Thanks the unbridled rise in healthcare prices, Medicare is going broke. As I mentioned in a recent post, four years ago the Medicare trust fund that pays for hospital stays started to run out of money. In 2004 the fund began paying out more than it takes in through payroll taxes.
Since then, the balance in the fund, combined with interest income on that balance, has kept the fund solvent. But in just 11 years, it will be exhausted,” the Medicare Payment Commission reported in its March. “Revenues from payroll taxes collected in that year will cover only 79 percent of projected benefit expenditures.” And each year after 2019, the shortfall will grow larger.
Make no mistake: this is not an example of an inefficient government program spending hand-over-fist without caring whether it is getting a bang for the taxpayer’s buck. As I discussed in that earlier post, health care prices have been climbing—without a concomitant improvement in patient outcomes or patient satisfaction—in the private sector as well.
Medicare Reform Could Pave the Way for National Reform
Before trying to roll out national health insurance, the next administration needs to address the structural problems that undermine the laissez-faire chaos that we euphemistically refer to as our health care “system.” Otherwise, we run the risk of winding up with a larger version of the dysfunctional, unsustainable system that we have today. Ideally, the administration should make Medicare reform a demonstration project for high quality, affordable universal coverage.
Let me be clear: Medicare reform does not preclude national health reform. To the contrary, by starting with Medicare, and showing what can be done, reformers enhance their chances of winning the larger war.
Nor does focusing on Medicare first mean that the suffering of uninsured and underinsured Americans must be ignored. As part of Medicare reform, Medicaid and SCHIP should be folded into Medicare,
turning these “poor programs for the poor” into federal programs,
expanding coverage, and raising the fees for doctors who treat Medicaid
patients.
Medicare presents reformers with a promising starting point.
Politically, Medicare reform will be easier than a nationwide overhaul,
simply because Congress recognizes that when it comes to Medicare, it has no choice. Legislators know that Medicare has reached a tipping point: they must do something.
This is why, earlier this month, the Senate flirted with political
suicide by considering letting a scheduled cut in the fees Medicare
pays physicians go into effect. On July 1, Medicare was supposed to
slash physicians’ fees, across the board, by an average of 10.6
percent. Physicians threatened that they would close their doors to
Medicare patients. At the eleventh hour, legislators stepped back from
the edge of the cliff.
But Congress knows that the problem has not been solved. Legislators
will have to revisit the problem of Medicare spending early in 2009.
Physicians’ fees are scheduled for another across-the-board cut on
January 1, 2009. Everyone knows that this is a crude solution. Medicare pays primary care physicians too little,
which is why, MedPac explains, 30 percent of Medicare patients looking
for a new primary care doctor report difficulty finding one. Meanwhile,
Medicare overpays other physicians for certain services.. Dollars need
to be redistributed; the net result could easily be a wash.
How Medicare Can Save Dollars and Lift the Quality of Care
But Medicare cannot contain runaway inflation simply by looking at how
much it pays doctors. The program overpays drug-makers; it overpays
device-makers; it overpays private insurers who offer Medicare
Advantage. In some cases, it overpays hospitals—or squanders dollars on
services that don’t benefit patients, without giving hospitals the
right financial incentives to provide more effective, safer care.
In its March and June reports, the Medicare Payment Commission has made
a number of shrewd and imaginative suggestions for cutting waste in the
system. First, Medicare should eliminate the windfall bonuses that
Medicare now pays MedPac insurers (see “The Problems with Medicare Advantage”).
Secondly, MedPac details ways that Medicare can begin to pay doctors and hospitals for the quality of the care they provide rather than the quantity. I’ll be writing more about this in future posts.
MedPac also calls for an independent, unbiased, “comparative
effectiveness institute” that would compare new, cutting-edge drugs,
devices, and procedures to the less expensive products and treatments
that they are trying to replace. Medicare would then make coverage
decisions based, not on the cost of these treatments, but on their
effectiveness, paying for the treatments that are most effective for a
particular set of patients. (This would not be one-size-fits-all
medicine).
The U.K. offers a model:
The National Institute for Health and Clinical Excellence (NICE)
reviews medical research, decides which treatments to cover, and issues
guidelines to doctors. (Note: since the U.K. has a much, much smaller
health care budget, NICE must look at the cost-effectiveness of
treatments: i.e., it must find out if a product which is likely to
give the patient only another six months of life is worth the
price-tag. But as I have written, because we have so much long-hanging fruit in our bloated system, we can save billions just by concentrating on clinical effectiveness, without worrying about cost-effectiveness.
