Reforms May Be Just the Rx Medicare Needs

Doctors gave a favorable diagnosis to Republican plans to reform Medicare last week--causing skeptics to wonder whether patients would suffer in their wallets if not in care for their health.

But approval by the American Medical Assn. is not cause for alarm. In fact, greater doctor involvement with this Medicare reform, the first of many for the program, could help resolve the true financial problem in medicine for America’s aging population, which is paying for the treatment of chronic illness.

The GOP plan, which comes up for a vote in the House this week, signals a shift away from the emphasis on squeezing doctors fees that has characterized the long-running battle to control U.S. medical costs.

It would allow doctors more liberal billing and the right to set up their own health maintenance organizations (HMOs).


That could provide competition for existing HMOs and insurance companies, possibly holding down costs.

But to understand what is going on with Medicare takes patience because important questions are never stated in shouting matches between Congress and the White House. Instead, debate has been filled with arguments about “saving $270 billion” by trimming future Medicare spending. Pay no attention. Those savings are rhetorical and not to be seen in reality.

The real and challenging numbers are that 33 million elderly Americans, plus 4 million disabled people, are now eligible for Medicare. The numbers of elderly will grow 10% in the next five years and more rapidly after that.

Medicare costs in the federal budget are growing 10% a year, and are projected to go from $178 billion this year to $315 billion by 2002--the year both parties vow to balance the federal budget.


The aim of the current reform is to slow the rate of growth in spending, to roughly 6.5% a year, by holding down payments to hospitals and doctors and by doubling premiums for Medicare recipients.

But the reform may not achieve even those cost restraints because Medicare recipients’ use of the system is growing.

Yet, with time, cost restraints and other reforms will come to Medicare, simply because it is an adaptable and innovative program. That’s right, adaptable and innovative.

Signed into law 30 years ago, Medicare first underwrote an enormous expansion of U.S. medicine. It built hospitals, gave physicians paying patients to treat--Medicare helped create the surplus of hospitals and doctors the country has today.

But Medicare was also early in devising cost-saving reforms--such as adjusting insurance payments to specific illnesses and to regional average costs. Private industry and insurance companies have taken up those reforms in recent years to control costs in employee health plans.

Still, “there is a lot of profit in Medicare,” economist Uwe Reinhardt of Princeton University points out. “Think about it. The government will pay a hospital $4,800 per patient. But not all patients are equally ill.”

In fact, says Reinhardt, government figures show that 25% of Medicare recipients account for 91% of the costs. “The average annual medical bill for a chronically ill patient is $28,000, but the bill for a relatively healthy person is $1,300.

“If you’re getting $4,800 a patient on average [scheduled to rise to $6,700 by 2002], there’s room to make money,” Reinhardt remarks.


Right there you see why old people with any chronic illness are afraid of HMOs, afraid of any change from the old system of fully insured fee-for-service. Simply put, the way medical institutions make a profit or stay solvent is by “risk selection"--minimizing the number of chronically ill patients and maximizing the relatively healthy.

Selection obviously implies discouraging patients with chronic diseases. But managed care is not inherently bad.

HMOs, which guarantee group treatment for a flat fee, are motivated to keep people healthy, says Marc Margulis, director of health care at Houlihan Lokey Howard & Zukin, a Los Angeles investment banking firm. “They often send their own employees into homes to see that railings are installed in showers"--as a preventive to hip-fracture accidents.

How will allowing physicians and hospitals to form HMOs affect managed care? It will intensify competition, possibly bring down costs. HMOs typically take 17% to 20% of revenue for administrative costs and profit. Group medical practices may be able to do the same job cheaper.

As to the problem of chronic illnesses, “at least physician owned and run managed-care institutions will make decisions about patient care on medical grounds, not simply those of finance,” says Dr. Schumarry H. Chao, a physician and consultant on medical economics.

In fact, says economist Alain Enthoven of Stanford University, Medicare’s administrators will solve the chronic illness problem in time. “Now they classify Medicare recipients by age and gender,” says Enthoven. “They could begin to classify by illness, raising payments for diabetic patients or those with congestive heart conditions, and lowering payments for healthier patients.”

Such a common sense reform would not seem beyond the capability of a computerized society. Yet the Medicare bills going through Congress with so much fanfare and acrimony say nothing about such important issues.

But then this reform is only a step in the continual refining of Medicare, a program destined to become even more valuable with the years. Specifically, after 2010, one of every six Americans will be eligible for Medicare, compared to one in 7.5 today and one of 11 Americans 30 years ago when this program of elderly independence was signed into law by President Lyndon Johnson, who intoned with feeling: “I have seen the old people afraid to go to the doctor, afraid to be a burden on their children . . . .”