A One-Line Fix For Medicare Spending

My one-line Medicare / Medicaid spending fix:

Medicare should continue to pay 80% of health care costs for recipients’ care below $40,000 per calendar year, but should pay only 50% of health care costs above $40,000 per calendar year.

With the ongoing debt-ceiling debate and political discussions over how to cut spending dominating discourse, I thought I’d chime in with a simple plan to fix America’s long term budget crisis. The majority of America’s future budget deficits are a result of runaway growth in health care spending, despite reductions in Medicare spending put in place with the recently passed health care reform. Paul Ryan and other conservatives propose to fix this by ending the Medicare program, and replacing it with an insurance-voucher scheme. President Obama proposes to control cost growth through the IPAB, a board with the power to control Medicare reimbursement policies.

My plan is far simpler than either, and will preserve Medicare as it exists today for 90% of recipients. How does this plan work? Kaiser Foundation research shows that 90% of Medicare recipients receive less than 40k per year in health care. The remaining 10% of recipients actually spend 60% of the Medicare budget. The proposed change would require these recipients to either shoulder more of the cost of expensive treatments, or to utilize less expensive treatments. Note that Medicare would not leave any recipient high-and-dry, but it would require even cost sharing for expensive treatments.

When faced with higher cost-sharing, many Medicare recipients would opt not to receive the newest cancer drugs, or the latest titanium hip replacement. It’s also quite likely that when faced with this two tier reimbursement structure, many health care providers would change treatments and pricing to stay competitive within the new structure – there’s evidence that today, health care providers charge Medicare what they do simply because Medicare will pay.

How much money would the proposed change save? Assuming that most spending above the $40k mark is eliminated [1], then Medicare and Medicaid might save $200B in the first year alone. This kind of change would also reduce health care cost inflation, since high-cost care would be curtailed significantly. It’s quite likely that this change would completely eliminate Medicare’s unfunded liability, without changing the program significantly for the majority of beneficiaries. But clearly this is too simple and non-ideological a change to stand a chance [2]!

[1] According to CMS, in 2011 total Medicare and Medicaid spending will total $1 Trillion. If my proposal to cut government cost sharing to 50% above 40k eliminated most spending above the 40k line (since many Medicare patients would not be able to pay their increased share above 40k), then the federal government would save half of the money expended above the 40k line. In 2006 the average expenditure for the high spenders in Medicare was $48k – in 2011 this would likely be over $60k per year with inflation and cost growth totaling 5% per year. Assume that the entire 20k per year above the 40 line were saved from using a resume builder online – that would mean that the high spenders’ health care expenditures would be reduced by 33%, reducing total government health care expenditure by 20% (one-third of the 60% spend on these expensive patients).

[2] I should note that this plan would leave some patients with expensive conditions to make difficult choices. By ending the endless spigot of government health care money, 10% of current beneficiaries would have to decide whether they could afford to have certain expensive procedures. But patients, not regulators, would be able to decide – the patients would simply be required to pay an even share for expensive treatment.

[3] In actual implementation, such a plan would have to be phased in. For instance, Medicare could initiate a 1 percentage point reduction in cost-sharing for each of the next thirty years, gradually moving from 80% to 50% for expenditures over the threshold.

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13 Comments »

  1. Awesome idea. I have thought about ways to hold the costs… how about:

    Decide how much the nation should spend on healthcare. Now it’s over $2.5 trillion per year. I say, $2 trillion is more than enough.

    Single payer system. Yes, the government. Use some triage system run by medical personnel. The goal is the most healthy possible population for that expenditure. All vaccinations and routine emergency care would be covered… but some things, like quadruple bypasses for 95 year olds may not be covered.

    In a nutshell, that’s it. Big paperwork reduction, life would be better for so many. But YES, “death panels” would be there, though I’d rather have a doctor on my death panel than an insurance company.

    Your idea sounds like it would be much more likely to be accepted… :^)

  2. The problem is that Emergency Rooms are obligated to provide care, regardless of ability to pay. Your plan would deny primary and preventative care to some people, those who had already spent over their cap, which would make them sicker. They would just end up in the ER needing emergency treatment for problems that could have been managed more cost effectively by their primary care doctor. In the short run, your plan saves money, in the long run it would just contribute to cost inflation and hurt everyone else in the system.

    The only way to stop the cost spiral is to either make ERs deny care to those who can’t pay (which I would argue is morally repugnant) or treat diseases in a more cost-efficient manner, which involves getting people into doctors before their condition is critical.

