How Cost-Sharing Leads to More Cost-Sharing: A Slippery Slope
President Obama’s newest proposal for reducing the federal deficit would slice Medicare reimbursements to drug-makers, nursing homes, rehabilitation facilities, home health services and teaching hospitals. As I explained in Part 1 of this post, using figures from the non-partisan and highly respected Medicare Payment Advisory Commission (MedPAC), these are groups that Medicare often overpays. Some skilled nursing facilities turn an 18 percent profit on Medicare patients while reimbursements to home health agencies have consistently and substantially exceeded costs.
By and large, these recommendations make sense, and could help throw a spotlight on excesses in Medicare spending. But I very much doubt that either Congress or the Super Committee charged with addressing the deficit will embrace the President’s proposals in these areas. The lobbies that represent drug-makers, our most prestigious academic medical centers and three health care industries that have been taken over by for-profit companies (skilled nursing facilities, rehab centers and home health service agencies) can write the checks that help swing elections.
Proposals That Are Far More Likely to Find Support in Washington
President Obama’s plan also targets future retirees, asking them to shoulder a larger share of Medicare’s costs. Specifically, starting in 2017:
• New Medicare beneficiaries would be hit with a penalty if they purchase MediGap insurance that covers all or most of Medicare’s copayments and deductibles. Administration officials claim that such insurance encourages excessive use of medical services.
• Upper-income beneficiaries would be expected to kick in higher monthly premiums for doctors’ services (Medicare Part B) and prescription coverage (Part D). Eventually 25 percent of all Medicare beneficiaries would be counted as “upper-income,” and hit with the 15 percent increase. This recommendation is likely to win votes, particularly among conservatives who would just as soon undermine wide-spread support for Medicare. “Divide and conquer” has long been considered a shrewd strategy. (Did someone say “class warfare”?)
• All new beneficiaries would be asked to pay a higher annual deductible for outpatient services. The so-called Part B deductible, currently $162, is indexed for inflation. It would go up by $25 in 2017, 2019 and 2021.
• New enrollees would have to come up with a $100 copayment for home health services, unless they have just been discharged from a hospital or nursing home.
• Some Medicare beneficiaries don’t pay their deductibles or co-pays—usually because they just don’t have the money. Medicare currently reimburses 70 percent of those bad debts; the President proposes slicing those payments to 25 percent, beginning in 2013. This cost-saving strategy would disproportionately affect hospitals that treat high numbers of low-income Medicare beneficiaries: safety-net hospitals and rural hospitals. As a result, some might not be able to offer all of the services that the nation’s most vulnerable Medicare beneficiaries need.
In the aggregate, these changes are, as the President has said, “modest.” But the impact on individual low-income and middle-income individuals could threaten their access to care. The problem is that as of 2009, Medicare households were already spending an average of $4,620 on health care, more than twice what non-Medicare households spent, according to the non-profit Kaiser Family Foundation.
Going forward, Medicare beneficiaries are projected to lay out as much as a quarter of their income on health care in 2020, up from around a sixth now. “Some have the impression that seniors are quite wealthy and could afford more premiums,” says Tricia Neuman, director of the Medicare Policy Project at the Kaiser Family Foundation. “The numbers tell a different story.”
Median income for women over 65 now stands at roughly $15,000. (This estimate is based on a Census Bureau report showing that, in 2008, the average woman over 65 lived on $14,500.) Half make do with less. That $15,000 includes income from all sources: Social Security, wages, self-employment, pensions, government assistance, and investment income. As of 2010, the Current Population Survey reveals that households headed by someone over 65 reporte $31,400 in joint income.
Even relatively affluent seniors are hardly rich. Singles over 65 who earn as little as $33,000 rank among the wealthiest 20 percent. At first glance, married couples appear to be doing better: to make it into that top quintile they must be earning at least $85,000 a year. But this is in large part because in many cases one spouse is under 65 and still working. In 2008, 41 percent of senior households reported earned income. Over time, as working partners retire, older couples are forced to live on less.
At one time, the notion of shifting Medicare costs to seniors was considered a third-rail proposal. But these days, conservatives have stoked the intergenerational wars, and many younger Americans resent the “entitlements” that their elders receive, especially because deficit hawks assure them that after spending a lifetime supporting wizened boomers, they will never receive a penny of Social Security or Medicare benefits themselves.