In the U.K., NICE uses its research to issue guidelines for “best
practice” to physicians. Note that there are not “rules,” but
guidelines. Everyone understands that in individual cases, physicians
might want to deviate from the recommendations. But in the U.K.
physicians now follow the guidelines 89 percent of the time.
Medicare also could reap huge savings by repealing that part of the
Medicare bill negotiated behind closed doors at the end of 2003 which
specifically prohibits Medicare from negotiating with drug-makers for the bulk discounts
that the Veterans Administration wins. As a result, Medicare now forks
over at least 50 percent more than the VA pays for half of the top 20
brand-name prescription drugs sold to seniors.
Won’t Industry Lobbyists Fight Tooth and Nail?
Absolutely. The for-profit health care industry reaps a handsome profit from sky-high spending.
Yet, despite the opposition, when it comes to Medicare reform,
legislators have a compelling argument: Neither the elderly nor the
taxpayers who support Medicare can afford to continue to be gouged
by drug-makers, device-makers, and others in the health care industry
who are the “price-makers” while patients and taxpayers have become
what Wall Street calls the “price-takers.”
Today, the health care industry says: “we will charge whatever the
market will bear.” That sounds fair enough. But when “the market” is
comprised of seriously ill patients (and roughly 80 percent of our
healthcare dollars are spent on those who are seriously ill), it turns
out that there is almost no limit to what “the market” will bear. This
is why free market competition in health care doesn’t work the way it
does in other sectors of the economy: when it comes to health care,
the customer has too little leverage.
Meanwhile, in the unregulated Wild West that we call a healthcare
system, no one pushes back to protect the patient. Virtually every
other developed country in the world negotiates for bulk discounts on
drugs. We don’t. Other countries insist on unbiased evidence that a
new, more expensive product or procedures is, in fact, more effective
than less expensive treatments already available. We don’t. (The FDA
only requires that a sponsor provides evidence that the new entry is
more effective than a placebo—in other words, better than nothing.)
Most Americans would agree: the government needs to defend both the
elderly and taxpayers. We simply cannot afford to keep the
pharmaceutical industry’s shareholders in the style to which they have
become accustomed. (Until recently, drug-makers have been far more
profitable than virtually any other Fortune 500 businesses. From 1995
to 2002 they took first prize, reporting earnings that ranged from 13
percent to 18.6 percent of sales each and every year. Over the same
span, the average Fortune 500 firm posted earnings that averaged just
3.1 percent to 5 percent of revenues. Granted, in 2004, drug-makers
fell to third place, trailing mining, crude oil production and
commercial banks, but even then, earnings equaled 16 percent of sales.)
Medicare Reform Is a More Manageable Project
A final reason to begin Medicare reform before tackling national health
reform is that, when compared to a fragmented national health care
system that involves a kaleidoscopic cast of payers and insurers,
Medicare is a single and fairly coherent program. This is a more
manageable project. It will give reformers a chance to show that they
can, in fact, trim spending while lifting quality. This should provide
a blueprint for tackling the larger, messier job of overhauling care
nationwide.
If done right, national health reform will take time. Those fighting
for universal coverage should not delude themselves: reform will be
extraordinarily difficult, not only because the system is so
fragmented, but because conservatives and progressives are so polarized
on this issue. The political climate is even more fraught than it was
when the Clintons attempted reform in 1993.
In 1993, compromise seemed possible. Keep in mind, 23 Republicans,
including then-Minority Leader Robert Dole, co-sponsored a bill
introduced by Republican Senator John Chafee that sought to achieve
universal coverage through a mandate that would require that all
individuals buy insurance.
Today, where would you find 23 Republicans willing to support
progressive reform that doesn’t simply hand the keys to the kingdom to
the private insurance industry?
In 2008, progressives and conservatives are so polarized on this issue
that anyone who talks about "bipartisan compromise" is talking about
health care "reform" in name only. Conservatives believe that free
market competition can solve our health care problems. Progressives
understand that this is a sector where market competition doesn’t work
to ensure high quality and reasonable costs. Government oversight is
needed to ensure that insurers do not discriminate against those who
are sick, and that everyone receives an equally comprehensive package
of benefits at price they can afford.