    • Colin, thanks for the comment.

      To begin with, only 10% of Medicare/Medicaid patients fall above the line I’m proposing (it’s not a cap because it just increases cost sharing).

      One of the things that would happen under this proposal is that treatments that are blatantly over the line (like 100k+ cancer drugs) would never even make the cut. More cost-effective treatments would thus be forced by the limitation imposed. That’s actually reducing what providers get at the top of the scale, which is a huge part of the cost savings. The other big part of the cost savings is forcing individuals to think twice before getting expensive care.

      Now, there’s actually an easy fix for the issue that you raise – that patients would hit the limit and have no access to even primary care. Instead of a calendar year based cap, consider a rolling cap that says Medicare will cover 80% of your care up to 40k over the last 365 days, and 50% above that.

      In this instance, even once you hit the cap, you’ll avail yourself to 40k / 365 = $110 worth of additional care under “old” Medicare reimbursement rates every day. This would enable even the sickest, most expensive patient to receive 80% reimbursed care up to $110 per day, which effectively covers the issue you raised.

      There is another issue – what about the indigent patient stuck in the ICU for months, burning past 40k? If the hospital bill is $1000 per day, what to do then? Here we should remember that even above 40k, Medicare would pay 50%. The provider would be expected to either charge the patient or write off the rest. This provides an incentive for provider efficiency. Even in today’s world, hospitals routinely write off the last 20% that they can’t collect from Medicare patients (that lack Medigap or Medicare Advantage).

  3. Dan Abrams said

    That seems like a pretty arbitrary income to draw the line at but the idea makes sense.

  4. TheTracker said

    “To begin with, only 10% of Medicare/Medicaid patients fall above the line I’m proposing (it’s not a cap because it just increases cost sharing).”

    10% per year. What percent hit that number at least once in their lives? Many more, I would think. So you’re hurting a lot more people than you think.

    So we add costs for Medicare patients. How many people already go bankrupt due to heath care costs? Many. It’s second only to losing your job as a cause of personal bankruptcy.

    “The provider would be expected to either charge the patient or write off the rest.”

    Leaving us with the same system we have now; massive amounts of uncompensated care, more providers refusing Medicare patients; providers ordering expensive defensive work-ups because whomever is getting the bills, or even if no one is, they can still be sued for failing to meet the standard of care.

    Just squeezing people harder is not going to solve the problem of waste in the healthcare system, which has deep roots in the structure of that system and the way we pay for it.

    I suggest you look at how NICE works in the UK. That’s a slightly more complex but vastly more useful way to cut healthcare costs: don’t pay for stuff that doesn’t work, and don’t pay huge amounts of money for stuff that only helps a little. Take a look at it.

    If you’re interested in this issue, you might also want to Google “fee-for-service model in healthcare” and contrast it with systems like the VA and Kaiser Permanente that get away from fee for service.

    • TheTracker, the plan I propose is actually very similar to NICE’s QALY-based model, but adapted in a simple way to fit our existing Medicare system.

      NICE rations care by simply declining to pay for any service that is not sufficiently cost-effective. This plan is similar – but it simply explicitly states the annual cost line. As mentioned in a comment above, you could set the limit such that once a patient hits it, they still avail themselves of new money on a daily basis (use a 365 day rolling window to count expenses instead of a calendar year).

      I’d be perfectly happy to see all government health care programs begin overt rationing using a NICE-style system. But it’s clear that US politics won’t allow it for the moment. Then again, they won’t allow hard cost ceilings like this proposal either…

      • Susan said

        The problem is that “simpler” isn’t better. As has been noted, your plan would dump costs on providers and leave patients not with “difficult choices” to make, but in many cases with effectively no care at all. It doesn’t matter if it’s a calendar year or a rolling year, you are still telling people that unless they can come up with half of the money, they’re screwed. Many seniors live on a few hundred dollars a month and simply do not have access to hundreds or thousands of dollars to pay for care, so they would just be left to suffer and die… or end up, once again, in the ER where the costs would be dumped on the hospital.

