantly, this approach ensures the permanent solvency of the Medicare program, by focusing the program’s resources on the most elderly Americans. The Congressional Budget Office estimates that raising the Medicare eligibility age from 65 to 67 could reduce federal spending by between $18 and $26 billion from 2019–2028, and by as much as $100 billion in the following decade.

In Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency, we proposed raising the Medicare eligibility age by four months a year in perpetuity, so as to gradually move the United States into a system in which everyone has the opportunity to purchase means-tested private coverage on his or her own. Premiums of older seniors who remained in the traditional Medicare program would be adjusted so that they would not be affected by younger retirees moving to the individual market. Over a 30-year period, we estimate that raising the eligibility age for Medicare by four months per year would reduce Medicare spending by $6.6 trillion, with an offsetting increase in premium tax credits of $1.5 trillion, for a net spending reduction of $5.1 trillion. These savings would be even larger in future decades.

Conclusion

Preserving Medicare for its current enrollees is an essential public priority. But so is preserving the affordability and sustainability of health care for future generations. In this lengthy and detailed report, we have explored many ways to achieve substantial savings for the Medicare program and achieve both of these objectives.

Medicare reform, emphatically, does not require reformers to choose between a fiscally sustainable future and the interests of today’s retirees. By tackling inefficiencies and inequities in the program, we can expand economic opportunity for those who depend on Medicare’s assistance and those who fund it.