Medicare, like Social Security has long been considered the “third rail” of politics meaning any candidate who suggests a major modification of the system will see their aspirations instantly killed by public disapproval as if they had touched the highly electrified third rail used to power subway trains.
When Republican Congressman Paul Ryan proposed his controversial budget earlier this year which included a major change in government funding of Medicare, the initial public opposition seemed muted. In fact, the Ryan Plan seemed to power down the deadly voltage in the third rail but left enough there to energize support from Tea Party conservatives. But in the weeks that followed, groups opposed to the Ryan Plan were able to crank up the voltage again to a lethal level which proved fatal to the candidacy of a presumptive GOP favorite in a special election in New York State.
The Ryan Plan passed the GOP controlled house but was defeated in the Democrat controlled Senate. But both sides of Washington now face a conundrum with polls showing widespread opposition to the Ryan proposal but at the same time, widespread support that Washington must do something to rein in spending including Medicare.
On Sunday May 29, 2001, the future of the Ryan Plan and Medicare in general were the topic on NBC’s Meet the Press.
Republican Senator Mitch McConnell drew obvious frustration from host David Gregory when he refused to either fully endorse or reject the Ryan proposal but instead repeatedly offered that it would remain “on the table” in any discussion of Medicare funding with Democrats. Meanwhile, Democratic Senator Charles Shumer of New York began to map out his party’s position that no negotiations could occur while the Ryan proposal was on the table. He also provided a glimpse into possible alternative cost cutting measures which will be discussed later.
The problem in the current economic and political climate is that both parties seem oblivious to the future impact of their proposals or the only true alternative to save Medicare.
MEDICARE – DESIGNED TO FAIL
When Medicare became law in 1965, like Social Security, it was designed as an insurance program based on the current and historical realities of the day. In an insurance program costs (risk) is spread out across a large population. Everyone pays a little so that those who suffer a covered loss can receive a lot. The core operating paradigm in insurance is assignment of risk. What Medicare’s architects could not see was that the industrial might of post World War II America that had grown in the 20 years following the end of the War, was about to embark on an equally rapid 20 year decline.
Medicare was designed as a safety net to pay benefits only as a last resort for those seniors without insurance or without enough insurance. At its inception, many American’s enjoyed employer funded healthcare which covered them into their retirement years. Life expectancies were also lower meaning those who did find themselves on Medicare were enrolled for shorter periods. What no one could foresee was the simple fact that America in 1965 was on the eve of an era of medical breakthroughs that would change the science of Medicine in two decades more than it had progressed in the previous twenty centuries.
The “perfect storm” of improbable events began to impact Medicare spending within the first decade. These events include breakthroughs in life-prolonging surgeries like open heart coronary bypass along with the emerging explosions of many other new health technologies. Just as the bill for American healthcare for seniors began to surge upward, the sudden transformation from an industrial to service based economy saw the promise of employer funded healthcare for life nearly disappear. According to the Centers for Medicare and Medicaid Services (CMS) the annual percentage increase in Medicare costs surged from approximately 4% in 1972 to almost 22% by 1975. It became clear that Medicare could not survive without some major changes to reduce the risk the government had assumed in 1965.
The most costly component of Medicare spending in the 1970’s was outlays for Part A hospitalizations. Even with limits on the percentage of payments to hospitals and out-of-pocket contributions from Medicare enrollees, these costs threatened to wreck the system before its 15th anniversary. The solution adopted in 1980 was a schedule of payments to hospitals which reduced the government’s risk by setting fixed fees based on a certain diagnosis. This system of paying based on Diagnostically Related Groups (DRG’s) is still a core component in Medicare.
The DRG system assumes that the average person suffering a certain condition will require a certain number of days of hospital treatment. An example would be the common occurrence of pneumonia. Under DRG’s , Medicare would assume the patient would need a seven day stay in the hospital for which the hospital would receive a fixed payment of approximately $7,000. {Numbers are for example only, not actual}
In the example above, the hospital receives approximately $1,000 per day for a seven day admission. If the hospital was able to treat the patient and discharge them sooner, for example in five days, then they would earn a higher per diem rate of $1,400 per day since the payment of $7,000 was not tied to the number of days the Medicare patient was hospitalized. On the other hand if the patient remained in the hospital for 10 days the per-day reimbursement from Medicare would amount to only $700 per day.
The DRG System effectively shifted the risk and cost uncertainty associated with the number of days a Medicare patient was hospitalized away from the government and onto the treating facility. At the same time, it also allowed the government to insulate itself to some degree from the volatile inflationary component of healthcare costs in that the actual dollar amount of a DRG payment could be controlled by the Medicare Fee Schedule regardless of inflationary factors.
While DRGs provided a temporary fix for the Medicare System its true impact on the overall healthcare system is one Medicare’s dark secrets, seldom discussed outside of the medical community and virtually never discussed in the political debate.
