Connections : Join the Conversation - The blog of Biomet CEO Jeffrey R. Binder

Congressional leaders and the White House are now considering alternate paths to merging healthcare legislation passed in the House and the Senate.¹ The White House has released its version of a compromise bill that it hopes will bridge the gap between the legislative proposals.

Any serious health reform plan should attempt to (a) significantly reduce governmental spending; (b) expand access to affordable healthcare; and (c) avoid raising taxes or fees on American companies during a time when the economy is fragile and unemployment rates are very high.

While meeting all these goals simultaneously may seem nearly impossible, they can be achieved if all parties are willing to consider fresh ideas and work in earnest toward an approach that can gain bipartisan support.

Squeezing providers, rationing care

Any set of solutions that increases access and reduces public costs must by definition significantly reduce the per-person cost of governmental health spending (primarily Medicare). Thus far, the government's two major approaches toward that end have been insufficient and problematic.

First, existing reform legislation attempts to drive down provider costs by using the blunt instrument of significantly reduced reimbursement rates. This approach has been tried for years without success. Looking at orthopedics as an example, reimbursement rates in real dollars have been steadily reduced over the past several years – from 2000-2009, physician reimbursement for primary total joint replacement has declined by 19% in inflation-adjusted dollars, and hospital reimbursements by 3.7%.^2-4 Clearly, simply squeezing providers does not work as cost containment and, as we have argued before, threatens access as the rate of reimbursement creeps dangerously close to levels where providers simply are not willing or able to provide treatment.

Second, Senate reform legislation would create an Independent Payment Advisory Board that would have the authority to demand Medicare cost reductions.⁵ This approach directly threatens access in that the government winds up deciding centrally what procedures and technologies will be covered at what rate, thereby essentially becoming an absolute arbiter of what kind of medical care is available to covered citizens. While the legislation states that the board would not be allowed to ration care, it's an empty promise. The authority to move healthcare dollars is, in effect, the authority to ration access to care.

Real health care reform must begin with a serious conversation about how best to reduce governmental healthcare spending per covered person, which requires substantial changes in Medicare.

Fixing Medicare

This blog willeventually outline a full set of reform proposals that meet the goals outlined above. But in this piece the focus is on Medicare because meaningful health reform must begin there.

In 2008, Medicare spending grew 8.6% to $469.2 billion, while all health care spending grew only 4.4%.¹⁰ In 2010, Medicare is expected to spend $504 billion, or 15% of the federal budget.⁶ With the population of Americans over 65 expected to grow 36% through 2020⁷, more than twice as fast as the population as a whole, Medicare is projecting that its hospital insurance trust fund will go broke by 2017.⁸ CMS reports that an immediate 134% increase in Medicare payroll taxes or a 53% reduction in benefits is required to restore solvency.⁸ Clearly, Medicare needs to be fixed, and quickly.

Part of the problem is that there are no incentives for patients to restrict their consumption of services. Medicare benefits per enrollee are nearly three times as costly as those provided by employer-based private insurance^8-9—understandable, given that older citizens are generally more likely to need expensive drugs and treatment.

As we think about how to fix Medicare, we must keep in mind that most Americans do not have much sense of what healthcare really costs and are not actively engaged in managing their own healthcare budgets. Any real reform must address the demand side of the healthcare equation and reconnect citizens with the cost of their care.

Surprisingly, U.S. citizens pay a relatively low—and decreasing--percentage of healthcare costs out-of-pocket. U.S. out-of-pocket expenses in 2008 were 11.9% of national health expenditures,¹⁰ lower than all but three OECD nations.¹¹ Even Canadians pay a higher proportion of healthcare costs out-of-pocket than Americans.¹ Yet the elderly are quite sensitive to changes in out-of-pocket costs. Research indicates that a 10% increase in health care prices reduces utilization among elderly by 14%.¹² Therein lies the key to controlling Medicare spending.

There are several inter-related ways to reduce Medicare spending per covered person without denying access to care. While many of these ideas have been championed by certain legislators and policy experts^19,20, they are largely absent from legislation passed by the House and Senate.

Congress should consider the following suggestions:

1. Raise the Medicare eligibility age to 67 for Americans born after 1965. This change would create consistency among Social Security and Medicare eligibility.¹³ When Medicare was formed in 1965, the average U.S. life expectancy at age 65 was 14 years.¹³ It is now 18 years.¹⁴ Those additional years of coverage add considerable expense. The eligibility age could be raised over time to reflect increasing life expectancy.
   
