How not to cut - budget; Medicare - Column

National Review, July 31, 1995 by Ed Rubenstein

MEDICARE, as every schoolboy knows, is going broke. The math is straightforward. Last year the program spent $162.5 billion. By 2002 this amount will nearly double. To avoid bankruptcy in 2002 Congress must cut the annual rate of benefit growth to 7 per cent from the current 10 per cent, or raise payroll taxes by 44 per cent. Medicare taxes have already been hiked 23 times during the program's 29 years of existence.

Yes, there are more elderly now, and the quality and cost of their care has risen dramatically. But Medicare's spending history defies easy explanation. Back in 1966 19 million older Americans received Medicare at a total cost of $1.2 billion, or less than $63 per recipient. In 1994 the program spent an average of $4,392 on each of 37 million beneficiaries. That's a 70-fold rise in per-recipient spending during a period in which general medical inflation rose 8-fold.

Washington responded to the cost explosion by capping or reducing the amount paid for particular services. Such price controls were easily circumvented. Doctors simply broke services up into several billable parts, e.g., instead of doing all lab tests in a single visit they made patients go for one at a time. This ultimately increased the overall use -- and total cost -- of medical services.

Curbing hospital costs was a major priority of the Reagan Administration. In 1983 the government started paying hospitals a flat amount per hospitalization. Hospitals spending less could pocket the difference; those spending more took the loss. As seen in the table, Medicare's hospital expenses slowed dramatically as a result of this policy. But this wasn't real cost control. Medicare merely paid hospitals less than the cost of their services, forcing them to shift those costs to patients with private health insurance. The new system also rewarded the rapid discharge of patients. Indeed, average hospital stays plummeted from 7.4 days in 1980 to 5.7 days in 1985. A 1988 government study found that 540,000 Medicare patients were receiving poor care, with 3,300 deaths attributable to premature hospital discharges.

In recent years the government has allowed HMOs to sign up Medicare patients. As a cost-control measure, this policy has backfired. Although the fee paid to HMOs is typically 95 per cent of the average cost of a Medicare participant, only the healthiest individuals tend to opt for HMOs. As a result, Medicare spends more on HMO patients than it would have spent under the conventional fee-for-service option.

Managed care perpetuates the illusion that ``someone else'' is paying your medical bills. A far better approach might be simply to give each senior his share of Medicare funds for use in purchasing private health insurance. One such plan gaining support in Congress is the ``Medical Savings Account.'' Under the MSA option retirees would buy an insurance policy with a high deductible -- say, $3,000 per year. The $3,000 would go into a fund, or MSA, which could be drawn down to cover out-of-pocket medical expenses. At the end of the year retirees could use leftover funds for any purpose -- a powerful incentive to ask questions about cost and medical necessity.

There is a caveat, however. In order to keep private-health-insurance premiums affordable the MSA option must be chosen by the vast majority of Medicare recipients. This may require a heavy-handed approach, with sanctions imposed against those opting to remain in the current program. Politically unpalatable? Yes, except when compared to what will happen if we don't do it.

MEDICARE'S MIXED SIGNALS