Medicare's bloated budget must be reduced

USA Today (Society for the Advancement of Education), Jan, 1996 by Steven Riczo

Billions of dollars wasted on an inefficient health care system takes money that could be used by taxpayers for food, clothing, shelter, and educating their children.

In attempting to balance the Federal budget, health care is a vital focal point, as evidenced by the November, 1995, standoff between Congress and the Clinton Administration. The Senate's budget proposal would reduce projected spending by $961,000,000,000 in seven years, with $256,000,000,000 coming from Medicare and another $202,000,000,000 from Medicaid and other health-related programs, representing 47% of the total cuts. The House budget seeks an additional $26,000,000,000 from Medicare and slightly less from Medicaid. Even using these parameters, increases would be permitted in these programs at a rate that exceeds the Consumer Price Index. There is no true cut in the health care spending budgets, but, rather, a slowing in the rate of growth. The fundamental question that arises is whether Medicare really needs to be funded at the 10-12% spending increases of recent years, with even greater funding going to Medicaid.

Medicare serves approximately 37,000,000 elderly and disabled recipients; the primary emphasis is on about 34,000,000 Americans over age 65. Of the funding, 52% goes to hospital inpatient care; 7.2% for outpatient treatment; 23% for physician payments; and the remainder to home health, nursing home, and other services. Current annual spending is approximately $195,000,000,000. Federal and state governments combined pay 44% of the nation's health care expenditures, the former covering 32%. Federal spending in 1996 for both Medicare and Medicaid is estimated at around $290,000,000,000.

There is significant cost sharing in the Medicare program, with the average recipient laying out about $3,000 per year in out-of-pocket expenses, including Part B (physician payments) premiums, copayments, and deductibles and Part A (hospital) deductibles and copayments. Over all, coverage includes most medical, hospital, test, and procedure needs with some exceptions, notably pharmaceuticals. Seventy percent of Medicare recipients purchase supplemental insurance, commonly referred to as Medigap, to cover their copayments and deductibles, while another 20% of low-income recipients receive such coverage from Medicaid. Those with Medicare spend an average of 23% of their incomes for out-of-pocket health expenditures; low-in-come recipients, more than 30%.

There are significant evidence and health care trends that support the argument for substantial reductions in the growth rate of Medicare. Inefficiencies in the health care delivery system have been well-documented. Former Surgeon General C. Everett Koop maintains that there is 20% waste in the current system. The Rand Corporation and others have documented unnecessary procedures, and physician observations regarding inefficiencies are replete in health care literature. According to The Journal of the American Medical Association, the consensus of studies in the 1980s was that between 20 and 25% of hospital services to the elderly were inappropriate. The AMA's reform proposals emphasize providing Medicare recipients a greater stake in their financial decisions, stopping unnecessary care from physicians, and reducing fraud and abuse.

While Medicare has made progress in shifting away from cost-reimbursed payment systems and development of new payment mechanisms such as Diagnostic Related Groups (DRGs) for inpatients and Resource Based Relative Value System (RBRVS) for outpatients, it still lags far behind the private sector in shifting recipients to managed care. Recently, a top official of the Health Care Finance Administration, which administers Medicare, pointed to a 20% growth in its HMO risk programs. However, this still leaves less than 10% of the Medicare population in managed care plans. In comparison to the private sector, a survey by KPMG Peat Marwick of 200 firms with more than 1,000 employees indicated that 65% of workers already were in managed care plans.

As managed care expands in the pre-health sector, health care inflation rates continue to decline. This is evidenced by the 4.5% rate between 1993 and 1994, compared to double-digit growth in prior years. Most analysts believe this favorable trend will continue.

A review of the literature commonly utilized by company benefits managers and large employers shows a consensus that managed care is saving them money. Foster Higgins, a large employee benefits consulting firm, indicates from its surveys that HMOs cost 25% less than fee-for-service plans, and preferred provider organizations (PPOs) save approximately 15%.

Broadly defined, managed care is providing health care in an efficient manner by managing pricing and utilization of services. By contrast, fee-for-service insurance pays for everything with very little emphasis on resource conservation (90% of Medicare recipients are in the fee-for-service program). For instance, managed care plans in the private sector review proposed elective admissions to hospitals to determine if they are necessary. When possible, workups and treatments are encouraged to be performed on a less expensive outpatient basis. Outpatient tests and procedures can be reviewed using established practice standards derived from medical and other research organizations. Very little utilization management exists in the Medicare program, often resulting in unnecessary care.