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Contact Us Spring 2001; Volume 2, Number 1
Features: Medicare Symposium
The Medicare Menace
Harry Cain, Ph.D.
page 1 | page 2 | endnotes

It is hard to imagine a stronger defense of the Medicare program than that offered by Bruce Vladeck in his paper, "Medicare Works." Vladeck brings to the subject an extensive knowledge of and experience with the program, an articulate writing ability, and the passion of a true believer. He is a "publichizer" of the first order [1].

Moreover, one has to agree with Vladeck's view that Medicare has been of huge benefit to America's senior citizens, and to their sons and daughters. For millions of them it has been literally a lifesaver, as well as major financial relief. Medicare has also been, especially in its first two decades, a boon to American hospitals and physicians, helping them on to great prosperity.

One must also agree that America's private market in health care today is struggling; healthcare costs have begun to rise again faster than the CPI; there are mergers, acquisitions, company failures, and political outcries over "managed care" everywhere; a third of the 160 million Americans covered by employer-based plans have no choice of coverage type; 42 million are not covered by insurance at all. There certainly is "friction." Most of the industry is trying to acquire the discipline of a market - for the first time - and it is neither a pretty sight nor a heartwarming experience [2].

Nonetheless, in my view, Medicare as currently operating is a menace to the future of health care in this country. My basic argument is two-fold:

  1. Only a market system (a regulated market system) based on price competition, can possibly foster enough innovation, efficiency, and responsiveness to keep our enormously complex healthcare industry evolving to the point where high quality service is available and reasonably affordable for all [3].
  2. While a very strong regulatory role for the government is required to set the framework for the healthcare market, and to assure that the market serves everyone, the current Medicare program is not only going in the wrong direction, it is harmful to the entire healthcare industry. Someday soon it will become injurious to the U.S. economy. To put it bluntly, Medicare now promotes price distortions throughout the industry, degradations of healthcare service, cheating, bounty hunting, abuses of governmental power, physician despair, mistrust of government, public ignorance, and consumer dependence.

Unduly harsh and intemperate words? I would have thought so, a few years ago. Now, you be the judge. And bear in mind that, contrary to Vladeck's assertion, there are better ways to do this job. The example he dismisses, the Federal Employees Health Benefits Program (FEHBP), serves millions of Americans who are also dependent on the Federal government for their healthcare benefits, and has outperformed Medicare every which way. The two programs are designed very differently, and none of the criticisms of Medicare listed below can also be made of the FEHBP. But that is another subject, which has been addressed elsewhere [4]. Here the focus is on what is wrong with Medicare - not this or that Medicare policy, but the total structure.

A Bill Of Particulars

Before getting to the central argument, some of the facts that Vladeck cites in Medicare's behalf cry out for more discussion. My favorite five are these:

  1. "Medicare pays its bills." It would be more accurate to say that Medicare pays what it decides its bills should be. The size and governmental power of Medicare allow it to act as a monopsonist, and it does so. In its early days Medicare paid fee-for-service charges (for doctor services) and reasonable costs (for hospital services), as did most of the private sector at that time. Not surprisingly, doctors and hospitals began to take advantage of such largesse, and total costs got out of hand. With a long series of regulatory changes, the government dramatically changed its approach. Now it tells the providers how they will calculate their bills to the government, what part the government will pay, and what part others will or will not pay, in enormous detail.
  2. The Medicare payment formulas now used by the government, Vladeck admits, are "widely derided for their length, mathematical complexity and obscurity. Yet they are literally indispensable." I agree with that, given the structure of the Medicare program, but I think Vladeck greatly underestimates the harm they cause.

For the uninitiated, note that the Medicare rules and regulations make the IRS code look concise and harmless. The Medicare "code" is many times the length of the IRS', and arguably even more complex (as impossible as that sounds). As Vladeck himIself noted, when describing 1997 Medicare amendments in which Congress tried to adjust payment formulas to help both rural areas and urban teaching hospitals, "the result was, in essence, a series of simultaneous equations that could not be solved [5]".