Thus, even a Democratic President is willing to open the door to more cost-sharing. Unfortunately, experience shows that cost-shifting tends to lead to more cost-shifting—once an initial barrier is overcome, it’s just so easy to continue. At what point will Medicare become unaffordable for middle-class seniors? At what point will wealthier Americans who are asked to pay climbing premiums rebel, and decide to drop out of all or part of the program?
Yet when compared to more Draconian solutions—such as giving 80-year-olds vouchers and letting them fend for themselves in a for-profit insurance market—President Obama’s recommendations seem mild. This may explain why many progressives appear willing to accept what I see as another step on a slippery slope that, ultimately, could destroy Medicare.
Who Lobbies for Seniors? Can They Count on the AARP?
But don’t seniors, like drug-makers and nursing homes, have a group dedicated to advancing their interests in Washington? Yes, the American Association of Retired Persons (AARP) boasts 40 million members, and has long been seen as one of the most powerful lobbies in the nation. Nevertheless in recent months the non-partisan organization has been accused of “waffling” on entitlement programs as it “gets too cozy with the political leadership it is trying to affect.”
Supposedly, size gives AARP its strength in Washington. But as Laura Olson and Frank Davis point out in an essay on “Senior Interest Groups and the Politics of Aging,” size also blunts its sense of mission: “While the AARP has spawned an enormous membership using material incentives, the diversity of its broad-based membership, with its questionable commitment to political causes, compromises its ability to launch and sustain political campaigns . . . The result is that AARP’s membership numbers may overstate its clout on a range of political issues, and policy makers seem acutely aware of this fact.”
The turning point for the AARP came in 1994, Olson and Davis suggest, when the organization endorsed the Democrats’ health care bill. At the time, it was rumored that many members resigned: “Since that time,” they write, “the group has been particularly careful to take ‘moderate non-threatening stands.’”
Granted, just last week, Executive Vice President Nancy LeaMond issued a public statement responding to the President’s proposal, and objecting, in no uncertain terms, to the idea of raising out-of-pocket costs for seniors. But there are indications that, behind the scenes, the nation’s largest senior lobby already has capitulated on this issue, and sees more cost-sharing as inevitable. “Our goal is to limit any changes in benefits,” John Rother, executive vice-president of AARP told the Wall Street Journal in June.
Thus, when faced with President Obama’s proposal that seniors should pay a surcharge on generous MediGap policies that cover out-of-pocket costs, Rother didn’t protest. Instead, the Boston Globe reported that he expressed relief that that no one is proposing “a flat-out prohibition against Medigap policies.”
Reportedly, some AARP officials were incensed by Rother’s public comments, and earlier this month the AARP announced that he is leaving the organization to become president and CEO of the National Coalition for Health Care. Nevertheless, Rother told the Wall Street Journal that “internally there was never a disagreement over the policy though some were upset by the “timing” of his remarks. In June the AARP issued a statement which seemed to confirm Rother’s claim, revealing that it might accept some benefit cuts to Social Security in order to preserve the solvency of the program.
Yet those who analyze safety-net programs point out that, when compared to Medicare, Social Security’s financial problems could easily be fixed. As The Century Foundation’s Greg Anrig has argued: “Social Security’s currently strong finances could be sustained beyond a 75-year time horizon entirely through modest tax increases targeted toward high-income workers. . . . One . . . way to do that would be to raise the cap on annual wages subject to the Social Security payroll tax, which is currently $106,800.”
In other words, Social Security benefits do not need to be trimmed. If the AARP is willing to see them on the chopping block, what does this say about its commitment to preserving Medicare as a program that seniors can afford?
A Closer Look at the President’s Proposals
- Penalizing Those With Supplemental “MediGap” Plans that Cover Out-Of Pocket Costs
Starting in 2017, this provision aims to save approximately $2.5 billion over 10 years by collecting surcharges from new beneficiaries who purchase supplemental MediGap policies with particularly low cost-sharing requirements. The surcharge would equal roughly 15 percent of the average Medigap premium. The hope is that if seniors duck the penalty by switching to less expensive MediGap policies that don’t offer “first dollar coverage,” they will be less likely to seek out “inappropriate” or unnecessary care. This provision appeals to those politicians who cling to the fantasy that if only the elderly had more “skin in the game,” they would suddenly become medical experts, able to make more prudent decisions about what care they need.