Most hospitals soon found themselves on the losing end of the DRG fix as their costs to treat a Medicare patient constantly outpaced the reimbursement table. At the same time hospitals began to experience rapidly increasing losses incurred from the delivery of emergent care to the growing numbers of uninsured persons. In order to cover for these losses hospitals were forced to increase the rates they charged those who could pay; mainly those covered by private insurance plans. This effect, known as cost shifting, is regarded as contributing to the rapid upward spiral of healthcare premiums as much as the actual inflation in medical costs.
Today, the average hospital is compensated for only 90% of the actual costs of treating a Medicare patient, while on average the payment for a privately insured person amounts to 127% of actual costs.
Both the Ryan proposed Voucher Plan and the emerging alternative being suggested by Democrats are effectively a continuation of the failed DRG solution which could place the entire American hospital system at risk along with the lives of millions of Medicare recipients.
THE RYAN VOUCHER SYSTEM
In an insurance system, risks (which are synonymous with costs) are controlled by either/or a program of Risk Reduction or Risk Management.
Risk Reduction is where an insurance program reduces costs by the total exclusion of coverage for certain events. Some key examples of Risk Reduction would be the previous benefit exclusion of many health plans for pre-existing conditions. Another example is the Medicare Part D “doughnut hole” where enrollees must assume approximately $2,500 of risks (costs). Risk Reduction is applied when the costs of an insurance program have grown so large that the plan can no longer operate under the traditional paradigm of, “Everyone pays a little so that those who suffer a covered loss can receive a lot.”
Risk Management on the other hand does not eliminate coverage for a certain condition or event but instead seeks to lower costs which may be incurred because of those events. A good example of Risk Management is the annual drive to motivate the Medicare population to obtain flu shots. While flu shots do not totally eliminate the risk of persons being hospitalized for pneumonia it seeks to manage this risk through preventive efforts since influenza can frequently lead to the development of pneumonia.
Medicare’s DRG program is an example of Risk Reduction where the government sought to eliminate the risks associated with the number of days Medicare patients were being treated in the hospital.
The Ryan Voucher Plan moves beyond Risk Reduction to total and complete Risk Elimination for the Federal budget. Medicare eligible recipients would receive government funded vouchers to purchase private insurance. Washington budget writers would no longer be concerned with healthcare cost inflation or with the days or even number of hospital admissions a Medicare patient may need. The cost of Medicare would become essentially a fixed expense equal to the number of eligible recipients multiplied by the dollar value of the vouchers distributed. But what happens to the risk and costs?
Under Ryan, the risk would presumably be assumed by private insurers who would offer policies paid for by the vouchers. But as previously noted, with an existing 37% gap between what Medicare has traditionally paid hospitals and what private insurers pay, the immediate result would be a 37% reduction in benefit buying power for the Medicare population. Those persons who can only afford to spend up to the limit of their voucher for private coverage will be limited to policies with huge deductibles, co-pays and doughnut holes along with risk reducing benefit exclusions. The result is, according to a range of estimations, that the average Medicare enrollee will pay an additional $7,000 annually as the true risk shifts from the government to private insurer and ultimately to them.
Obviously many Medicare enrollees will not be able to purchase either additional benefit coverage or pay for the gaps in a policy funded only by the voucher payment. Some of the risk will flow to the healthcare providers who will incur even more losses.
The realities are a matter of simple math. While HMO’s and private for-profit insurers are often portrayed as the greedy villains in the healthcare debate, according to Standard & Poor their average annual pre-tax profits range between 6-7%, a mere fraction of the margins in most other business segments of the economy. Hospitals, who themselves are often similarly criticized are struggling to hold a 5% bottom line according to the National Hospital Association. The retired American senior citizen, the majority of whom now find themselves trying to exist solely on Social Security’s monthly stipend of $1,100 [according to 2011 numbers from the Social Security Administration] is also in no position to absorb the risk being abdicated under the Ryan Plan.
The future is predestined. Seniors will be forced to delay or deny themselves needed medical care until conditions reach the stage of a medical crisis. This will create an immediate spike in the costs of care for seniors driving up insurance premiums further and forcing hospitals to provide even more uncompensated care.
The domino effect could rapidly result in failures of hospitals and other healthcare providers at a time when demand by seniors will surge with the retiring of the ‘Baby Boom’ generation. A decrease in supply at a time of surging demand can only result in one outcome – rationing.
Ironically, the Republican Party’s most loathsome criticisms of healthcare reform: rationing and the consequent establishment of ‘death panels’ would be the most likely legacy of the proposed Ryan reforms.
THE DEMOCRATIC SOLUTION
While Democratic strategist are hoping to make significant political gains in next year’s elections based on the widespread opposition to Ryan, it is clear that so far, even their vaguest alternative which was briefly offered by Schumer on Meet the Press is as flawed as the Ryan voucher and ultimately leads to the same ends.
