|BUSINESSWEEK ONLINE : OCTOBER 2, 2000 ISSUE|
Commentary: Who Has the Better Health-Care Plan?
By Laura D'Andrea Tyson
George W. Bush has proclaimed his intention to ''modernize Medicare for our times'' by building on the proposals of the Bipartisan Commission to Reform Medicare. I served on the commission, and like the Texas Governor and Republican Presidential candidate, I believe that despite Medicare's resounding success, it needs reforms. First, Medicare lacks prescription drug coverage, a regular feature of private health-insurance plans. Second, Medicare needs additional tools to encourage more competition and greater efficiency. And third, Medicare faces a long-run budget gap as a result of an aging population and escalating health-care costs. Unfortunately, the proposals crafted by the Medicare commission's leadership failed to solve these problems--which is why I voted against them and why I believe that Bush's Medicare reform plan misses the mark.
The governor's prescription, like the commission's, sounds better than it is. Both rely on private insurers to offer prescription drug coverage to Medicare beneficiaries and extol the advantages of competition and choice in a market-based approach. But private insurers have already said they are not interested in competing in this market, at least not at the modest subsidy levels currently proposed. Why not? Because of ''adverse selection.'' Insurers know that if they offer a prescription drug plan at a premium high enough to cover the cost of insuring the average Medicare beneficiary, only those most likely to incur large drug bills will buy the plan. Healthy beneficiaries who anticipate lower-than-average drug bills will not. For insurers, this is a disaster.
The answer is to offer a subsidy rate generous enough to encourage the majority of Medicare beneficiaries to purchase such coverage. According to government actuaries, a subsidy rate of about 50% of the premium price for all Medicare beneficiaries (which Vice-President Gore proposes) would achieve this outcome. The subsidies proposed by the Medicare commission and by Bush fall far short of the mark.
I believe that Medicare's efficiency can also be improved. But I don't share Governor Bush's view that the Medicare ''bureaucracy'' has been hazardous to the elderly's health. Before Medicare, more than half of the elderly were uninsured. And Medicare has performed as well as the private health-care system in controlling costs.
But the practice of medicine is changing, and Medicare needs to keep up. First, as both the Medicare commission and Gore recommend, current law must be changed to allow Medicare to use such efficiency-enhancing measures as competitive bidding, selective contracting with preferred providers, and disease-management techniques regularly used in the private marketplace. Providers will vociferously oppose such reforms, but they are essential for the Medicare system to remain competitive.
Second, the elderly should be able to choose between the traditional fee-for-service Medicare plan and competing private plans, and to pay lower premiums if they choose lower-cost plans. Competition among plans and greater price sensitivity among beneficiaries should strengthen incentives to contain costs. On this, the Medicare commission, Bush, and Gore agree.
WISHING AWAY. To succeed, however, all of the authorized plans must offer the same set of standard benefits. Otherwise, plans will be tempted to compete on coverage rather than on price, quality, and efficiency. Plans could offer additional benefits, but those who choose them would pay the higher premiums themselves. Second, for beneficiaries choosing to remain in traditional fee-for-service Medicare, premiums must not rise faster than current law allows. The traditional plan may be the only available option if HMOs continue to abandon the Medicare field. Those taking this option should not be penalized.
The Vice-President's plan meets both of these conditions, encouraging competition with appropriate safeguards. The governor's plan does not: His approach, like the commission's, could raise premium payments by 25% to 40% for the majority of beneficiaries who continue to choose the traditional Medicare program, forcing low-income beneficiaries into managed care.
Finally, both the Medicare commission and Bush dodge Medicare's long-term budgetary problem, while Gore addresses it head-on. Like the commission, Bush simply wishes away part of the problem by assuming that Medicare reform will generate substantial cost savings. And like the commission, Bush refuses to commit any of the non-Social Security surplus to Medicare's long-run solvency. In contrast, Gore proposes to set aside about $440 billion for this purpose over the next 10 years. For the real challenges confronting Medicare, the Vice-President's plan beats the governor's plan hands down.