But as Naomi recently pointed out, when co-pays and deductibles are not covered, seniors are just as likely to defer preventive care as they are to skip an unnecessary doctor’s appointment. This, she reports, is particularly true of “the most vulnerable”—those who are “poor and chronically ill.”
The typical 70-year old simply does not possess the medical knowledge to discriminate between essential and optional care. Should he go to a doctor to check out that odd-looking growth on his back? After all, it’s no bigger than a pencil eraser; years ago, when he had a doctor look at something similar, it turned out to be nothing. The average senior also doesn’t know when he needs a colonoscopy, and almost certainly isn’t particularly eager to find out.
What many politicians don’t understand is that medicine is not “consumer-driven.” The supplier is in the driver’s seat. Relatively few patients wind up on an operating table because they “demanded” surgery. A doctor tells them what they need. Most patients then do what a doctor tells them that they should do. The only way money is saved, Naomi points out, is when “participants decide not to initiate care.” In other words, if a Medicare beneficiary doesn’t go to a doctor in the first place, no one will tell him that his blood pressure is going through the roof—or that he should pay more attention to his diabetes. In these cases, patients just don’t receive the preventive care and chronic disease management that they need.
Once patients finally do go for help, the fact that they have a high deductible has virtually no effect on how much Medicare will wind up laying out for their treatment. In the healthcare market, the supplier determines how much care the patient needs, and sends Medicare the bill. As Naomi writes: “once patients are hospitalized or under a physician’s care, the choices about the kind of treatments or cost of treatments they receive are no longer in their control.”
Politicians such as Joe Lieberman claim that when seniors have “first-cost coverage’ they use more health care. What he ignores, Naomi observes, is that “Medicare recipients who buy the most comprehensive MediGap policies often are low-income and in fact, many do suffer from chronic diseases.” So if they utilize more health care, “it’s because they are also sicker than the average Medicare beneficiary.” Indeed, according to a report released in May by America’s Health Insurance Plans (AHIP), some 33 percent of all Medigap policyholders had annual incomes under $20,000. Nearly 54 percent reported annual incomes below $30,000. In rural areas, AHIP revealed, some 62% of seniors with Medigap policies had incomes below $30,000.
The fact that low-income seniors scrape together the money to pay for comprehensive MediGap plans shows that while they may not know exactly what medical treatments they need, they do know that they need the financial protection that these policies offer. Typically, poorer 65-year-olds are sicker than the rest of us, and they are aware of the many gaps in traditional Medicare. They realize that they cannot afford 20 percent co-pays for doctors’ visits, a $1,132 deductible for a short hospital stay, or hefty co-pays for a lengthier hospitalization. Indeed, these out-of-pocket costs can easily force them to avoid doctors altogether. Rather than penalizing them for make a prudent choice, we should encourage them to buy policies that provide the first-dollar coverage that they sorely need.
- Means-Testing Medicare
One of the more lucrative recommendations in Obama’s plan seems, at first glance, far more progressive. Rather than targeting the most vulnerable seniors, it asks more affluent beneficiaries to pay higher premiums for doctors’ visits (Medicare Part B) and the drug prescription program (Medicare Part D). The 15 percent surcharge is expected to generate $20 billion over 10 years. Today, only the wealthiest 5 percent of Medicare’s 48 million beneficiaries pay higher premiums. Under this proposal, 25 percent of all seniors would be labeled “high income.”
This raises a question: just how rich are the wealthiest 25% of U.S. seniors? Today, an individual with total income of $31,000 makes the cut-off for the top quartile. (This 2011 estimate is based on 2008 figures from the Social Security Administration). Stories in the mainstream media have suggested that only seniors earning over $85,000 would be subject to the surcharge. But the Social Security Administration’s numbers show that $85,000 represents the joint income of married couples when one of the spouses is over 65, and as noted earlier, in many cases the younger spouse is still working. As the couple ages, their combined income plunges. And as spouses die, many widows wind up living on an average of $15,000 while the typical widower averages just $27,000.
