Competition in the Medicare Program

Committee on Finance, United States Senate

Policy analysts and politicians alike recognize the evolving demographic changes that mandate that reforms be made in our Medicare program that will assure that funding will always be available to ensure that health care need never be an issue for the retired and for those with long term disabilities. President Clinton and Senators Breaux and Frist have advanced plans that have been accepted as the nidus for reform. Both plans propose using competition between health plans as the primary mechanism to control health care costs. To limit the discussions to such a narrow concept of reform is a glaring logistical error.

Abundant health care resources in America

We really do need to step back and briefly absorb a panoramic perspective of the status of health care in America.

At 14% of the Gross Domestic Product of the wealthiest nation on earth, the amount that we already delegate to health care, we have available an enormous reserve of funds, the envy of the world. We already have far more funds in health care, per capita, than all other industrialized nations, nations which provide comprehensive care for everyone. The world is also envious of our infamous excess capacity in health care. With all of this wealth, and with this great capacity, we stand in shame before our fellow nations over the fact that we have not been able to utilize this great gift for the benefit of all of us. Unfortunately, by confining thought processes to health plan competition, more effective and beneficial alternatives are being ignored.

The committee is addressing the issue of controlling Medicare costs through health plan competition. The models before them threaten to reduce benefits offered to Medicare beneficiaries, merely for the purpose of preventing the inevitable increase in funding that will be necessary to assure comprehensive care for everyone enrolled in the Medicare program. The amount of additional funds that would be necessary to fund comprehensive care for all Medicare beneficiaries pales in comparison to the amount that we would need to provide similar benefits for the entire nation under our current health care structure. We need to admit that our current system is not capable of properly allocating our generous resources to provide optimum care for everyone. We need fundamental structural reform. In the best of economic times, from a perspective that has a limited amount of time on our side, it would be a tremendous error not to address the more global issue of funding comprehensive care for everyone.

Is health plan competition a rational approach to cost containment?

Competition in the marketplace is a well-accepted business theory of controlling prices. There is serious concern about whether this theory is applicable to competition between health care plans. In health care, the legitimate market is between patient-consumers, and the actual providers of health care, including physicians, hospitals, pharmacies, laboratories, and others. Health plans have interjected themselves as intermediaries and have assumed control of the health care marketplace. They dictate to patients and providers the terms of participating in the health care market. Whether health plans really compete with each other is in some doubt as they continue their march toward monopsonistic control of the market. The current Medicare proposals place the market health plans in competition with the traditional HCFA administered program. Although the traditional program is a high cost risk pool, since it includes a higher level of chronically ill individuals, the extra costs do not begin to offset the very high administrative costs characteristic of the private plans. In order to compete on price, the private plans, of necessity, will have to reduce the benefits available for their beneficiaries. Competition based on the ability to deprive patients of relief from suffering is not the direction in which we wish to be headed.

There are doubts about whether health plans will even be able to survive, considering their outrageous administrative costs and inefficiencies. Even now they are exiting some markets, and are shunning the same competitive models that the legislative proposals support. It would be a mistake to enact legislation that places health plans in control, only to see them exit the market once it is clear that they cannot compete. Then we could be left with a severely impaired Medicare program that might take much longer to rebuild than it would have taken to inflict the damage.

Medicare cannot be reformed as an isolated process. The health care delivery system does not isolate Medicare into a separate niche. Medicare services are delivered by the same system that delivers all health care services. As examples, changing Medicare influences cost shifting, structural design of health plans, business decisions of provider organizations that impact health care, funding of academic centers, and the viability of many sectors of the delivery system. Rather than changing our health care system to meet the political manipulations of Medicare, it would be far preferable to change our health care system into a rational, integrated system that can meet the health care needs of everyone, including Medicare beneficiaries.

The plight of the uninsured and under-insured is a much greater and more pressing problem than even the issue of assuring adequate funding of Medicare. These deficiencies are escalating in the best of times, and can only become more catastrophic at the next major downturn in our economy. The public will demand comprehensive reform. It is imperative that we abandon the view that Medicare is an isolated problem, and that we forthrightly move to rebuild our entire system to optimally serve all of us.

Modernizing the traditional functions of health plans

If health plans are not the actual delivery system of health care, then just what do they do? Traditionally, they have three functions, administration and marketing, risk pooling, and information management. Let’s look at these functions.

