Medicare: A Bigger Mountain than Everest

America has always feared socialism.  We like our independence and freedom.  Because of this, it is no wonder that it took 20 years from the initial suggestion of a federally funded insurance program to the actual implementation of this program.  Having been the first president to suggest a national health care program, Harry S. Truman was the first recipient of what is now known as Medicare.  The Medicare program was signed into law on July 30, 1965 by President Lyndon B. Johnson.  Commenting on the landmark bill, President Johnson said, “We marvel not simply at the passage of this Bill but that it took so many years to pass it.”

In order to qualify for Medicare, you must fall into one of the following categories:  American citizens age 65, citizens on disability for 24 consecutive months regardless of age, or having end stage renal disease (ESRD).  Currently, the Medicare program provides hospital coverage, skilled nursing care, prescription drugs, and outpatient services to over 50 million Americans.  Today, due to a variety of problems, Medicare is facing a financial crisis that makes the bailout look like “a walk in the park.”  These problems did not arise unexpectedly.  Forecasters have warned politicians for many years of potential problems.  The warnings and concerns are now a reality.  If the Medicare program continues along the same path it is going, it will become insolvent in 2020.

When looking at the reasons for failure of the Everest case climb, some of the lessons learned can be applied to the Medicare program.  The first is the “Sunk Cost Fallacy.”  This states that people tend to escalate commitment to a course of action in which they have made substantial prior investments of time, money, or other resources.  (Michael Roberto).  This Fallacy also argues that the future is what matters, what was in the past should not have any bearing on the decision at hand.  This Fallacy relates to Medicare Advantage, which some call the privatization of Medicare.  The second lesson is the “Root Cause Trap.”  This states that blame is often laid on a single reason for failure.  Roberto says that this search for a single root cause can be futile, especially when there are many factors that led to failure.  With regards to Medicare, one of the biggest problems is being overlooked as politicians try to fix the “root cause” of Medicare.  Finally, the last comparison is with the “Complex Systems Issue.”  This states that within a complex system, there are different elements of the system that can interact in ways that are difficult to perceive.  This can be complicated by tight coupling or rigid, time-dependent processes.  Once again, this plays a large part with the Medicare program.  There are more sides to this program than anyone imagined.  The potential end of Medicare is only eleven years away.

Root Cause Theory

When looking at changes and attempted fixes to Medicare, they all try to fix or reform Medicare from an operations side, cutting costs or increasing funding.  The primary blame for Medicare falls on skyrocketing medical costs, averaging 10% per year since 1965.  Looking at past Medicare Legislation, almost every bill is aimed at lowering costs and/or increasing funding on the operations side (cutting costs and fraud, improving efficiency, etc.),.  Unfortunately, there is not a single root problem that is causing health care costs to increase.  It may be impossible to raise enough money to keep Medicare around and attempts to control costs haven’t worked.  By focusing on these problems from an operations side, a major problem is being ignored.

This problems lies in how in how the public views and feels about Medicare.  Medicare is an entitlement benefit, meaning that it is a right for every American.  A major problem that is ignored is the difference between an entitlement and insurance.  Right now, Medicare is an entitlement benefit that is offered as an insurance program.  This is an oxymoron.  Insurance at its nature is protection against catastrophic risk.  It is not designed to cover minimal, everyday costs.   People do not buy auto insurance to cover oil changes or to inflate their tires.  Homeowners insurance does not cover the cost of lawn care.  However, the Medicare program does cover routine procedures and other things that are not catastrophic in nature.  This is because people feel they are entitled to Medicare and in turn, their entitlement should cover routine, non-catastrophic things.  This contributes to the insolvency of Medicare because when you have a third party paying for affordable services, premiums and the cost of services increase.  Because Medicare is viewed as an entitlement, people are trying to “break-even” on their insurance or getting what they are entitled to instead of buying protection for what they could not normally afford.  Under our current delivery method, cost is all but eliminated out of the equation (there are supplemental programs that individuals can buy that pay 100% of costs, leaving the individual with no out of pocket cost whatsoever).  Because there is no connection between the amount or cost of care and the individual, people are inclined to get as much as they can.  The Medicare program is seen as a buffet, making waste (and fraud) difficult or impossible to measure and prevent.  These examples are being ignored by our government, who instead are focusing on their perceived “root cause” on the operations side.  Until the public changes its perception of the Medicare program, this problem will remain.

