Medicare: An entitlement out of control

Introduction

If Congress had known in 1965 how expensive Medicare would become, it might not have approved the program in the first place. So Lyndon Johnson made sure it didn’t know.

He railed against his budget advisers for trying to predict the long-term costs. “The fools had to go projecting it down the road five or six years,” he complained to Sen. Edward M. Kennedy at the time. Johnson’s allies were getting nervous, according to historians David Blumenthal and James Morone, so Johnson had to hide the price tag.

And when Wilbur Mills, then the chairman of the House Ways and Means Committee, worried about how much cash would be needed to cover doctor’s services, Johnson was happy to throw more money into the mix. “Tell Wilbur that 400 million’s not going to separate us friends when it’s for health,” Johnson said.

Forty-five years later, the costs of the Medicare program have become all too obvious. Medicare is a significant part of the reason the national debt is soaring out of control. It is an indispensable safety net for millions of senior citizens and people with disabilities, who depend on it to protect them from bankrupting medical bills. But since it’s an open-ended program — with no upper limit — the nation has no similar protection to keep Medicare from bankrupting the country.

The way things are going, Medicare could do just that. With its one-two punch of rising health care costs and more seniors to cover, Medicare will eat up more and more of the federal budget in the years ahead. But it’s also politically untouchable. When either Democrats or Republicans try to suggest ways to trim the costs, they’re accused of trying to push Grandma down the stairs in her wheelchair. Republicans did it to the Democrats during the debate over the new health care law, and Democrats are doing it now, at the height of election season, as Republicans float their own proposals.

Medicare is already growing faster than Social Security, and it could become bigger and more expensive than Social Security in the next 25 years. It is also growing faster than the economy, and if that keeps up, Medicare could cause the national debt to swell up to more than two-thirds of the gross domestic product in just the next decade.

For years, experts have also warned that Medicare faces trillions of dollars in unfunded liabilities — meaning that it will have to pay trillions of dollars more than the amount of money that is coming in. In fact, last year, the Medicare trustees warned that the program was facing more than $36 trillion in unfunded obligations.

This year, the Medicare trustees said that problem has basically disappeared because of spending cuts in the new health care law. But critics in Congress and the federal government — including Medicare’s chief actuary — don’t buy it. They believe those rosy projections come from playing games with the math.

“It’s a completely unsustainable system,” said Republican Rep. Paul Ryan of Wisconsin, who could become the next chairman of the House Budget Committee if the Republicans win control of the House in November. The United States would still have to spend trillions of dollars to maintain the program as it is, Ryan said, “and we can’t do that without bankrupting the country and shutting down the economy.”

The future of Medicare is not just a partisan concern. “I understand the importance of Medicare in people’s lives. I’ve seen it in my own family,” Sen. Kent Conrad of North Dakota, the Democratic chairman of the Senate Budget Committee, said at a January hearing. “But the suggestion that we don’t have to do anything is just not being straight with people.”

Medicare also provides a vivid and alarming window into why America’s entire health care system is so expensive. Nationally, health care experts believe that as much as a third of all health care spending — about $800 billion a year — goes to health care that doesn’t make us better. That’s happening for reasons that affect all health care, but since Medicare accounts for more than one fifth of all personal health care spending, its payment policies have a massive impact on what happens in the rest of the system.

The big challenge, not just in Medicare but in all of our health care spending, is to figure out how to bring the costs down without taking away needed care. That’s why it’s so important to make sure Medicare is spending its money wisely.

Unfortunately, the system as it exists today often does exactly the opposite. An analysis of Medicare claims data that was obtained jointly by the Center for Public Integrity and The Wall Street Journal reveals how Medicare is paying millions of dollars for procedures and services that, based on available evidence, don’t really make sick people better. In an upcoming series of stories, the Center will demonstrate how a portion of that spending has been powered by a medical industrial complex of equipment-makers, pharmaceutical firms and specialists that have manipulated the system to increase Medicare payments and benefit their bottom lines, instead of patients.