As for those who are truly wealthy, they already contribute more. The Medicare Modernization Act of 2003 (MMA) established Part B premiums that vary by income; those changes took effect in 2007. The Affordable Care Act of 2010 (ACA) then brought means-testing to Part D; wealthier seniors began paying higher premiums for the drug program this year. Finally, as the Incidental Economist’s Austin Frakt notes: “Medicare benefits are implicitly means tested through a number of premium and cost-sharing support programs for low-income beneficiaries, such as the Medicare Savings Program (Part B), the Low Income Subsidy Program (Part D), and Medicaid.”
Now, the president proposes building on the means-testing that is already in place by adding the 15% surcharge.
Many would argue that this is both fair and necessary. As Frakt puts it: “Since revenue cannot be raised where it does not exist—e.g., from the millions of beneficiaries living at or near poverty—increasing premiums on wealthier program participants seems like a natural way to shore up program finances.”
But, he acknowledges, there is a real danger that these hikes could undermine broad support for Medicare. The very rich already chip in more than the rest of us through payroll taxes. (Keep in mind that while workers pay Social Security taxes only on income up to $106,800, they pay Medicare taxes on all earnings. Traditionally, the program has been extremely popular because, in the end, everyone benefits equally. Whether you are rich or poor, how much you take out of Medicare turns on how long you live and how sick you are.
This seems to me fair.
Moreover, asking the wealthy to pay significantly higher premiums on top of fat payroll taxes risks alienating affluent Americans. If they begin to think of Medicare as a program for the middle-class that asks the wealthy to foot more and more of the bill, they are as Frakt observes, increasingly “likely to be sympathetic to changes” that reduce benefits, or raise out of pocket costs for everyone.
Commenting on Obama’s deficit-reduction plan, he raises the critical question: “Have we reached the tipping point where increased premiums for higher-income beneficiaries will threaten popular support for Medicare in a significant, meaningful way? It’s instructive to recall the Catastrophic Coverage Act of 1988, repealed one year after enactment after a revolt by seniors who were asked to shoulder the costs of the program through income-related premiums. Though the uprising against the Catastrophic Coverage Act was due in part to confusion over the law, it stands as a reminder of the political power of beneficiaries and interest groups in the context of the introduction of income-based premiums. The wealthy are a potential source of revenue for Medicare but also possess the means to finance the most strident challenge to it.”
This is precisely the danger. Rather than threatening affluent Americans with additional surcharges, we should concentrate on the fact that one out of three Medicare dollars are squandered on overtreatment and overpayments. There are tremendous savings to be realized if we just focus on the waste.
- Hiking the Part B Deductible
All new beneficiaries would be hit with this increase. Currently, the deductible for doctors’ visits and other out-patient services is $162, and is indexed for inflation. Under the president’s plan it will go up by $25 in 2017, 2019 and 2021. Phased in over time, this is a small increase that would generate $1 billion over 10 years. But as I explain below, that extra $25 gives seniors another reason to forego medical treatment.
- Requiring a $100 co-payment for Home Health Services.
As noted in part 1 of this post, the Medicare Payment Advisory Commission warns of “widespread fraud” in this area. Some home health agencies send nurses to give supposedly homebound diabetics insulin injections. Too often, these patients are neither homebound nor unable to give themselves the injections. Some don’t even have diabetes. The co-pay would discourage these patients while raising $400 million over 10 years. But it represents yet another burden for median-income widows who truly need those nurses.
- Reducing Reimbursements to Providers Stuck with “Bad Debt”
Some Medicare beneficiaries who receive hospital care never pay their deductibles or co-pays, usually because they simply don’t have the money. Even a short hospital stay requires that Medicare beneficiaries meet a deductible of more than $1,000. Given that 50 percent of all Americans over the age of 65 make do with less than $20,000 a year–sometimes far less– it should not be too surprising that hospitals wind up with a pile of unpaid bills.
To ensure that the costs of these services are not passed on to non-Medicare patients, Medicare currently reimburses providers for 70 percent of these bad debts after they make “reasonable and customary” attempts to collect. The President’s package would cut reimbursements to 25 percent, yielding $20.2 billion in savings from 2013 to 2021. Some argue that hospitals are not making a sufficient effort to track down Medicare beneficiaries who fail to meet their obligations. By covering 70 percent of their losses Medicare is making it too easy for them to sit back and wait from the check from the government.
