Going to the supermarket with my mother was always a test of patience. She would carefully examine the produce, looking for defects that only she could see to make sure that she found the best head of lettuce or bunch of carrots. If they were too expensive, she put them back.
She was a careful shopper when it came to items that cost a few dollars. It is not very likely that she would be less careful if the price was much higher. Yet that is what the latest study of Medicare reform seems to imply.
The Kaiser Family Foundation published a report this week showing that 59 percent of Medicare beneficiaries—25 million people—would pay more to remain in their current health plan if a premium support system was fully implemented. This matters because premium support is the reform advanced by presidential candidate Mitt Romney and his running mate Paul Ryan, and we are three weeks from the election. The headline suggests that Mom would stick with her expensive plan even though plans are available that offer the same benefits for much less.
There is bipartisan agreement that Medicare needs work. The program’s spending is growing much faster than the country’s ability to pay for it, and the money that is being spent is often wasted and fails to deliver high value health care. (That’s not a Republican idea; Donald Berwick, who recently stepped down as the administrator of the Medicare program, has said the same thing.)
The traditional Medicare program that most seniors choose pays more when health care providers deliver more services, essentially without limit. That’s a major reason for an explosion in medical imaging (including X- rays and CT scans) in recent years, and it has driven up the growth of overall Medicare spending.
Premium support would place a limit on Medicare spending and let seniors decide whether the traditional Medicare plan or a private health plan would be a better buy. They would continue to receive all of their Medicare benefits no matter what plan they chose. Seniors would pay more if they chose an expensive plan, but that would be their decision.
The Kaiser report emphasizes a worst-case scenario. To reach their conclusion, the authors assume that no beneficiary would change health plans even if a less expensive option would save them hundreds of dollars a month.
But Mom wouldn’t buy tomatoes that were too expensive. She wouldn’t buy health insurance that was too expensive either, if she had a choice. The study authors recognize that, and show that if a quarter of seniors shifted to a less expensive plan about 35 percent of beneficiaries would pay higher premiums to remain with their current plan. A less dramatic number, but one that is more consistent with reality.
Is that the best premium support can do? Fortunately, no.
Health plans and providers would also respond to the shift to premium support. Knowing that the government was no longer paying an unlimited subsidy, they would compete for customers by cutting out waste, getting smarter about how to provide the right care at the right time, and reducing premiums.
The Kaiser study reports that when the cost of health plans falls, more beneficiaries have to pay more, not less. They assume that plans under premium support will find a way to save 5 percent, a modest amount compared to the 30 percent of health spending that the Institute of Medicine says is squandered every year. But the study shows that if costs drop 25 percent, then 93 percent of Medicare beneficiaries would pay more—and the extra payment would be much greater than before.
Yes, you read that right. Lower health plan costs would increase what Medicare beneficiaries have to pay—but only if they insist on paying more for the same benefits that are offered less expensively elsewhere.
The reason is simple. The Kaiser study does not show what sensible seniors could save if they simply follow their supermarket instincts and select the best deal. The study shows how much seniors would lose if they keep their old plan in the face of much better options. My Mom isn’t that dumb.
What about health plans? Can we really expect them to find much more than 5 percent of unnecessary spending to cut out?
There is reason to be optimistic. Consider how dramatically inpatient care changed in the 1980s when Medicare changed the way it paid hospitals. By shifting from paying hospitals their cost plus a margin to a fixed payment, hospitals no longer had an incentive to provide unnecessary services. Hospital stays plummeted, since an extra day was now an extra cost. No more being admitted on a Friday and waiting until Monday for a test or procedure.
It is clear that premium support will create even larger incentives to cut waste and improve cost-efficiency. That could result in nearly all plans offering lower bids than we see today, and the differences could be substantial. That means savings for the Mom’s of America, and savings for their children who are stuck with the tax bill.