The new health care law President Obama signed in March was supposed to put the brakes on some Medicare spending by establishing pilot programs to address these issues. But no one knows if these experiments will work, or if they do, whether they’ll be sustained. Many of the Medicare cuts might be overturned anyway if politically powerful health care providers complain too much about them.

Despite the rhetoric, the administration and Congress have a lot more work to do to steer Medicare’s spending toward the most effective care, rather than a fee-for-service system that benefits doctors — especially specialists — more than patients. The nation’s budget picture will only get better if Medicare becomes smarter about where and how it spends its money. “It’s a very big factor, and the passage of health care reform didn’t do much to change that,” said Robert Bixby, executive director of the Concord Coalition, an organization that pushes for changes to the nation’s entitlement programs to reduce growing budget deficits.

But all of the protests over the new health care law are only going to make it harder — not easier — to bring Medicare spending under control. Remember all of the raucous town hall protests and the charges of “rationing” and “death panels”? Just wait until Congress tries something that really puts a lid on Medicare spending. The program simply can’t go on like this — but no one can get it under control without getting shouted down.

Huge Benefits, Massive Costs

Lyndon Johnson may not have considered $400 million a lot of money for Medicare, but now there’s a lot more than $400 million being thrown around. This year alone, Medicare will spend some $451 billion — about 12 percent of all federal outlays.

By the standards Medicare was supposed to meet, it is an incredible success story. This year, 47 million Americans will get their health coverage through the program — mostly senior citizens who wouldn’t be able to afford medical care or get decent insurance otherwise. The program pays for medical care for 39 million seniors and 8 million people under age 65 who have permanent disabilities.

“The enactment of Medicare assured access to health care for millions of Americans age 65 and over, and prevented millions from being forced into poverty,” said John Rother, executive vice president of policy and strategy for AARP. Before Medicare, he said, “when you got into retirement age, you were on your own.”

But at the rate it’s growing, Medicare is also pushing the national debt to frightening levels.

Right now, the national debt is a little more than half the size of America’s gross domestic product, and it could grow to as much as two thirds of GDP in just 10 years. And Medicare’s spending is growing faster than the economy. If Medicare’s spending isn’t slowed down substantially, the debt could become even larger, according to the Congressional Budget Office.

Medicare isn’t the biggest of the open-ended entitlement programs, which have to give benefits to everyone who qualifies. That title still belongs to Social Security. But Medicare’s price tag is growing faster than Social Security’s. Right now, Medicare is about 3.6 percent of the size of the national economy, compared to 4.8 percent for Social Security. By 2035 — twenty-five years from now — Medicare will be 5.9 percent, almost as large as Social Security.

And that’s actually the best-case scenario. It’s only going to happen that way if Congress doesn’t block a series of cuts in Medicare payments to doctors and other health care providers that are supposed to happen over the next 10 years.

But Congress isn’t exactly known for showing that kind of discipline. Payments to doctors are already supposed to be slashed deeply from their current levels, thanks to a 1997 law that calls for yearly payment cuts to strengthen Medicare’s finances. But Congress keeps delaying the cuts, and put off a scheduled 21 percent decrease just this summer; the longer lawmakers stall on this, the deeper the eventual proposed cuts will get.

And starting next year, the new health care law is supposed to raise the fees for other providers at less than the rate of inflation, a change that is supposed to push them to become more productive. Over the next 10 years, that adjustment is supposed to save $157 billion.

The cuts were one of the chief mechanisms that allowed Congress to pay for the new health care law. But, of course, Congress has a history of stopping these kinds of cuts before they take place — just as it has been putting off the changes that are supposed to lead to the cuts in doctors’ fees. In fact, Congress has stalled those cuts 10 times in the last eight years. If it delays those changes again and cancels the other provider payment cuts in the new law, Medicare will swell to 7 percent of the size of the national economy in 2035 — larger than Social Security.

