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Five myths about Medicare

By John Rother,

by John Rother Because of Medicare’s size and growth, the health-care program has taken center stage on the campaign trail and in Capitol Hill discussions about the federal budget deficit. Medicare covers almost one in six Americans and comprises about 15 percent of the federal budget, but it is often misunderstood. Let’s take a few minutes to separate fact from fiction.

1. Medicare is inefficient and fails to control costs.

The trustees of Medicare last year projected that the program’s share of gross domestic product would increase from the current 3.7 percent to about 5 percent in 2030 and nearly 6 percent by 2050. But since Medicare’s inception in 1965, its spending growth, on a per-person basis, has stayed consistent with or lower than the increase in private health insurance premiums.

The Congressional Budget Office recently predicted that per capita Medicare spending will grow 1 percent faster than the rate of inflation over the next decade. The CBO attributes the slower projected trend in Medicare spending to the enactment of President Obama’s health-care overhaul, which reduced high payments to Medicare HMOs, and to the anticipated influx of younger, healthier baby boomers, which will lower the average cost per beneficiary. Medicare enrollment is projected to accelerate over the next 25 years, from 47.5 million today to 80 million in 2030.

The addition of baby boomers is the single largest factor in Medicare’s projected spending growth over the next few decades. In the short term, this shouldn’t be a problem, but as that vast generation ages, if systemwide health-care costs don’t come down, it will be.

2. The well-off don’t pay enough for their Medicare benefits.

Many assume that Medicare has uniform requirements for contributing to the program, placing an unfair burden on most participants and not asking enough of upper-income seniors. This is no longer the case. Wealthier people pay more than others.

Medicare Part A — hospital insurance — is financed through a 2.9 percent tax on earnings paid by employers and employees (1.45 percent each). In 1993, Congress lifted the cap on income so that individuals who earn more pay more. This contrasts with Social Security, which caps an individual’s tax exposure at $110,100. For higher-income workers (more than $200,000 for an individual and $250,000 for a couple), the Medicare payroll tax rate will increase from 1.45 percent to 2.35 percent next year.

Premiums now also vary by income. While the standard Medicare premium is $99 per month this year, for beneficiaries who make $85,000 and above (based on the previous year’s tax filing), premiums are scaled so that the more you earn, the more you pay. Similarly, income-related premiums now apply to Medicare prescription-drug coverage. While public opinion may favor asking wealthier seniors to pay more, the truth is, they already do.

3. Medicare benefits are overly generous.

The current Medicare benefits package resembles what was offered when the program started nearly five decades ago. Benefits are less generous than in most private insurance plans, as demonstrated by the fact that the majority of Medicare beneficiaries have supplemental insurance — through a former employer, a private insurer or, if they are low-income, Medicaid.

However, Medicare coverage is still costly; beneficiaries pay relatively high deductibles and co-insurance. For example, the deductible for each hospital visit is $1,156. Many pay full price for medications once they hit Medicare’s limit for prescription-drug coverage.

Most glaringly, the program doesn’t cap beneficiaries’ out-of-pocket spending. In 2007, for example, Medicare paid only half of the nearly $18,000 that an average beneficiary consumed in medical and long-term care, with the remaining half divided between out-of-pocket spending and supplemental insurers’ payments. One in four Medicare beneficiaries spends 30 percent or more of his income on health expenses, according to the Kaiser Family Foundation.

4. Cutting Medicare is the only way to save it.

Recent legislation has proposed trimming Medicare costs by limiting increases in payments to providers and plans. According to the Medicare Payment Advisory Commission, these have rarely been found to affect quality or access to care. In fact, providers’ costs for treating Medicare patients are generally covered, and in many sectors, such as in-home nursing and hospice, providers make almost 20 percent profit from treating Medicare patients.

However, restraints on payments are not the most effective way to control costs; changing incentives offers much more promise. The current fee-for-service system rewards not value but volume of care (the number of doctors’ visits, medical tests, procedures, etc.). Doctors and hospitals should be paid to change the way they operate so that patient outcomes are improved and waste is reduced. Better patient engagement and stronger public health measures, such as programs to prevent obesity and its related diseases, can also lower Medicare’s cost burden.

Eighty percent of Medicare spending pays for treating the sickest 20 percent of patients. However, Obama’s health-care reform law, the Affordable Care Act, will set up new approaches such as patient-centered medical homes and organizations that coordinate care more efficiently by improving communication among providers, reducing duplicative services and managing prescription medications.

5. Medicare needs fundamental restructuring.

Several proposals would transform Medicare into a system of competing private plans, similar to the exchanges being set up under the Affordable Care Act. Under most “premium support” proposals, beneficiaries would be given a certain amount of money from the government to spend on a plan and would pay additional costs if they choose a plan that exceeds that amount, theoretically turning them into more diligent comparison shoppers. (Beneficiaries already have a choice of private HMO plans under Medicare.) While such Medicare exchanges could make sense, there is virtually no data to show that they would restrain the system’s total costs rather than simply shifting costs onto beneficiaries.

When politicians call for restructuring the program to save money, missing from the discussion has been the clear need for additional revenue over the longer term to support the inflow of 30 million more people between now and 2030. Even the most well-run and efficient program cannot nearly double its enrollment without a matching increase in money.

Containing health-care cost growth is critical for Medicare’s survival, but it’s impossible to do that for Medicare alone. Payment restraints and incentives that improve value must be applied to the entire health-care system to be effective.

jrother@nchc.org

John Rother is president and chief executive of the National Coalition on Health Care, a nonprofit organization that gets funding from health providers and purchasers, and from consumer groups.

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