Conceivably, if Congress is in a hurry, it could cobble together
compromise legislation that gives every American access to a piece of
paper called "health insurance." But this would not mean that middle-class Americans would have access to health care.
If the insurance industry is not regulated, insurers will continue to
sell health care policies that are filled with holes, while shifting
costs to the sickest patients.
Finally, the most important reason why the next administration should put Medicare first on its health care list is this: if Washington tackles Medicare reform in 2009, it can show Americans that it is possible to reduce costs and improve care. In fact, lower costs and higher quality go hand-in–hand.
This is counter-intuitive. The notion that more care—and more
expensive care—is not better goes against some of our most deeply-held
assumptions about medicine and medical technology. But as I have explained here, decades of medical research shows that less aggressive, less intensive care leads to better outcomes.
Until most Americans understand this, it will be supremely difficult to
create an efficient, affordable, and sustainable system that offers
high quality care to all. This is why starting with Medicare reform could lead to the health care reform that Americans need.
Maggie Mahar says “if Washington tackles Medicare reform in 2009, it can show Americans that it is possible to reduce costs and improve care”
YOU GOT IT!
Congratulations!
Dr. Rick Lippin
Southampton,PA
Medicare reform
Should it precede national health reform? “Medicare presents reformers with a promising starting point. Politically, Medicare reform will be easier than a nationwide overhaul, simply because Congress recognizes that when it comes to Medicare, it has no ch
Here’s a novel concept: As part of that demo project, how about a Consumer-Driven Arm? Let medicare distribute the funds directly to the member in a designated HSA. I’m sure there’s no shortage of wonks who would be more than willing to see their ideas put to the test.
Hi Maggie –
This is a great blueprint for the next administration. You’re 150% right that our problem in getting a grip on health care costs is a failure of political will, not a dearth of information. We need more fortitude, not more studies. Working on Medicare will be tough enough, but Congress can’t avoid it, and as you point out, it is a lesser task than whole “system” reform.
Best
Jim Sabin
Many American health systems are significantly underinvested in quality management Infrastructure, Process, and Organization. To reduce fragmentation and support the need for physicians to improve quality of care, hospitals and health systems need to develop a “world class” quality management foundation that includes:
Strategy: including a clear linkage of quality and patient safety to the organizational strategy and a Board-driven imperative to achieve quality goals.
Infrastructure: incorporating effective quality management technology, EMR and physician order entry, evidence based care development tools and methodologies, and quality performance metrics and monitoring technology that enables “real time” information.
Process: including concurrent intervention, the ability to identify key quality performance “gaps,” and performance improvement tools and methodologies to effectively eliminate quality issues.
Organization: providing sufficient number and quality of human resources to deliver quality planning and management leadership, adequate informatics management, effective evidence based care and physician order set development, performance improvement activity, and accredition planning to stay “survey ready every day.”
Culture: where a passion for quality and patient safety is embedded throughout the delivery system and leaders are incented to achieve aggressive quality improvement goals.
My firm has assisted a number of progressive health systems and their physicians to achieve such a foundation, and to develop truly World Class Quality.
I think you should post your PR about the new working group on the blog someplace.
A novel idea would be to make the working group interactive. Usually there is some private testimony, followed by internal deliberations and then a white paper from on high.
Posting your agenda, testimony as received and allowing for criticism and suggestions would make your final report more comprehensive.
This doesn’t mean that your internal deliberations or working drafts have to be made public.
Something about the wisdom of crowds…
You’ve covered the problem well. If the system is not restructured we will compound the deficiency that exists–the consumer buying the product without regard for cost and a third party paying the bill. Regarding universal care: think basic, not frills. Read my blog on Basic Healthcare.
charlesclarknovels
http://www.charlesclarknovels.com
Health Wonk Review at the Health Business Blog: July 24, 2008
Welcome to the latest edition of the Health Wonk Review at the Health Business Blog.
Bitter pills
Pyrrhic victory. Expansion of the Americans with Disabilities Act has coincided with a decline in employment levels among the disabled. Workers Comp Insider
Maggie,
You wrote: We simply cannot afford to keep the pharmaceutical industry’s shareholders in the style to which they have become accustomed. (Until recently, drug-makers have been far more profitable than virtually any other Fortune 500 businesses. From 1995 to 2002 they took first prize, reporting earnings that ranged from 13 percent to 18.6 percent of sales each and every year. Over the same span, the average Fortune 500 firm posted earnings that averaged just 3.1 percent to 5 percent of revenues. Granted, in 2004, drug-makers fell to third place, trailing mining, crude oil production and commercial banks, but even then, earnings equaled 16 percent of sales.)