The catch is that this cost-saving strategy would have the greatest impact on hospitals that treat high numbers of low-income Medicare beneficiaries: safety-net hospitals and rural hospitals. As a result, some might not be able to offer all of the services that the nation’s most vulnerable Medicare beneficiaries need.
- Shifting Costs To Seniors: Penny-Wise and Pound Foolish?
A study published in the New England Journal of Medicine just last year shows that when Medicare managed care plans raise co-pays for outpatient visits, seniors go to the doctor less frequently. This of course, is just what the insurers hoped they would do. Having more “skin in the game” made them think twice about seeing a doctor.
Unfortunately, thinking twice didn’t mean that they thought wisely. Too often patients skipped needed care and wound up in the hospital. “Policymakers should be very sensitive to adverse and unexpected consequence of increased cost-sharing,” warns Dr. Amal Trivedi, an assistant professor of medical science in the Department of Community Health at Brown University’s Alpert Medical School and the lead author on the study. “It can be a lose-lose proposition.”
Researchers looked at Medicare data involving nearly 900,000 beneficiaries; comparing 18 Medicare plans that increased co-payments for outpatient care to 18 that offered similar coverage but kept co-payments steady. The more expensive plans saw co-payments double for primary care, from $7.38 on average to $14.38, and from $12.66 to $22.05 for specialty care. For the plans where co-payments stayed constant, those co-payments remained at $8.33 for primary care and $11.38 for specialty care.
The following year, patients in health plans that increased co-payments cut back on doctors’ visits, just as expected. Higher cost-sharing led to nearly 20 fewer annual doctors’ appointments per 100 patients. But hospital admissions rose by 2.2 admissions per 100 patients, and the insurer wound up covering 13.4 additional hospital days per 100 enrollees. By contrast, health plans that maintained low co-payments saw little change in hospital admissions.
Trivedi and his colleagues found the effects of higher co-payments for outpatient care were particularly magnified among lower income senior citizens and among patients who suffered from hypertension, diabetes or a history of heart problems.
The researchers concluded: “increasing copayments for ambulatory care among elderly Medicare beneficiaries may be a particularly ill-advised cost-containment strategy. Assuming an average reimbursement of $60 for an outpatient visit, seven annual outpatient visits per enrollee, and an average copayment increase of $8.50 per visit, a Medicare plan would receive an additional $5,950 in patient copayments and avert $1,200 in spending on outpatient visits for every 100 enrollees, for a total of $7,150 in savings for the health plan. However, assuming an average cost of $11,065 for hospitalization of a person 65 to 84 years of age in 2006, our estimates suggest that expenditures for inpatient care will increase by $24,000 for every 100 health plan enrollees in the year after copayments for ambulatory care are increased.”
Trivedi and his colleagues point to two other studies which report similar results: “The introduction of a $1 copayment in California’s Medicaid program in 1972 was associated with an 8% reduction in physician visits and a 17% increase in hospital days. Similarly, the introduction of a $10 copayment among elderly beneficiaries receiving supplemental insurance benefits through the California Public Employees Retirement System resulted in substantial declines in outpatient visits but increased utilization of hospital care.”
It’s worth noting that even a small co-pay can stand in the way of patients getting the care and counsel that they need.
One can only wonder how some of the larger increases in Medicare cost-sharing that President Obama is now recommending would affect seniors. These studies suggest that Medicare stands to lose more than it saves.
Why Washington Is Wrong About Cost-Sharing
Politicians may think that cost-shifting represents a shrewd way to reduce overtreatment. But politicians are not physicians. They don’t begin to grasp the uncertainties of medical science or the complexities of the human mind/body. And this is why politicians should not be making health care policy.
Sometimes even a doctor cannot be sure whether he needs to see a patient in three months, in six months or in a year. Should he order another test? Does the patient need to see a specialist? At least the physician can consult evidence-based research when prescribing a course of treatment. But how can we possibly expect a 70-year-old diabetic with little education to make savvy medical decisions?