CONTROLLING THE MEDICARE BUDGET—TIME TO FAST FORWARD TO 1999?

The Congressional Budget Office estimates that the government deficit will exceed one and a half trillion dollars this year, with federal health care annual expenditures expected to hit the trillion dollar mark by 2012. The largest federal health care program is, of course, Medicare, with costs projected to be close to $600 billion in 2012, and growing at around seven percent a year thereafter, although forecast to drop to a mere six percent annual increase if and when the Affordable Care Act is fully implemented.

Republicans and Democrats have each offered proposals to reduce projected Medicare expenditures, Republicans by shifting much of the cost of the program to beneficiaries, Democrats by passing responsibility to the already hobbled and politically endangered Independent Payment Advisory Board. Neither proposal has any realistic chance of passage.

Maybe it’s time to blow the cobwebs off the 1999 proposal from the National Bipartisan Commission on the Future of Medicare.

The Commission, co-chaired by Democratic Senator John Breaux and Republican Representative Bill Thomas, was created by Congress as part of the Balanced Budget Act of 1997, back when bipartisan cooperation was still sometimes possible. The Commission spent nine months examining Medicare’s program structure and costs and alternative approaches to reform, with the two co-chairs issuing their joint recommendation in March 1999. The co-chairs’ recommendation was, however, supported by only ten of the seventeen Commission members, one short of the number required for formal adoption, with the more liberal members generally opposed to the proposal’s cost control approach. Ironically—in the light of subsequent economic events—one key reason for the failure of the co-chairs’ proposal to gain more support was the booming economy of the later Clinton years, combined with the success of already enacted program changes dictated by the Balanced Budget Act.

Despite its failure to achieve the two-thirds majority needed for adoption, the 1999 proposal includes some recommendations that together look more practicable and potentially more politically acceptable than those of either Representative Ryan’s Republican plan or President Obama’s Democratic proposal:

1. Medicare would become a premium support program, with federal contributions of 88 percent of average premium cost (and with subsidies for low-income seniors) – Like Representative Ryan’s 2011 plan, the 1999 proposal recommended a voucher-type approach in order to encourage beneficiary cost-consciousness, but with considerably less of a potential financial burden on beneficiaries.

2. Traditional fee-for-service Medicare would remain as an option along with insurer offerings – Unlike the Ryan plan, the three-quarters of seniors enrolled in traditional Medicare would not be forced to switch to an insurance company plan. However, the FFS program would have to be self-funded and self-sustaining and meet the same requirements as private plans, including standards for actuarial soundness, adequacy of reserves, and performance capacity.

3. Medicare program administration would be transferred from HHS to a government-chartered Medicare Board, free of civil service restrictions – Key functions of the Board would include negotiation with health plans, risk adjustment, and premium collection and disbursement, but with the standard Medicare benefits still determined by Congress.

4. The traditional FFS program would have some power to contract with individual providers in order to control costs – Rather than a one-size-fits-all reimbursement approach, the FFS program would have some flexibility of payment methods and would be able to contract selectively in areas where otherwise it would be uncompetitive with insurance plans.

5. Parts A and B would be combined into a single program – With close to 95 percent of beneficiaries enrolled in both Part A and Part B, with the blurring of lines between inpatient and outpatient services, and with the recommended changes in funding, combining Parts A and B seems a logical step.

6. The Medicare eligibility age would be the same as for Social Security – As with Representative Ryan’s plan, the 1999 Commission saw increasing the eligibility age as a reasonable reflection of demographic trends. Tying Medicare eligibility age to Social Security would be a rational approach.

Could the 1999 proposal be the optimal solution for Medicare? Probably not, but with finding an approach that could gain enough votes to reduce the deficit increasingly urgent, it seems more realistic than the recent political offerings, provided steps are also taken to minimize cost-shifting to the non-Medicare market.

The Bipartisan Commission’s proposed average 12 percent beneficiary contribution (roughly equal to today’s Part B premium) would not result in immediate federal savings. However, as the experience of the Federal Employees Health Benefit Plan and state employee plans like California’s CalPERS has shown, a premium support model can result in much greater consumer awareness of coverage cost, without imposing undue financial burdens on beneficiaries. Retaining the traditional FFS Medicare program as an option, but with real price competition with—and between—private plans, would alleviate many seniors’ concerns, while forcing both the private Medicare insurers and the government plan to press their providers to be more cost-effective.

How far could such an approach go towards reducing the deficit and enhancing the financial viability of Medicare? The 1999 Bipartisan Commission’s staff analysis estimated that it would reduce the growth of Medicare spending by approximately 1 percent a year, once fully implemented, or—based on current CMS projections—some $60 billion annually. Given that the 1999 projection was made at a time when Medicare growth was slowing significantly, a new cost analysis might show a bigger potential reduction, while a slightly higher beneficiary contribution would obviously increase the federal savings. What’s needed now is to do that updated analysis—preferably without the pressures of partisan politics—in the hope of finding an acceptable bipartisan solution, before the deficit crisis dictates a more desperate and draconian approach.