I recognize that net profit as a percentage of sales is an easy concept for the public to understand. From an investor’s perspective, however, it is not useful in comparing the profitability of companies in different industries because of significant differences in capital and asset intensity.
If you look at the ratio of sales to assets for the years, 2004-2006, for example, it was 0.85 for the S&P 400 Industrials, 0.49 for Pfizer and 2.29 for Wal-Mart. So, Wal-Mart can support over 4.5 times more sales with a dollar of assets than Pfizer can which is why retailing is a much lower profit margin on sales business model than pharmaceuticals. Conversely, some utility companies need $3.00 or more of assets to support a dollar of revenue and, therefore, earn a very high net profit margin on sales even when tightly regulated. Yet, their return on capital is only about average as compared to the S&P 400.
To fairly compare profitability across industries, investors prefer to focus on EBIT ROA or earnings before interest and taxes as a percentage of total assets. Financial services companies are evaluated differently. The three year average EBIT ROA covering the years 2004-2006 was as follows: S&P 400 Industrials, 10.6%; Pfizer, 11.2%, and Wal-Mart, 14.9%. Investors (reasonably, I think) expect to earn a satisfactory risk adjusted return on their capital in order to induce them to invest their money in the first place.
While even I thought that the drug industry was more profitable than it needed to be to attract capital in the late 1990’s until about 2002, its profitability declined considerably in recent years as a number of important drugs lost patent protection and the pace of new drug discovery was disappointing. The bottom line is that at least for the last several years, drug industry profitability has not been nearly as high as you portray it.
In an article on the Commonwealth Fund’s study showing poor US quality performance, Times reporter Reed Abelson states: “In some cases, the nation’s progress was overshadowed by improvements in other industrialized countries, which typically have more centralized health systems, which makes it easier to put changes in place.”
This certainly reinforces Maggie’s arguments about the relative ease of reforming Medicare, both in cost and quality. A similar point has been made by Paul Krugman about the ease of change in the VA, or at Kaiser, etc., etc.
But instead of learning from such system-wide approaches, with the ever-swelling pay-for-performance mania we continue to tinker around the edges with marginal incentives to improve care and reduce cost.
Barry, you are a fascinating man. What do you do?
Thanks everyone for comments.
I’ve been traveling –and on top of that my laptop was invaded by a horrible virus.
But I will get back to you soon–
Thanks everyone for comments.
I’ve been traveling –and on top of that my laptop was invaded by a horrible virus.
But I will get back to you soon–
You write:
“Before trying to roll out national health insurance, the next administration needs to address the structural problems that undermine the laissez-faire chaos that we euphemistically refer to as our health care “system.” Otherwise, we run the risk of winding up with a larger version of the dysfunctional, unsustainable system that we have today. ”
But this misses the point: at the very heart of the dysfunction lies the fact that only in The US do we treat health care as a commodity to be bought and sold in a marketplace. Our non-system owes itself to the fact that it pays very well indeed.
Dougie–
You’re entirely right. We’re the only country in the developed word that has chosen to turn healthcare in an unregulated for-profit enterprise.
Many countries in Europe have private sector insurance, and people are making profits, but everything is Tightly Regulated (much the way we used to regulate utilities.) There are rules to make sure that everyone gets equitable coverage and that no one is gouged.
Andrew–Yes, we need structural reform. It’s very very difficult to make improvements in our fragmented health care system. Part of what the working group I’ve put together (seeing newest post) will be doing is making recommendations for how to bring health care providers together in accountable groups, and how to “bundle” payments to doctors and hopsital for episodes of treatment.
An independent Comparative Effectiveness Institute also would be a place where doctors could find all of the research, carefully reviewed, in one place, and it could generate “best practice” guidelines (not rules) for providers.
Will be back later with more replies
Lisa,
I’m a securities analyst for a large corporate pension fund.
Maggie and Barry…. You have to put into context the 6% profit insurers make on Medicare. That’s AFTER deducting for extraneous expenses like broker commissions, high CEO salaries and bonuses, shareholder profits, and even the lobbying and campaign expenses they add to the costs of their service.
I don’t know the exact numbers, but Medicare spends perhaps 96% of its dollars on patient care and the privates spend perhaps 75-80%. The patients are not getting a lot of bang for their buck with the latter.
