When President Obama says he wants to overhaul the health care system and provide coverage for 46 million uninsured Americans, he surely hasn't forgotten the grim reality that Medicare, Lyndon Johnson's program that provides medical coverage at government expense to 45.2 million Americans 65 years and older, is now--or soon will be--bankrupt. The two issues are politically intertwined.
According to the 2009 Annual Reports of the Social Security and Medicare Boards of Trustees, "Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues." This was also the case in 2008. The growing deficits in the HI components of the Medicare package are expected to exhaust reserves in the next eight years.
The HI Trust Fund also does not meet the Trustees' "short-range" test of financial adequacy, the ratio between Trust Fund assets at the beginning of the year and projected costs for that year. Its trust fund ratio is expected to fall below 100% in 2011 with assets being exhausted by 2017, two years earlier than previously reported. The drawdown in reserves will put increasing pressure on the federal budget. The only way out, the report says, is to contain spiraling health care costs--and the sooner the better.
Medicare looked like a much better bet to the 1965 domestic advisers of Lyndon Johnson than it proved to be. In 1965, the average life expectancy for American men was 66.8, for women 73.8. Today, the comparable figure is 75.42 for men and 81.28 for women. Medical procedures were simple and relatively inexpensive. In 1965, there was none of the expensive MRI machines, robotics, CAT scans, angioplasty, bone marrow transplants or microsurgery techniques that came with later advances in science and technology.
The program that LBJ bulldozed through Congress removed government from the rate-fixing business--likely to assuage fears that we were entering an era of socialized medicine. Doctors could fix their own fees so long as they were "reasonable, customary and prevailing," and hospitals could charge for their services on a cost-plus basis.
Seemed pretty straightforward at the time, except that anyone who has ever had his or her kitchen redone knows that cost-plus is the most expensive way to go: It offers the contractor incentive to jack up the cost to drive up the profit. The economic inflation of the 1970s soon escalated hospital and doctors' bills, which vary widely from place to place, to new unprecedented levels.
The crying shame is that medical insurance premiums, unlike all other forms of insurance, are not sufficiently geared to risk. I pay more for fire insurance than my neighbor because he has a hydrant closer to his house. He pays more for automobile insurance because he has had two accidents and four moving violations. We both pay the same health insurance premium, although he is obese, smokes, drinks excessively, doesn't exercise and skips his annual physical. Health insurance premiums are not related to age, life-style family history of disease or any of the factors that can predict more costly, and highly preventable, medical treatment.
When LBJ asked for new modes of payment and warned that annual costs would soar to $100 billion by 1975, Congress rejected the projection as exaggerated. In fact, the Medicare number for 1975 came to $133 billion. Today, the annual cost comes to over $440 billion, which is roughly 3.2% of gross domestic product and 16% of all federal spending.
We cannot borrow our way out of this problem. Burgeoning deficits inflated by the trillion dollar cost of the Iraq war and the proposed stimulus program have alone made us a debtor nation with most of our debt held by China, Russia and various Middle Eastern countries that may have no particular reason to mean us well.
So how do we solve the problem? I have a few favorites--born not out of political ideology or anger, but merely a desire to help the debate:
--Insurers must require an annual physical during which doctors will elaborate preventive health measures such as exercise, weight loss and sensible diet. For failure to comply, premiums will increase incrementally each year so that those who want to gamble with their health will pay the bill for their recklessness.
--President Obama, in an Aug. 16 New York Times op-ed, said he wants to "finally bring skyrocketing health care costs under control" by cutting "hundreds of billions of dollars in waste and inefficiency in ... Medicare and Medicaid." He should promptly do so.
-- To accomplish a uniform national rule, health insurers should be regulated by the federal government--not the states where regulators are notoriously weak and ineffectual.
--A government-sponsored insurance coverage for all Americans in competition with private insurers is the order of the day. Competition is the only way to keep premiums in harness. To say, "We have to keep government out of the healthcare business." is as ridiculous as saying as someone did at a recent town meeting, "We have to keep the government out of Medicare." Government is already in the healthcare business up to its eyeballs. And, again, premiums must be geared to evaluation of individual health risk.
--The government should reinsure much of its health care risk under Medicare and Medicaid with the private sector. These arrangements are standard in the insurance industry, with the government keeping some of the premium and giving up the rest along with the liability for coverage.
--Medicare should drop the cost-plus method of paying hospitals. Instead, there should be devised a number of "carrots and sticks" designed to spur efficiency. For example, as is the case with many hospitals, negotiated fixed fees should be geared to the nature of the service--not to the cost or duration of stay. Thus, the hospital's fee for an appendectomy should be the same whether the patient spends two days or two weeks in the hospital, and should not depend on how the hospital allocates its cost to the patient's treatment. This will give the hospital the economic incentive to discharge the patient as soon as is medically feasible, rather than the present system where the hospital has the incentive to increase the fee by expanding the services. .
--Doctors and hospitals should be disincentivized from ordering unnecessary or inappropriate tests. A doctor and patient enjoy a relationship of trust and confidence, so a doctor should be required to disclose her ownership interest in the MRI machine, the CAT scan or the testing laboratory to which she refers the patient.
--"Death panels" are now off (or were never on) the table. But there is a place for independent peer group panels to monitor exotic or unusually expensive tests or advanced procedures offered in many of hospitals that need to recover their investment in high-cost technologies.. The determination of such a panel could be made binding and conclusive in a malpractice action charging the doctor with failure to administer a test or perform a procedure.
--There is a hysterical cry among doctors and insurers for tort reform. Sensible tort reform, including possible caps on recovery for non-economic injury, may prevent irrational and excessive medical malpractice awards, but it is unclear how much money this will save.
--Medical malpractice insurance premiums should be regulated by the federal government. This way premiums will coincide with the true risk in a specific region, rather than the greatest "horror story" in an outlying state.
--Launch a massive public health campaign. Educate the public about the dangers of obesity, smoking and excessive indulgence in alcohol, the benefits of exercise, the elements of a healthy diet and strategies for dealing with stress.
There may be other measures to deal with crippling hospital costs, such as expansion of tax-advantaged MSA accounts. But prevention must be the piece de la resistance. When Tiger Woods was asked, "What is the best way to get out of the rough," he replied, "Don't get in there in the first place."
Originally posted on Forbes.com on August 20, 2009