The complexity and obscurity of the Medicare payment rules have become a nightmare for most providers, not because accurate calculations are so difficult, but because mistakes are now routinely defined by government investigators as "non-compliance" subject to civil and criminal penalties for "false claims" (pay treble damages). Many Congressmen are fond of claiming that the major cost problems of Medicare are due to "fraud and abuse" (a truly ignorant claim - and self-serving, for it deflects attention from Congress' role in the Medicare debacle). Therefore, in a serious effort to check the rapid growth of Medicare spending, the government has funded major increases in the investigative agencies.

More troublingly, the investigative agencies are now allowed by law to keep part of whatever monetary penalties they extract from their prey, in order to expand their investigative activities. In the West, that is referred to as "bounty-hunting." (And I'm not even getting into the new law that offers bounties to patients for turning in their physicians if any potentially fraudulent activity might be uncovered [6]).

Once caught in the "false claims" web (and remember, the rules are so complicated that literally everyone associated with the program is at risk of being snagged) there are huge incentives to settle with the government out of court, even if one feels totally blameless and innocent: the cost (money and time) and risk (bankrupting fines if the judgment goes against you) are so high that prudence argues against challenging the government investigators in a court case.

Under these circumstances, as one might guess, the bounty hunters are having a field day. Providers are having to eat the high costs of hiring the expertise needed to try to assure compliance, and many, especially physicians in smaller practices, are just having nightmares. The level of provider antipathy toward Medicare - what often comes across as genuine hatred, especially in the western part of the country - is now reaching dangerous heights. At some point, I believe, physicians by the droves are going to say, "Enough!" (though perhaps not in the northeast, where abuses of governmental power seem to be better tolerated [7]). The critical point here, I believe, is that these governmental actions are not simply unfortunate aberrations that should be stopped or moderated. They are natural consequences of Medicare's design. "It must follow as the night the day," as Shakespeare might have muttered.

  1. Another argument Vladeck offers in defense of Medicare's complicated payment rules is that private sector payers, such as the Blue Cross Plans, now use them, indeed "rely heavily on them." I would argue that private payers who did not use those rules would be stupid. If the biggest payer in the world sets out payment rules for all the providers, rules designed to minimize the bill as much as possible, and then requires all the providers to comply, by law, or go to jail, why wouldn't the smaller payers take advantage of that? They would, and they do. That does not make it good for the healthcare economy.
  2. Under "Medicare and the Public Good" Vladeck argues that one of Medicare's benefits is the tremendous amount of otherwise unavailable information and data it provides to researchers and others trying to understand the industry. No argument there, but do we need a huge, government-run health insurance program to do that? Somehow the Securities and Exchange Commission makes available tons of information on all publicly traded companies, information on which millions of Americans make their investment decisions.
  3. Vladeck asserts, "Medicare beneficiaries, unlike a growing proportion of other Americans, are highly satisfied with their health insurance." Well, that depends on how you phrase the question. Do they understand the governmental power behind Medicare, and how it works, and what rules their doctors have to live with? No (and to this point, who cares?) Do they like being able to go to any doctor they like (good, bad or indifferent)? Absolutely. Do they like not having prescription drug coverage? No. Do they like not having an out-of-pocket cap on catastrophic expenses? No. Does Medicare+Choice look good to them? Not any more. Do they like to have to buy supplemental insurance to fill in gaps in Medicare, as two thirds of them do? No. Would they prefer having Medicare to nothing at all? Be serious.
What's Really Wrong with Medicare?

The real menace of Medicare lies in the combination of the size of Medicare, backed by the power of government, and its design, with the decision-making structure that flows therefrom.

The size and power of Medicare are such as to easily distort the healthcare marketplace, the consequences of which will ultimately be harmful to everyone. By size and power I refer particularly to:

  • The population covered. While numerically the Medicare population is less than 15% of the U.S. population, its need for and use of health care is nearly equal to all the rest of the population combined; soon, in this regard, Medicare beneficiaries will outweigh everybody else combined.
  • The providers covered. At least 90% of the providers (hospitals, doctors, home health agencies, etc.) have essentially no option. They must participate or starve (or leave the industry).
  • Dollars spent. In any and every community, Medicare is many times larger than the next largest buyer. The annual aggregate Medicare expenditure now exceeds a quarter of a trillion dollars.

page 1 | page 2 | endnotes
Spring 2001, Volume 2, Number 1
Table of Contents
Editor's Note
Features: Medicare Symposium
Features: Interviews
Features: Health Care for the Elderly
Health Highlights
In Focus

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