Sunk Cost Fallacy

Medicare has always been a hot topic for debate.  The previous presidential elections promised “reform, action, and solutions!”  However, very little has actually been done to solve Medicare’s problem.  Why is this?  One of the biggest reasons can be attributed to the Sunk Cost Fallacy.  Medicare has existed in basically the same way since 1965.   There have been small “tweaks” to the program here and there.  Each piece of legislation that was passed amended or built on what others had previously done to Medicare.  This is one of the biggest reasons for why Medicare is in its current state.  What needed to happen was a drastic overhaul of our entire health care system.  Experts have agreed that there needs to be a drastic reform for quite some time.  If politicians are in agreeance with this, why has nothing happened?  The answer could lie in our sunk costs.  Our previous attempts to fix Medicare have cost billions of dollars to taxpayers.  We continue down these paths even though they are not providing better care and have not slowed down sky-rocketing medical costs.  A prime example of sunk costs adding to the problem is with Medicare Advantage.

Medicare Advantage

The federal program is called a fee-for-service program.  If a person on Medicare wishes to see a doctor, they can go anywhere they want.  These providers then bill Medicare for the services they provide.    This type of service is usually more expensive because there is a third party paying for the bulk of services and the patient (not the payer) dictate where and when they see a provider.  The individual has the freedom to go to any provider without any prior authorization or pre-certification from an insurer or Medicare.  This delivery method can foster abuse and is a main reason for increased costs.

The proposed solution to this problem was brought to Congresses’ attention in 1997. Medicare+Choice was enacted under the Balanced Budget Act of 1997.  Medicare + Choice (now known as Medicare Advantage) works like this:  When an individual enrolls into the federal government program they have an alternative to getting the federal government fee-for-service benefit.  Prior to 1997, there was not an alternative to Original Medicare.  All eligible persons received the traditional fee-for-service plan.    After 1997, they could choose to receive their Medicare benefit (80% of health care costs) thru a private insurer rather than by the federal government.  If the individual signs up for the private plan, then Medicare pays the “average cost of care” to the plan.  In 2009, this amount is approx $1,000/mo (This amount is the average cost a Medicare eligible person would spend on health care per year)  The plan then is responsible for giving that individual all of their care.  Medicare in effect washes their hands of that person and the insurance company is responsible for paying claims in place of Medicare.

Unlike Original Medicare, these private companies are able to manage care.  They come in the form of Health Maintenance Organizations (HMOs), Preferred Physician Organizations (PPOs), and Private-Fee-For-Service plans (PFFS).  These plans contract with the federal government to give Medicare eligible citizens their Medicare benefits.  According to Wikipedia, managed care is used to describe a variety of techniques intended to reduce the cost of providing health benefits and improve the quality of care (“managed care techniques”) organizations that use those techniques or provide them as services to other organizations (“managed care organizations”), or systems of financing and delivering health care to enrollees organized around managed care techniques and concepts (“managed care delivery systems”). According to the National Library of Medicine, the term “managed care” encompasses programs:  …intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases.  In Medicare’s situation, managed care was the solution to increasing medical costs.  Medicare hoped that if private insurers were able to approve services, negotiate lower/different payments to providers, and foster competition, then costs would go down.   The problem was, from 1997-2003, there was not a decrease in costs.