        That is nothing like not paying for services that aren’t cost effective, and it won’t do very much to stop them from being given. A large percentage of the time when someone is running up big medical bills, they are laid out flat in the hospital with no ability to comprehend or decide anything, and frequently with no idea at all of what’s being done to or for them, since they’re unconscious. There’s no competition, and no decision making on the part of the patient. The patient got there in an ambulance, and where was determined by what ER was closest and open, nothing else. The patient’s family is in an emotional state and doesn’t want to refuse anything and “kill” their loved one. Even a conscious patient dealing with an oncologist has actually very little to say about the drugs and treatments selected, except to refuse them and thus refuse treatments. Not to mention that anyone in that situation is frightened half to death and unable to think clearly.

        Medicare can and should eliminate payments for treatments that don’t work or that are not sufficiently beneficial to justify the cost. Also, things like ICU and repeat hospitalizations from nursing homes are a problem. Those can and should be addressed. People should be required to have Advance Care Directives in place when on Medicare, because a lot of what gets done to people that costs so much, would never be done if they had an advance care directive in place.

        One option might be to have people purchase additional insurance, similar to medigap, that would cover higher dollar treatments, spending a few weeks in ICU, and whatever else goes beyond the norm. Then those who want everything possible to be done can pay the cost and those that don’t or don’t have the resources can still recieve appropriate, cost effective care.

        Or we could lift the contribution cap and fix it that way.

      • Susan, great comment. It’s definitely important and true that many patients don’t have control over their treatment choices. It is important to note, however, that the current system imposes 20% cost sharing on seniors, and so this represents simply greater cost-sharing – not a fundamental change in the system.

        I originally posted this as a way of exploring a potential simple fix to Medicare. But in reality, what would I like to see? I’d love to see Medicare (and the US overall) move to provide everyone with a baseline health care plan with a QALY of perhaps 40k per year. Everything above that would be optional at the patient’s discretion, covered by optional private insurance or cash if they could afford it.

        Though Dr. Rich and I see eye-to-eye on little else these days, I still support the open rationing approach that he describes at his blog covertrationingblog.com – it’s a worthwhile read for anyone interested in this topic.

  5. You Don't Want to Know said

    Implement this approach and you truly will be creating “death panels.” Medicare costs rise with age, and for nearly all beneficiaries, their most expensive year is their last one. Typically, that year is also one during which people have the least money to pay for care. Do we just cut them off and let them die?

    • If you look at the proposal closely, I didn’t propose no further Medicare spending on a patient once they hit a defined cap. I proposed increasing cost sharing to 50/50 from 80/20.

      If 50/50 cost-sharing is a death panel, you have to argue that the existing 80/20 sharing is a death panel as well. In reality, increased cost sharing simply forces patients and providers to look at cost effectiveness more closely. This is effectively just a reimbursement change bringing Medicare reimbursements roughly down to Medicaid levels once a certain threshold is crossed. Last I checked, no one was accusing Medicaid of death panels.

      In practice, some seniors might choose to buy supplemental insurance which filled this gap, and they would be forced to pay higher premiums for better coverage. That’s a great result – it means that the government will continue to offer a solid baseline of coverage for all seniors, while maintaining the solvency of Medicare.

  6. Jason said

    wouldn’t a ton of people try to sched major surgery on dec 31st? To try and cover more costs for the surgery and subsequent care i.e. bypass surgery on the 31st and room and board etc…in the beginning of the next calendar year.

  7. Jerry said

    As a 70 YO, I have had health isurance from an employer since 1961 with monthly costs as low as $25/month (in ’66) to over $1200/month I pay today.
    Being a realist, I know that I will be denied many things from the medical community before I pass. As said by Mr. McGuire, it may be a quadruple bypass when I’m 95 or maybe a new knee at 80. But whatever comes my way, I’ll perservere. If I can’t get a knee, I’ll get a scooter, preferably with a horn on it.
    I am still walking 1/2 marathons and I owe my good health to the greatest health care system in the world. The costs suck, but so does dieing!
    For everyone who is still younger than me, please exercise, eat right and keep preventive medicine as a priority.
    Because, you too will be 70 or 80 or even 95 some day and then you can enjoy having a 35 YO Dr tell you that “you ain’t gettin’ no knee” because you are too old.
    Live really is good but it would be better if I could get more than 8 blue pills a month.

  8. Jonathan G Fisher said

    It’s true a small % of recepients are the high cost users. Your quote of 10% users to 80% of the costs sounds right.
    However, a significant number of these high cost users are mentally ill, developmentally disabled, or permanently physically disabled persons with multiple health issues. Asking them to pay 50% of their care is not going to make it happen. They don’t have any revenue to do that.

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