   There are nearly 10 million Medicare enrollees between the ages of 65 and 69.¹⁵ If half of those are age 65-67, then nearly 5 million Americans could be weaned from Medicare (conservatively speaking—the numbers would be higher as the population ages). The government could provide these citizens a $6000 voucher to buy private insurance for two years, as proposed by Rep. Paul Ryan in his recently-introduced legislative proposal.¹⁹ Because the average Medicare beneficiary consumes $11,000 in healthcare services,⁸ the quick math shows that this approach could save Medicare at least $24 billion per year.
   
    
2. Means-test hospital inpatient deductibles for basic Medicare. Currently, Medicare charges every patient the same deductible--$1100 in 2010.¹⁶ However, there are nearly 3 million Americans of Medicare age with incomes above $60,000 per year.¹⁷ The median U.S. household income in 2007 was $50,740.¹⁸ If those with higher incomes were expected to pay deductibles of $2200, it would save Medicare $685 million per year. In addition, higher deductibles would lead patients to get more involved in understanding and managing the cost of their care.
   
    
3. Expand options in basic Medicare. Basic Medicare provides essentially one payment structure, fee-for-service, with one premium schedule. This is in contradistinction to the private insurance market and to Medicare Advantage, which both offer a variety of coverage options with variable premiums and deductibles. Medicare Advantage has proven popular, particularly among those with low incomes, and now covers 10 million Medicare enrollees.⁶ While Medicare Advantage is not without its problems, the choices it offers have clearly been embraced by beneficiaries.
   
   With greater choice in basic Medicare, patients would be able to choose the level of coverage they prefer and can afford. By tying premiums to benefits, Medicare would regain control over utilization and spending, while creating patient incentives to spend judiciously.
   
    
4. Fixing Medicare Advantage
   
   Medicare Advantage provides private plan options to Medicare beneficiaries. It's an idea that is popular with patients and policymakers. In its June, 2009 report, MedPAC stated:
   
   "The Commission supports private plans in Medicare and the innovative delivery systems and care management techniques they can offer."²¹
   
   The current Medicare Advantage program provides beneficiaries with a greater range of benefits than basic Medicare. The problem is that the government overpays for the benefits. MedPAC states that Medicare pays an average of $1.30 for each dollar of enhanced benefits.²¹
   
   Medicare Advantage rates are based on benchmarks determined by the government. Private insurance carriers bid against the benchmarks, which vary by county. The rules for setting benchmarks create a perverse situation where rates can go up over time, but never down.²¹
   
   Rather than the current bidding structure that is wired to drive up costs, the government should allow head-to-head bidding among private carriers. This approach is currently used in Medicare Part D to provide drug benefits, and has resulted in lower drug costs than anticipated.²²
   
    
5. By allowing greater choice for patients, Medicare can move toward more streamlined benefits at carefully managed reimbursement rates. However, it should allow the private market to function above this coverage. As part of this change, the government should eliminate the prohibition on charging Medicare patients above Medicare rates for services provided. Medicare rates would be carefully set at a market clearing price that would ensure reasonable capacity for ensuring access for Medicare recipients who choose not to spend out of pocket beyond their Medicare deductibles and co-pays.
   
   In this system, doctors, hospitals and other direct providers to Medicare would have the option of either accepting Medicare rates as full payment or charging more. If providers were to charge more, then patients would have the option of using their own funds or buying supplemental insurance to pay the difference. For example, some orthopedic surgeons might choose to accept Medicare in full and would therefore attend to a broader potential patient population. Others would insist on a premium above Medicare, thus restricting their patient base. In any case, access to basic care would be ensured at lower reimbursement rates while at the same time the government would not interfere with the right of patients to pay more to use their provider of choice.
   
   Similarly, while Medicare would cover proven tests and therapies at a reasonable reimbursement rate, the program might not cover (or alternatively could cover at a higher co-pay) certain advanced technologies for which it believes the burden of cost-effectiveness has not been proven. Again, the law should change to allow patients to pay a premium for these technologies through private insurance or personal funds.
   
   While these changes might limit the availability of advanced technology at the Medicare rate, providers and patients could determine whether more advanced technology is worth the cost, based on the patients' needs and expectations. This approach would encourage continued innovation and cost competition among providers and medical technology manufacturers that can help improve the cost-effectiveness and quality of care.

Subsequent blogs will address other critical elements of healthcare reform. But, as argued above, the first and most critical issue is Medicare reform. Until policymakers begin addressing the real issues in Medicare, healthcare reform has no chance of succeeding.