Tyson, dean of the Haas School of Business, advises Vice-President Gore. She is an Economic Viewpoint columnist
NO, BUSH DOES
By Gail R. Wilensky
Medicare has succeeded in helping millions of seniors gain access to health care. It has brought security and dignity in retirement to over 80 million Americans since 1965. But despite its popularity, Medicare needs serious reform. Our attention has focused on the lack of coverage of outpatient prescription drugs in the traditional Medicare program, but there is more in Medicare that needs modernizing.
Medicare was modeled after the most popular insurance plans of the 1960s. That meant coverage for inpatient and outpatient hospital and physician care, but not for outpatient prescription drugs or catastrophic care. Today, this coverage is commonplace for working Americans. Medicare needs to be updated to reflect the best of insurance of today.
One of today's most popular programs is the Federal Employees Health Benefits Program, which covers some 9 million federal workers, retirees and members of Congress. More than 200 health plans participate. The federal government pays a fixed payment, reflecting a share of the average costs of the most popular plans. Once a year, people pick the plan that suits them best. The FEHBP was the model for reform preferred by 10 of the 17 commissioners on the Bipartisan Commission to Reform Medicare.
The federal employees' model is the basis for Governor George W. Bush's proposal for Medicare modernization. Under it, all plans participating in Medicare, including traditional Medicare, will have to offer a basic option that covers current Medicare benefits, plus an expanded option that includes outpatient prescription drugs and other benefits.
In Governor Bush's proposal, all plans will also provide a stop-loss of $6,000. As a result, all seniors will remain entitled to current Medicare benefits, have a choice of health plans that includes outpatient prescription drugs, and have catastrophic protection. Most important, any senior who wants to stay in traditional Medicare will be able to do so and still be able to choose a version that has prescription drug coverage.
Several concerns have been raised about Medicare modernization that follows the FEHBP model. Insurance companies have been vocal in their objections to proposals that rely on prescription drug-only plans. They worry about adverse selection, whereby only those Medicare beneficiaries ill enough to require high-priced drugs will pay expensive premiums and healthy seniors will not. Under the Bush proposal, all plans will offer a basic option and a comprehensive option that includes outpatient prescription drugs. This is a very different model and not one subject to adverse selection.
Some concern has also been raised that the traditional Medicare program will be priced out of the market because of adverse selection. The combination of continued efforts to improve risk adjustment and the stop-loss provision should mitigate this issue.
Governor Bush has proposed spending $110 billion for Medicare modernization to make sure there are adequate resources for the new prescription drug coverage and for the transition to a modernized Medicare program. This is in addition to the substantial savings that are expected to result from competition among health plans, savings that were also anticipated by government budget experts when the Medicare commission was modeling its efforts at reform.
The $110 billion will be used to cover the full cost of prescription drug coverage for seniors with incomes below 135% of poverty, some of the cost for seniors with incomes between 135% and 175% of poverty, and 25% of the cost for prescription drug coverage for seniors above 175% of poverty. It should cover the costs for catastrophic coverage for annual Medicare costs above $6,000 per senior.
Medicare modernization may take a few years to be legislated and implemented. In order to help low-income seniors and seniors facing catastrophic drug expenses now, Governor Bush proposes an immediate four-year, $48 billion program of direct support to the states beginning in 2001. Seniors below 135% of poverty receive prescription drug coverage for free, seniors between 135% and 175% of poverty receive a subsidy, and all drug costs above $6,000 annually for any senior are covered.
This election offers a clear choice of direction for Medicare reform. The Bush plan seeks to include prescription drug coverage in a modernized Medicare program that offers more choices to seniors. The focus of the Gore plan is a prescription drug program, specified by the government, administered by a government-granted monopoly entity, and offered to seniors on a one-time-only basis. Our seniors deserve better.
Wilensky, a fellow at Project HOPE, directed Medicare and Medicaid from 1990 to 1992 and advises George W. Bush
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