In 2003, after 6 years of Medicare + Choice and costs on the rise, private insurers came back to the government, begging for higher reimbursements.  Insurers were unable to control costs and as a result, would start pulling out of markets because of it being unprofitable.  Here is where the Sunk Cost Fallacy came into play.  With billions of dollars invested and an election right around the corner, President Bush and Congress felt it was better to increase funding to an existing program that had a seven year track record of failing rather than start over.  Against logic, Bush signed the Medicare act of 2003.  Not only did this act continue the same types of programs Medicare+Choice initiated, but it increased the funding the federal program would give to private insurers!  Instead of paying the same amount it cost Medicare to provide benefits, the government decided to increase funding 13% to private insurers who offer Medicare replacement plans. In a sense, throwing good money after bad, which is one of the major symptoms of the Sunk Cost Fallacy.  This act was under heavy scrutiny because of the previous seven years but was passed by the House on 6/27/2003 (216 – 215).  Instead of looking at this situation rationally, I believe that sunk costs played a crucial part of this crisis.

Complex Systems

The complexity of our health care delivery also plays a major role.  Within Medicare, you have many different groups lobbying their own way.  You have insurance and pharmaceutical companies lobbying for different things, seniors pushing for better coverage and lower premiums (threatening politicians with votes), and the government stuck in the middle.  The dynamics between these parties cannot be ignored because they all play significant roles within Medicare.

Medicare has been under scrutiny for quite some time.  However, Members of Congress have largely ignored it because all of the possible reforms are considered politically risky.  Any politician running under the campaign of “increased premiums” and “reduced benefits” may as well stay home.  The incentive for politicians is to get reelected.  By ignoring Medicare, they hope to fly under the radar.  As long as Medicare is still available when they leave office, then they won’t be blamed.  What Medicare needs is a team of leaders and guides, whose specific job is to fix Medicare, not get reelected.

Another party with considerable interest in Medicare is our nation’s health care providers.  Physicians are a favorite target for Medicare cuts.  Reimbursement rates to doctors and hospitals are stuck in 1980’s prices.  Previous legislation targeted payments to providers.  If caps and restrictions could be placed on what doctors can charge, then costs would level off.  Unfortunately, providers started to bill multiple charges and services that they received the highest margins on, even if it was not the best course of action for the patient.  The AMA warns that if reimbursement rates continue to be cut, then our nation’s providers have no choice but to stop accepting Medicare recipients.

These dynamics are interacting at a time when we are in the quiet before the storm.  Starting in 2011-12, the first baby-boomers will become eligible for Medicare.  As more boomers move from working (and paying into Medicare) to retirement (and drawing benefits) the numbers grow worse exponentially.  In fact, the 85 and older segment is now the fastest growing population segment in the world.  Our aging population is the biggest argument for acting now.  One of the largest myths is that there is no hurry to fix entitlement benefits.  In fact, Social Security, Medicare, and Medicaid already absorb 42 percent of the federal budget and are growing by 7 percent annually, making them the largest impediment to balancing the budget. Furthermore  many believe that anyone over age 55 should be exempt from entitlement reforms (meaning you are locked in for life to whatever benefits you were first offered).

Every year, 4 million more baby boomers turn 55, effectively locking in their future benefits (and taxpayer costs). By 2019, all 77 million baby boomers will have turned 55, leaving future lawmakers with the unpalatable options of massive, economy-stagnating tax increases  unprecedented program terminations, or the paring back of benefits for those over 55. Tackling reforms immediately will reduce their ultimate costs, spread the burden across more people, and give baby boomers more time to adjust their retirement strategies.  This is the biggest argument for acting now.  Three years to fix our ailing entitlement system is a small window of opportunity that is quickly closing.

Conclusion

Like climbing Everest, Medicare needs a charismatic leader and some qualified guides to keep everyone on the right path and allow the necessary change.  Perhaps if our government can recognize that they cannot recoup sunk costs or fix the past, we can emerge with a new solution that looks at fixing Medicare from all angles.  Until now, reform focused on controlling costs by cutting reimbursements to providers and allowing private insurance companies to manage care.  Unless the public perception of Medicare is changed, from an entitlement to a true insurance program, waste will continue to be prevalent.  With the baby-boomer population on the doorstep, the time is now.  In the near future, let us hope that this is a mountain that is able to be conquered.

Works Cited

www.cms.hhs.gov

www.kff.org

www.medicare.gov

www.wikipedia.org