The functions of administration and marketing alone place into serious doubt the validity of nurturing health plans as the model for Medicare reform. The multiplicity of health care plans duplicates endlessly the administrative functions of a rational health care system. Most plans are careful to fund, first and foremost, their own administrative divisions, including the exorbitant executive compensation packages. Increasingly, venture capitalists and shareholders are drawing off more funds. Marketing, including advertising and duplicative contracting efforts directed at providers and at patient-consumers, draws off even more funds. Although health plans have been successful in attaining a one-time slowing of health care inflation by ratcheting down rates paid to providers, their own administrative costs have consumed much of those savings. In fact, the health plans themselves are the greatest inflationary element in health care today. The dollars that they are wasting should be re-directed to patient care.

Perhaps the most important traditional function of health plans is to pool risk, moderating costs such that health care remains affordable for all. Today, the behavior of health plans is to avoid risk, as they devise methods to pass risk on to patients, providers, and purchasers of health care. Perhaps the most egregious example of this behavior is their established pattern of utilizing marketing techniques to avoid enrolling higher risk individuals, even though they have been able to convince the purchasers of plans, especially the government, to fund them at levels that would cover this risk that they effectively avoid. In abandoning the function of risk pooling, health plans are providing almost no value for the outrageous amount of health care funds that they are consuming.

Information management is the key to modernizing Medicare, and, in fact, modernizing our entire health care system. At present, health plans limit information technology primarily to claims processing. Some attempt at quality assessment is being made, but this science is still in its infancy. We now have a tremendous potential for improvement of our health care system through the power of integrated information technology. Using encrypted electronic medical records as a substrate, we can coordinate care between all providers, reduce error, provide portability, and provide anonymous outcome data that can generate guidelines for improving allocation of our resources. Investigating outliers for excessive quantity, frequency or intensity of services can reduce fraud and abuse. If we are careful to be certain that the technological infrastructure is developed in the public domain, then vendors can provide these services economically, at cost with a fair profit. The alternative is to passively allow proprietary entities to continue with their current plans to monopolize the health care information technology industry for the purpose of creating mega-wealth. Such a model would only add on to our current defective system, diverting even more dollars away from patient care.

Some features of Medicare cannot be left to the market to be manipulated by a common business ethic that is designed to enhance shareholder value. Defined, comprehensive benefits are an essential element of Medicare. Allowing business interests to deprive beneficiaries of benefits merely because of goals of cost containment is not acceptable. Pharmaceuticals have become such an integral part of care that coverage is now mandated. Beneficiaries must also be protected against catastrophic losses and excessive out-of-pocket expenses that threaten affordability and access.

We need to re-visit risk pooling. Today, the funding of Medicare is irrational. We take the most expensive risk pool, the retired and those with disabilities, and we fund that pool primarily on the backs of wage earners, 44 million of whom cannot afford insurance for themselves or their families. We need to place all funds into one single risk pool, which includes everyone, and fund that risk pool in a fair and equitable manner, such that each pays their share, based on capability. This is really the only ethical and rational method of funding our health care system.

Our antiquated health plans, as we know them, should be eliminated. We should end the outrageous waste in administrative costs and marketing, and end the drain of health care dollars to passive investors that are providing no value in health care. We should establish a single risk pool, funded in a fair manner. We should replace the middleman insurance/managed care industry with a public, integrated information technology system.

Cost containment through global budgeting - redirecting dollars to patient care

Much of the reason for discussing competition amongst health plans has been for the purpose of containing costs through the market forces of competition. If we do not have competing health plans, then how can we contain costs? Simply, we can do it by utilizing global budgeting, combined with negotiated rates for providers, and budgeting of capital improvements. Budgets are often condemned as a mechanism of containing costs, yet every business, every household, and even every health plan uses budgets. There is no rational reason that our entire health care system cannot be funded through a budget. Most other industrialized nations have been successful in establishing universal health care coverage by utilizing some form of global budgeting, resource planning, and control of rates to hospitals and physicians. Providing comprehensive services to everyone, within the limits of a very modest budget that is characteristic of all other nations, occasionally stresses the system, resulting in some delays for elective services. The crucial difference in the United States is that our great wealth and our excess capacity in health care refute fears that universal coverage would result in unacceptable queues for care. In fact, just the opposite would occur for the 44 million uninsured that would no longer be subjected to the implicit, infinite queue that they now face. A publicly administered global budget would change the paradigm from a model of micro-management of clinical services to a model of macro-management of the funds used to pay for comprehensive services.

The moral imperative

We have enough resources to provide quality care for everyone. We have a very sick system that remains incapable of delivering those resources to patients. We need to restructure that system, converting it into an efficient, integrated entity, utilizing the great power of information technology. Demographic changes and aggressive market elements have created an element of urgency. We are long overdue for the development of the political will to enact health care reform that will finally enable us to say, quite honestly and with justifiable pride, “We have the finest health care system on earth.”

People who are sick will be allowed to die because it's best economically." - Alan Fogelman, Chair, UCLA Department of Medicine