In their most recent report, issued in August, the Medicare trustees said the program should be in better financial shape under the new law. They said the trust fund for hospital expenses should now last until 2029, rather than running out in 2017, and that Medicare’s coverage of physician services should be more stable as well. But Bixby and other critics have faulted the trustees for assuming the Medicare savings will help the program’s finances, when they’re actually being used to pay for other health coverage expansions under the law. The trustees also warned that they had to tie their estimates to “unrealistic substantial reductions in physician payments.”

And in an unusually harsh statement, Richard S. Foster, the chief actuary of the Medicare program, said the report’s projections “do not represent a reasonable expectation for actual program operations” because providers won’t be able to cut their costs enough to match the cuts in their payments. “The best available evidence indicates that most health care providers cannot improve their productivity to this degree — or even approach such a level,” Foster wrote, and “Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.”

As Bixby put it, “He went about as far as a civil servant can go in saying, ‘Congress pulled a fast one here.’”

The Roots of the Problem

Medicare is under financial stress because two powerful forces are combining to push spending higher and higher. The first force: changing demographics. Because of the aging of the population, driven by the large cohort of baby boomers, Medicare is expected to cover as many as 79 million people in 20 years — nearly twice as many as it covers now.

That’s a problem unique to Medicare, but the other force is the same one that is bedeviling all of health care: rising costs for each person. Over the last 40 years, average annual health care spending has grown faster than the economy by anywhere from 1.3 to 3 percentage points each decade. The overall spending trends are a bigger factor in Medicare’s budget pressures than the growth in the elderly population, according to Tricia Neuman, vice president of the Henry J. Kaiser Family Foundation and director of its Medicare project.

Why is that? State-of-the-art medical technology gets part of the blame. A host of new medical equipment can treat conditions that couldn’t be treated before, but it’s not designed to save money, and it’s so profitable for health care providers to stock up on expensive gadgets like CT and MRI scanners. That drives as much as half to two-thirds of all growth in health care spending.

Some new medical procedures do save money and are less invasive than the old ones, but they still drive overall spending up because so many more people get them. Chronic conditions are also a crucial factor in rising costs — especially in Medicare, where they may account for as much as a third of all spending growth in recent years.

But the big problem that may explain why health care spending is so much higher in some places than others — without any evidence that the patients do better because of it — is that doctors have too many incentives to give patients more and more care, rather than better care. As long as they get paid for each medical service they give their patients, they have little reason to ask whether a test or procedure is really necessary.

In an influential article in The New Yorker last year, author and surgeon Atul Gawande compared the practice of medicine in two Texas towns, McAllen and El Paso, to find out why McAllen spends so much more on its health care even though the demographics are about the same in both places. He found that McAllen had lots of doctors who owned surgical or imaging centers and used them to bring in revenues. McAllen didn’t have better care. It just had more of it.

The problem isn’t just that health care providers are paid to perform too many services. It’s that specialists are rewarded more than the primary care physicians who are likely to be needed in coming years. Robert A. Berenson, a senior fellow at the Urban Institute, studied Medicare’s payment rates and found that radiologists, surgeons, cardiologists and dermatologists earn more per hour than the primary care physicians who perform important, basic services. The same is true for private health insurance, which often takes its cues from Medicare.

Specialists are “not the doctors who will be up in the middle of the night helping you with a crisis,” said Berenson. “People want to go into them [specialty practices] because of the lifestyle, but they’re also the most lucrative.”

Big Problems, Little Fixes

There are plenty of ideas on how to cut back spending without taking away urgently needed care. But there’s not much evidence yet on which of those ideas work best. So the heftiest cuts the new law will make to Medicare spending have nothing to do with the root causes of the out-of-control spending growth.

The cuts in payments to providers, for example, are a major portion of the law’s Medicare savings. But fee cuts will do nothing to stop the overuse of services — and there’s no guarantee that Congress won’t just get cold feet and cancel the cuts anyway.