Barry, and Jack–
Barry–
Yes, I realize that pharma’s profits are as high as they once were (that’s why I said until recently).
But 11% is still double-digits. And for more than 20 years, Big Pharma has not been a high-risk investment. It has been widely regarded as a safe haven–which is why large pension funds have invested in it.
You don’t need 11% profits to get people to invest in a safe haven. The fact that they are accustomed to double-digits means that they will “punish” a stock that offers less, but this is simply because investors are greedy.
Ultimately, as analysts like Sheryl Skolnik have argued, health care stocks should not be seen as “growth stocks.”
They should aim for stable returns. Ideally, a regulated drug industry would operate like a good utility (think the old Bell Atlantic or gas & electric companies) that paid a nice dividend and would not aim for high growth.
As a society we cannot afford high-growth healthcare. We can afford a healthcare industry that grows only as fast as GDP.
Scott–
I agree with virtually everything you say. Much of what you are doing sounds much like what Don Berwick’s Institute for Healthcare Improvment has been sponsoring. Do you work with them at all?
Jack–
Yes, private insurers now pay out about 85% of what they receive in premiums in health care.
Medicare pays out a much larger percentage.
But the majority of wasted dollars–both under private insurance and under Medicare–is not administrative costs, but the fact that $1 out of $3 dollars is spent on totally uneffective, unnecessary, unproved and over-priced care.
Jim– thanks, looking forward to moving foward on this.
Charles– thanks for joining us–I’ll definitely look at your blog.
Robert–I will think more about how to open this up . I’ve been asked to become involved with a large grass-roots online project and that may be one way to do it.
Jack,
First, the average PRETAX profit margin range that private insurers make on Medicare Advantage policies is 3%-6% which implies an average of 4.5% pretax and 3% after taxes, not 6%. Second, that margin IS the shareholder profit, it’s not AFTER shareholder profit. For perspective, UnitedHealth Group will generate over $80 billion of revenue this year including its commercial business, Ingenix, Medicare, Medicaid and everything else it does. Wellpoint will generate over $60 billion. The total of lobbying costs and the CEO’s salary and bonus is little more than a rounding error in both companies’ expense structure. I know it makes a nice sound bite, but even if lobbying costs were zero and the CEO worked for free, the expense reduction would be minimal. Broker commissions on Medicare policies average about 3% of premiums. Medicare, for its part, pays a price for its low administrative costs in the form of high fraud losses which some observers think could be as much as 10% of program costs. Paradoxically, the higher their fraud losses are, the lower their administrative costs look! If CMS were smart, it (and taxpayers) would be net better off if it put more money into oversight, but doing so would push up its administrative cost ratio.
That all said, as Maggie points out, the real challenge is to squeeze out wasteful utilization of healthcare services. That’s where the dollars are, and that’s where we need to focus.
Yes, fraud exists in Medicare, but it is much higher in private medicine because it usually does not involve jail time. The best way to stop it is to require education of healthcare employees of what fraud is, and how the whistleblower laws can protect them if they turn in their employer. Let nurses and employees provide the oversight for free, and you’ll see few if any employers allowing it to occur.
See http://tinyurl.com/2hzj65
I should have said “… whistleblower laws can protect AND REWARD them if they turn in their employer.”
It’s funny how just one disgruntled or departing employee can have such a positive effect on the system.
Also, it took a lot of deep thought, but I think I have a new drug program..…
1) Physician writes prescription
2) Patient buys at drug store, pays deductible
3) Drug store bills Medicare the balance
What? No insurance industry in the loop?
Barry & Jack–Thanks for your comments
Barry–you and I are on the same page in terms of where the major waste is in our healthcare system: unnecessary, ineffective treatments. But Jack has a real point about what happens if you try to cheat the federal govt.
Jack– As you say, if you
cheat Medicare–and are caught–you are talking about FBI raids and a real possibility of jail time.
And you are also right that there is no reason why Medicare couldn’t offer a prescription benefit directly–with beneficiaries paying a premium for Part D to Medicare, rather than to an insurer.
And, if Medicare used its size and leverage to negoatiate for discounts (as the VA does, very successfully, and as every other developed nation does) Medicare could procure drugs at a much lower price than Medicare Advantage insurers can get. They’re just not as big. And the pharmacy benefit managers have not turned out to be very effective.