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.

Do Doctors Really Lose Money on Medicare?

The media often reports that doctors are dropping Medicare patients because they are “losing money on Medicare.” Given the vagaries of the Medicare fee-setting process, it’s definitely the case that certain medical procedures are under-reimbursed, and that others are over-reimbursed, creating winners and losers within the medical profession. More generally, do doctors really lose money by simply seeing a Medicare patient for an office visit? This American College of Physicians blog post claims that is the case.

It’s possible to perform some simple calculations to check the veracity of this claim. Assume that a doctor sees 16 patients a day for half an hour each, for 8 hours of patient time per day. With two hours of overtime work that makes for a 10 hour day, or 50 hours per week. That’s busy, but not an uncommon workweek for many professionals in the US. If the physician works 48 weeks per year, 5 days a week, that’s a potential 3840 patient visits a year. Assuming a 10% vacancy rate in appointments, whether due to cancellations, additional vacation, or otherwise, this leaves 3456 appointments per year.

Medicare reimburses office visits at around $85 per visit [1], though precise reimbursements vary by region. At $85 per visit, a primary care physician seeing nothing but Medicare patients could expect to receive $293,760 in annual reimbursements. Subtracting out the physician’s annual overhead provides an estimate of the physician’s salary. According to this physicians’ overhead spreadsheet, 50% is a good target for a primary care physician’s overhead. Overhead cannot fall below 100-150k for most physicians, as many expenses are fixed. This would leave our example physician with net income of roughly $147,000 annually.

This isn’t a terrible income, as it’s more than triple the average American income, but it is slightly less than primary care physicians’ average pay nationwide. These numbers do show conclusively that it is possible for a family practice physician to make a living on Medicare patients alone!

While Medicare reimbursements may be sufficient for a primary care physician to make ends meet, what is the situation with Medicaid reimbursements? Medicaid pays significantly less than Medicare, with reimbursements averaging roughly 60% of Medicare. This implies that Medicaid would pay less than $50 for an office visit. If our example doctor saw only Medicaid patients, they would gross $172,800 in annual reimbursements. Unfortunately, overhead costs tend to be fixed, so the doctor would still have around $147,000 in overhead, leaving a net income of only $26,000! This helps explain why only 40% of doctors nationwide will accept all Medicaid patients.

With hard work, it is possible to make an extraordinary living even from Medicare and Medicaid reimbursements. I know a family practice physician who works incredibly hard, seeing patients 6 1/2 days a week for 10-12 hours a day, and averaging close to 40 patients a day! He lives in a poor community with many Medicaid patients, but his patient volume (due in part to his efficiency, seeing a patient every 15 minutes) makes up the difference since overhead is relatively fixed. By having over 12,000 appointments a year, this doctor is able to take home roughly half a million per year, likely in the top 1% of all family practice doctors nationwide. While this cannot be expected of all doctors, it is possible to make money while serving the poor on Medicaid!

[1] This link provides example reimbursement amounts for pediatricians in Colorado based on both Medicaid and Medicare schedules. While reimbursement varies by type of procedure and geography (Medicare bases reimbursement in part on local costs), $85 seems appropriate based on this data. Physicians are sometimes able to bill multiple codes for a single visit, increasing their potential reimbursement.

What Percentage of US Healthcare Is Publicly Financed?

Public, taxpayer-funded health care spending will pay for for 53% of US health care in 2009. If health care tax breaks are included, this figure rises to 62%.

Of the $2.5 Trillion dollars expected to be spent in the United States on health care this year, what percentage is paid by taxpayers? The Kaiser Family Foundation calculates that 46% of health care spending was publicly financed in 2006, but this number seems to exclude health care for government employees. The Center for Medicare & Medicaid Services collects data on health care spending in its National Health Expenditure survey, which can be used to perform a direct calculation on the government share of health care financing. The following table summarizes the 2007 NHE data, the latest year for which a detailed breakdown is available:

Category Amount (2007 $ Billions)
Medicare [1] 418
Medicaid (Including State Funding) 340
Other Public Health Programs [2] 189
Federal, State, and Local Employee Health Care 134
NIH and FDA Budgets [3] 32
Total Public Spending 1113
All Private Health Spending 1018
2007 Total US Health Spending 2131

The 2007 data show that 52% of all health care in the United States is publicly financed. The NHE data also show that from 1987 to 2007, the government’s share of health care financing has risen by ten percentage points, or about half a percentage point per year. This means that in 2009, the public share of health care spending is likely at 53%, or perhaps higher as a result of rising unemployment due to the recession. If health care subsidies (primarily tax exemptions) are included as government financing of health care, they add another $200 Billion to the total, raising the government’s share of health care spending to 62%.

