Medicare or Medi-scare?

By Ronald E. Bachman

Frightening seniors about Medicare changes is often referred to as Medi-scare. All Americans should be scared: In the coming years, 78 million baby boomers will place unprecedented demands on Medicare. Meanwhile, Medicare’s Hospital Insurance Fund will run out of money in 2024, according to the 2011 Medicare Trustees Report.

Standard & Poor’s recently downgraded its financial outlook for the United States; federal budget deficits are projected to exceed $1 trillion annually. This country has borrowed more than $14 trillion. Medicare alone has a $38.2 trillion unfunded deficit. Just like families that have outspent their income and borrowed too much, the federal government must now make reductions.

Every politician wants to solve financial problems by eliminating “waste, fraud and abuse.” Organized crime is heavily involved in Medicare fraud: In 2010 federal indictments in five states exposed the largest Medicare fraud scheme ever committed ($163 million), involving members and associates of an Armenian-American organized crime enterprise.

For once, it seems reasonable to attack fraud before reducing program benefits, increasing taxes or dramatically changing Medicare. Changing this popular program is risky business. As a part of the Patient Protection and Affordable Care Act (PPACA), Democrats reduced future funding for Medicare by $500 billion and suffered historic defeats in the 2010 elections. Recent Republican proposals are suspected of causing voter backlash, too.

Margaret Thatcher once said, “First you need to win the argument, then you win the votes.” Neither Republicans nor Democrats seem to follow that advice. The Republican Medicare proposal was highlighted when presidential candidate Newt Gingrich stated that “right-wing social engineering” is no better than “left-wing social engineering.” Gingrich, a student of Margaret Thatcher, was urging a national bipartisan conversation on Medicare reform. He inartfully meant that neither side should impose a solution. In his view, the “Ryan Plan” for Medicare reform is a courageous start, not a final answer.

There are many ideas that have not been widely discussed with the American public. Below are examples of several changes that could be a part of any broader reform:

(1) Eliminate fraud

(2) Remove the 150-day limit on hospital stays (Part A)

(3) Provide a maximum out-of-pocket level for physician services (Part B)

(4) Allow Medicare Health Savings Accounts (HSAs)

The current Republican proposal does not produce new Medicare savings until 2022. Eliminating fraud can produce savings of $1 trillion over the next 10 years. To stop fraud now, Sam Palmisano, CEO of IBM, has offered his company’s technology as a free public service. The savings from fraud elimination can add to the solvency of Medicare and help modernize Medicare.

The greatest fear of the elderly is outliving their assets. Part A exposes beneficiaries to the cost of hospitalization beyond 150 days. Reform could eliminate the Part A hospital day limit. A CMS actuary priced removal of the day limit for all at a quarter of a percent of Part A and Part B spending.

Part B exposes beneficiaries to an unlimited 20 percent cost share. Employer plans typically include a cap on patient payments – called “Maximum Out-Of-Pocket” limits. The limit for Part B should be $5,000 to $10,000. A $5,000 limit would cost approximately 3.5 percent of Part A and Part B spending.

Hospital stays are paid on a fixed, diagnosis-related group (DRG) basis. Extended hospital stays or “outliers” are paid using hospital charges rather than true costs. A change in the outlier reimbursement could be used as a cost offset.

Medicare HSAs would generate savings to offset any added costs of modernizing Parts A and B. A 2009 study by the American Academy of Actuaries showed employer plans had 12-20 percent savings with HSA-eligible plans. About 9.2 million Medicare beneficiaries have Medigap plans to fill the gaps in current coverage. The proposed improvements would minimize the need for Medigap plans; the $200-$300 monthly Medigap premiums (totaling $22 billion to $33 billion) could be put into HSAs.

Expanding Medicare at a time when the debate is over how to reduce costs is difficult but doable. Sometimes doing the right thing is also good politics. The fastest growing bloc of voters in the country are baby boomers (78 million, or 10,000 per day) becoming eligible for Medicare. Tea Party members are 40-60 percent Medicare beneficiaries. Politicians have a chance to solidify this voting group by improving Medicare as it is being reformed.

Making improvements to Medicare, politicians can support increased personal security, lower costs, promote more private-market Medicare Advantage options and diminish the sale of Medigap plans – the worst health insurance buy on the market.

For a financially viable Medicare program, any reform needs broad public support. The problems are huge and intimidating. Boomers and generations beyond will demand a new model of Medicare that reflects their needs. Constructive honest discussions can persuade Americans past Medi-scare and toward creative solutions. Listen to Margaret Thatcher.

Ronald E. Bachman FSA, MAAA, is President and CEO of Healthcare Visions, Inc. and a Senior Fellow at the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. He is also a Senior Fellow at the Center for Health Transformation, the Wye River Group on Health and the National Center for Policy Analysis. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.