In response to host Gregory’s question Schumer briefly outlined what would essentially be a global application of the failed DRG system to be applied to doctors. He suggested that the answer lay in setting up a fixed fee for doctors treating Medicare enrollees with various conditions and that this “fixed” arrangement would achieve necessary cost reductions. But again, as with DRGs, the federal government removes itself from the risk aspect and by default places the costs squarely on the backs of providers and/or patients who cannot afford to accept it.
MEDICARE’S ONLY HOPE – GENUINE RISK MANAGEMENT
The Medicare situation is not unlike a very high stakes game of Texas Hold’em Poker. Sitting at the table is the Federal Government, the healthcare insurance industry, healthcare providers and the Medicare enrollee. Everyone has gone “all in” with all their available chips already pushed to the center of the table. But in this game the dealer, who represents the amalgam of all the factors and failures which have brought the system to this critical point, refuses to allow betting to end and insists that more dollars be added to the pot.
The only real option for controlling Medicare cost is not the perpetuation of tossing the “hot potato” of risk and cost around the room but of genuine reform to lower overall costs through comprehensive Risk Management. Risk Management is frequently referred to in the insurance business as Utilization Management or UM for short. Are there dollars to be saved through the practice of good UM enough to effect a real change in the upward spiral of Medicare costs? Everyone agrees they are and most conceded they are of sufficient billions to have true impact on costs without the sacrifice of benefits. The answers lie in attacking the components known as FAW – Fraud, Abuse and Waste.
The Centers for Medicare and Medicaid Services estimates the 48 of the 500 billion dollars spent on Medicare in 2010 was paid to cover fraudulent claims. That amounts to 9% of total Medicare spending and a sum greater than the combined profits off the entire American health insurance industry. The 2009 Healthcare Reform legislation has increased funding for auditors and inspectors to root out this theft. The administration has also allotted over 20 billion dollars for Information Technology enhancements for doctors and hospitals which could help stop fraud from occurring. The non-partisan Congressional Budget Office (CBO) estimates that for every $1.00 invested in fraud detection, $1.75 is saved or recovered. But many experts believe the CMS estimate is low and all agree it does not include significant fraud which is happening in the Part D Prescription Drug program or the less flagrant gray areas of abuse and waste.
A fraud occurs when a Medicare provider knowingly and deliberately bills for services that were never performed. Many seniors whose credit ratings and available cash would make them poor targets for identify thieves are often targeted none-the-less by them in order to gain access to their Medicare information which can then be passed on to a fraudulent service provider who can reap millions from even a small list of these numbers.
Abuse on the other hand generally refers to providers who try to manipulate doctors and patients by billing for premium services when a lower cost service or product would have met the patient’s medical needs. These types of scams are common in dealing with items known as Durable Medical Equipment or DME – like a wheelchair.
Waste generally refers to the billions of dollars charged to Medicare through simple neglect, poor oversight or a lack of sound Utilization Management practices, and not an overt act of the party receiving payment. The staggering costs of Medicare’s high hospital readmission rates are a prime example.
One in five Medicare patients who are admitted to the hospital was previously in the hospital in the prior 30 days for the same condition. For some of the most common Medicare diagnosis such as Congestive Heart Failure, the 30 day Readmission rate is approximately 36%. All agree that any other industry whose product or service had a 20% return/defect rate would be quickly out of business.
The factors driving readmissions are numerous. Hospitals are frequently faulted for readmissions caused by hospital acquired infections or premature discharges (motivated by the need to limit length of stays and loses caused by DRGs). But they also occur when patients simply refuse or for lack of family or community support, cannot comply with discharge instructions and follow-up treatments prescribe by their doctor. Another readmission driver involves Medicare patients with Behavioral or Substance Abuse issues being admitted to acute care facilities for clinical conditions when the proper course would be admission to facilities or outpatient programs to treat the mental and not medical illness of the patient.
In 2009, New York officials estimated that the combined impact of Fraud Waste and Abuse could easily account for 30% of all Medicare spending in the Empire State. Virtually no one has challenged that number and some reliable experts have even offered that the true percentage of wasted Medicare dollars may be as high as 50%.
Among commercial health insurers there is a belief that the practice of good utilization management yields a 20% savings in overall costs. If applied to Medicare, a 20% savings would, at current levels, result in $100 billion dollars annually or $1 trillion dollars over the next ten years.
These potential savings are credible and achievable and represent reductions demanded by the Ryan Voucher Plan while leaving fully intact, the benefit structure demanded by Democrats. But in order to realize these savings both parties as well as all American’s including healthcare providers, Medicare recipients, their families and the community at large must appreciate that it will take extra work by all to reduce Medicare costs. The only other alternative that can be placed on the table is a failure of the Medicare system which almost certainly domino into a failure of the American healthcare system as we know it.