Another considerable source of savings — $136 billion over 10 years — comes from lowering the payments to some Medicare Advantage plans, private plans that deliver Medicare services. Those plans are being targeted because Democrats in Congress say they get too much money from the federal government. But going after wasteful private plans isn’t the same thing as tackling the broader incentives to overuse medical services.

The new health care law does set up a series of experiments with newer approaches that health care experts believe might actually change the equation. For example, different groups of providers will be able to join together to form “accountable care organizations,” in which they can work together across different settings, try to save money for the Medicare program, and keep some of what they save. In addition, there will be a five-year pilot program that directs Medicare to give providers “bundled” reimbursement — a single payment that covers an “episode of care,” such as surgery and follow-up care.

There will also be a new agency — the Center for Medicare and Medicaid Innovation — to guide other experimental approaches, such as coordinating medical care more carefully for people with chronic conditions and paying physicians salaries instead of separate fees for each action.

All of these initiatives have a common goal: to change the culture of medicine so health care providers are paid for providing the best care, not just more of it. The experiments could make a difference, some health care analysts say, but only if lawmakers and federal officials give them a chance to prove themselves — a big “if.”

“It’s going to be important that Congress is supportive of a creative and aggressive strategy, and they’ve got to realize that there will be some failures as we learn what works,” said Gail Wilensky, a former administrator of the agency that runs Medicare, now known as the Centers for Medicare and Medicaid Services. Unfortunately, Wilensky said, the agency’s culture has traditionally not tolerated failures in pilot programs. And if there are no failures in the new round of experiments, she said, “You know you’re not being very creative or imaginative.”

Budget watchdogs generally like the experiments in the law. They just don’t think there’s any guarantee that they will work — yet — or that they will be utilized more broadly even if they are successful.

“I would have been a lot more comfortable if they had done this stuff first, found out whether it saves money, and then expanded coverage,” said Bixby of the Concord Coalition.

There’s also going to be more federal support for research that looks at two or more different ways of treating a medical condition to see which one works the best. The term of art is “comparative effectiveness research,” and it’s the feature that provoked many of the charges that the new law would lead to rationing. After all, who wants a bunch of government bureaucrats telling you that you can get one kind of medical care but not the other?

The real point, though, is to give medical providers a better idea of what’s useful and what’s wasteful. Medicare will be able to use the research to make some decisions on what to cover and what not to cover — sort of. Congress wrote in multiple restrictions to prevent some tough decisions that might feel scary. For example, the research can’t be the only factor in the coverage decisions, and the Medicare program won’t be able to make those decisions in a way that values the lives of elderly, disabled, or terminally ill people any less than other people’s lives.

But if the program couldn’t use the research at all, Medicare officials would have no real way to encourage the most effective medical services — so it would just keep paying for the wasteful or ineffective ones. “If we’re steering people toward the interventions that work best,” said Rother of AARP, “that’s not rationing. That’s improving the productivity of health care.”

The new health care law also creates the Independent Payment Advisory Board, a 15-member expert panel that will recommend ways to cut back on Medicare spending, starting in 2014, if the program’s costs grow too fast. The cuts it recommends will take place automatically unless Congress approves a different set of cuts that save the same amount of money.

The idea was to let an outside board make the politically unpopular cuts that Congress refuses to make. But lawmakers’ fear of “rationing” caused them to enact substantial limits on what the board could actually do. For one thing, the law says the board can’t “ration health care.” The board also can’t raise taxes or Medicare premiums, make seniors share more of the cost of their benefits, trim the benefits, or change the eligibility rules.

And because hospitals groups were powerful supporters of the legislation — and the Obama administration and Congress wanted to make sure they stayed that way — hospitals can’t get hit with any of the cuts until after 2019. Hospices will be exempt until then, too. What that leaves isn’t exactly clear — other than, perhaps, proposing even more payment cuts to providers who aren’t hospitals.

