Stop Soaking the Elderly : Medicare Can Cover Catastrophic Illness Economically

Recently my widowed mother-in-law asked my wife and me to review her supplementary “Medigap” insurance. We found the policy, like most insurance documents, nearly incomprehensible.

A federal Medicare guide devotes half of its 18 pages to warning about the hazards of uninformed Medigap purchases. So I asked the Arizona insurance commissioner his opinion. He reminded me about a “sting” operation conducted by his department, which exposed widespread fraud in the sale of such policies. He also noted that Medigap policies on the average pay only 60 cents on the premium dollar; some other policies pay even less.

I’ve done a lot of homework since then and I now understand why there is so much concern among the nation’s 28 million senior citizens, and their families, about eroding Medicare coverage. The federal program now covers less than half the cost of health care for the elderly.

Another unsettling fact is that the sicker the patient, the less the coverage. For example, hospital costs are the biggest component of health-care expense. After an initial deductible of $492 for the first day, Medicare pays the full cost for two months. After that, hospital coverage drops off fast. For the following month, the patient must pay $123 per day, for a total of $3,690. For another 60 days of “lifetime reserve” benefits, the patient must pay $246 per day--another $14,760 out-of-pocket. After these 150 days of partial coverage, Medicare offers no protection at all.

For physicians’ services, a patient owes the first $75 plus 20% of all other charges, without limit, plus all amounts that physicians charge over and above what Medicare decides to pay.

These facts have not escaped the attention of the Reagan Administration. When he was budget director, David Stockman proposed in 1984 to expand Medicare into catastrophic insurance covering all hospital expenses incurred after the first 60 days.

It was an attractive idea, but what Stockman gave with one hand he more than took away with the other, proposing to finance the extra costs by imposing large new co-payments on the first 60 days of hospital stays. There still would have been no improved protection against physicians’ bills. Understandably, this idea was not acceptable to Congress.

This year the Administration may try again. The new secretary of Health and Human Services, Otis Bowen, has suggested financing catastrophic coverage for both hospital and physicians’ costs by more than doubling the monthly $15.50 premium currently paid by Medicare enrollees.

But this suggestion, like the earlier Stockman idea, would result in higher across-the-board charges for all senior citizens, many of whom are hard pressed to meet existing charges.

The Stockman and Bowen proposals have the right objective but the wrong approach. Medicare should be reformed to provide catastrophic coverage, but without imposing more hardship on those who cannot afford higher charges.

Real catastrophic coverage for both hospital and physicians’ costs could be provided first through a premium increase of about $16 per month--but the 25% of the elderly with incomes below $5,000 could be fully exempted from the premium increase for catastrophic coverage. All enrollees would be fully protected against all hospital costs after the first-day deductible, no matter how large the bills become, and against physicians’ costs above $225.

The exemption for poor senior citizens could be done by a simple restructuring of Medicare’s Part B supplementary insurance program, which covers physicians’ services. Part B is financed 75% by general revenues and 25% by enrollee premiums. The 75% government contribution, which now comes to $558 a year per enrollee, is an outright subsidy that goes to all senior citizens, regardless of their income.

If this subsidy were taxable for those with incomes above $25,000, or $32,000 for couples (the threshold above which we now tax Social Security proceeds) about $600 million would be raised. This amount is sufficient to provide catastrophic-illness protection for the 3 million elderly with incomes below $5,000 who are not already covered by Medicaid.

An added benefit of such catastrophic-illness coverage would be a sharp reduction in the need for private Medigap and “dread disease” policies, and elimination of the waste and abuse associated with many of them. Overhead for this extension of Medicare would be abut 2%, versus up to 35% for private Medigap insurance. Net savings to senior citizens alone could total more than $1 billion annually.

This approach won’t solve all of Medicare’s problems. Nor does it deal at all with the vexing issues of financing nursing-home care. But it would provide a real boost to the security and peace of mind of the nation’s elderly, and their families, without adding to the federal deficit. It’s time to change the system to protect the nation’s senior citizens with Medicare coverage that provides for catastrophic illness.