With the government already paying for the majority of US health care, one thing is clear about the current health care reform debate: The debate is not about whether the government will take control of the health care system, as that has quietly taken place over the last 40 years. The real debate is about how the government should distribute its health care spending, and on whether it will be able to rein in endless health care cost growth.

[1] The detailed NHE data split up by source of payment can be found here:

In calculating the numbers in the above table, I used Table 1 in the pdf. I allocated all costs associated with Medicare to the public sector, unlike the table in the pdf, which counts Medicare premiums and contributions as private sector payments. From a standpoint of determining government involvement in the health care system, it makes more sense to count all Medicare dollars as public financing, particularly since paying Medicare taxes is precisely how most of the Medicare system is funded!

[2] According to the NHE pdf, other federal, state, and local health programs “Includes maternal and child health, vocational rehabilitation, Substance Abuse and Mental Health Services Administration, Indian Health Service, Office of Economic Opportunity (1965-74), Federal workers’ compensation, and other miscellaneous general hospital and medical programs, public health activities, Department of Defense, Department of Veterans Affairs, and State Children’s Health Program (SCHIP)” and “Includes other public and general assistance, maternal and child health, vocational rehabilitation, public health activities, hospital subsidies, and state phase-down payments.”

[3] The NIH budget is $30 Billion, and can be classified entirely as health care spending, though it’s often left uncounted. But isn’t research to cure disease health care spending? If it’s not, then what exactly is it? I have also included two-thirds of the FDA budget, as that is the portion related to drug and medical device supervision.

Healthcare Bubble

Dot com bubble. Real estate bubble. Commodities bubble. Healthcare bubble? How can the US healthcare system be a bubble when tens of millions are uninsured and more people fall through the cracks daily? The media, public, and politicians alike have been more concerned with the inadequacies of the system than with its rapid growth. US healthcare spending has grown enormously, exceeding the rate of inflation for decades to become the largest sector of the US economy. The United States now spends over 16% of its GDP on healthcare, almost double the average for developed nations.

Perhaps Americans just demand the best and priciest healthcare, with the most modern technology and treatments. Other insurance prices are on a steep rise, including home, accidental and auto insurance. If Americans paid for healthcare themselves, this would simply represent a rational spending choice. But the federal government now incurs 60% of all healthcare spending, meaning that taxpayers, and not individuals, pay for most of our healthcare. Medicare, Medicaid, and other direct government healthcare accounts for 46% of healthcare spending, while tax breaks on healthcare subsidize another 10-15% of healthcare spending [1].

At current growth rates, government healthcare spending will exceed the entire Federal budget by 2050 [2]. Total spending on healthcare will near one-third of GDP by 2030. It’s unlikely that the US can devote 1/3rd of all productive capacity to healthcare without crippling other sectors of the economy and reducing overall economic growth. The healthcare bubble thus dwarfs all previous bubbles in size, since the technology, real estate, and energy sectors are all so much smaller.

How will the bubble pop, and what will its effects be? Since most healthcare spending is federal, the bubble will pop when the government can no longer afford its healthcare outlays. The US has been able to borrow freely by issuing debt for many decades, but this will eventually end once our debt exceeds GDP. With the current downturn, government debt may actually exceed GDP by 2015 [3]. Thus the reckoning may come sooner than many expect.

Will healthcare reform contain costs and deflate the bubble gradually? Most reform plans focus more on increased coverage than on cost control, so they may exacerbate the problem. Eventually the hard choices will have to be made, and they will include some combination of reducing Medicare benefits, cutting provider reimbursements, openly rationing government health care, and limiting the tax break on health insurance. I just hope that some of the hard choices are made before we are collectively up against a fiscal wall.

[1] $200 Billion in taxes are foregone as a result of the employer-based healthcare tax deduction, equivalent to 10% of all healthcare spending. When this subsidy is included the government’s share of healthcare spending rises to 56%. This analysis does not include the exemptions on property taxes and sales taxes that healthcare providers receive; adding these subsidies in would likely drive the government’s share of health care spending over 60%.

[2] The CBO predicts that Medicare and Medicaid will account for 14% of GDP by 2050. This figure doesn’t include healthcare spending through the VA system, SCHIP program, and other federal healthcare programs, which total $100 Billion in spending today. If these programs also grow commensurately, total government spending may near 18% of GDP in 2050, roughly equivalent to total government revenue.

[3] This projection of public debt growth shows that US government debt will exceed gdp by 2050. This only takes into account debt held by the public, however. Gross government debt is already above 65% of GDP, and may grow to 75% by the end of 2010 as a result of the recession and stimulus spending. With deficits of $500B+ per year possible for several year, US total government debt could exceed gdp in less than 10 years.