And it’s not clear that Congress will even allow the board to survive. A group of Senate Republicans, led by John Cornyn of Texas, have already introduced legislation to abolish it — the “Health Care Bureaucrats Elimination Act.” Republicans aren’t likely to get anywhere with their promises to repeal the entire health care law, but they could have more luck knocking out some of the least popular parts of it. And a board of experts that’s supposed to cut Medicare could easily become one of the least popular parts of all.

Bruising Politics

Ultimately, budget experts don’t believe piecemeal changes will slow Medicare spending enough to make the program affordable. As long as Medicare remains an open-ended program, with no overall limit on what it can spend, they don’t believe the costs will ever get under control.

As a result, some of those experts are talking about more substantial, systematic changes to Medicare — like capping the spending so seniors can no longer expect it to pay for everything.

The idea is to “put Medicare on a budget,” said Rudolph Penner, a senior fellow at the Urban Institute who writes frequently about budget issues. And in the United States, he said, the only politically acceptable way to do that would be to turn Medicare into something more like a voucher program.

The most prominent example of this approach is a proposal by Ryan, the Republican congressman from Wisconsin, that would give all seniors a fixed payment to help them buy a private insurance plan. If they wanted more generous coverage, they would be able to pay extra for it, Ryan said. But if they chose a lower-cost plan, they could save their extra money or put it to other uses, like long-term care coverage.

The payments would start at $11,000 a year, on average, and they’d be indexed at a rate greater than inflation — but lower than the current rise in medical costs. The amount would be higher for seniors with health problems, and low-income seniors would get more as well. The plan would be phased in, so it would apply only to people who are currently under age 55.

Ryan says his plan is the best way to save the Medicare program from exploding debt and, eventually, from leading to government price controls and direct rationing of care. “There’s two ways to go. You can put the government in charge of the system and put down more and more price controls, with sort of ‘intelligent rationing’ … or you can put the doctor and the patient at the nucleus,” Ryan said. Any Medicare rescue plan has to get at the root causes of rising costs, he said, and “the market does that better than any other system.”

Seniors’ groups, however, say the proposal itself would be a form of rationing. And liberal groups have promised to fight the proposal, saying it would push seniors into the least efficient kind of health insurance: the individual market, which is full of coverage gaps and unstable premiums. “You’d be throwing one of the most vulnerable populations into the mix of an unscrupulous private health insurance market,” said Alex Lawson, communications director for Strengthen Social Security, a coalition of liberal groups that also monitors health care issues.

To get any traction for such a restructuring of Medicare, Republicans would need some support from Democrats, or at least a cease-fire, to protect them from a backlash from seniors. But given how hard Republicans are fighting to either repeal or withhold funding from the Democrats’ signature achievement — the health care law — they’re not likely to find any goodwill to advance their own proposals.

The politics of Medicare are so brutal that neither side can get costs under control on their own. When the Democrats pushed through relatively minor changes to Medicare in the new health care law, Republicans accused them, over and over, of cutting seniors’ benefits to pay for a big-government health care program. In return, a liberal group is using Ryan’s plan to accuse him and other Republicans of “planning a sneak attack on Social Security and Medicare.” House Republican leaders are so nervous about the subject that Ryan’s plan isn’t part of their “Pledge to America.” And no wonder. Seniors vote — and changing Medicare isn’t the campaign pledge they want to hear.

In coming weeks, the Center for Public Integrity will present a vivid picture of some of the questionable spending that occurs in the Medicare program. Cutting such spending could be a first step in figuring out how to fix this landmark Great Society program. But ultimately, Medicare won’t become sustainable or affordable until political leaders from both parties figure out how to convince seniors that a bit less spending won’t destroy the program.

The way things are going now, that could take awhile.

David Nather is the author of The New Health Care System: Everything You Need to Know (Thomas Dunne Books/St. Martins Griffin).