Defined contribution programs and their effects on Medicare
By Harold C. Sox, FACP
The Bipartisan Commission on Medicare recently reported some of its proposals for reforming Medicare. Congress is likely to take these proposals very seriously as it tries to control rising Medicare costs, which are depleting the Medicare Trust Fund.
One Commission proposal that could profoundly affect America's seniors involves changing Medicare from a defined benefit program to a defined contribution program. In the January issue of ACP-ASIM Observer, ACP-ASIM Senior Vice President for Governmental Affairs and Policy Robert Doherty explained the concept of defined contribution plans. ("How can Medicare be saved? A look at what's on the table" is available on ACP-ASIM Online at www.acponline.org.) I would like to expand on that introduction and look at the issue in a contemporary political context.
When trying to explain why health care costs continue to rise, most experts point to two principal reasons. First, the potential of expensive new technologies to help patients creates inexorable pressure to use them. Second, the insatiable demand for technology is in part a consequence of the distance between patients and the economic consequences of their demands for health care. In other words, people pay for their health care once a year and thereafter don't feel the economic consequences of their health care decisions.
There are several ways to get patients with insurance to take greater responsibility for their health care decisions. One approach is to use co-payments and deductibles. Another more drastic approach is to give patients an "allowance" for health care, hoping that they will spend the money as responsibly as if they were free to save it or spend it on consumer goods. One Commission proposal suggests making Medicare a defined contribution plan by giving patients such an "allowance" to pay for their health care.
Traditional, fee-for-service Medicare is a defined benefit program that guarantees a defined range of services to all eligible persons. The Medicare program is the jewel of our country's social programs. For the last 32 years, Medicare has meant security for older people.
If Medicare becomes a defined contribution plan, however, Medicare beneficiaries will not have guaranteed benefits. Instead, they will receive a sum of money earmarked for their health care. Under one version of a defined contribution plan, Medicare-eligible seniors would receive a voucher with which to purchase private insurance.
Cause for concern
Why is the defined contribution approach so attractive to the Bipartisan Commission on Medicare? Perhaps Commission members hope that Medicare beneficiaries will spend more wisely on health care and hold down overall costs. More importantly, by setting the size of the defined contribution, Congress can keep Medicare solvent. It can do that by limiting the size of the defined contribution—and that's why older Americans should be worried.
In fact, the size of the government's defined contribution may be considerably less than the cost of covering basic services. Patients will have to pay the balance. The cost of health insurance is likely to increase faster than the defined contribution, since an increase in the government's contribution would probably require Congress to levy higher taxes. As a result, patients' out-of-pocket health-related expenses are likely to increase.
One model used for voucher systems is the Federal Employees Health Benefits Program (FEHBP). The plan covers nine million active and retired federal workers who can choose coverage from a number of health care plans that meet minimum standards. Under federal community rating regulations, all plans must charge the same premium. The FEHBP pays 60% of the average premium of the six largest plans; beneficiaries pay the balance of the coverage they choose.
The FEHBP has successfully maintained comprehensive benefits for federal workers and controlled costs, so it is a model that deserves serious consideration. Of course, the makeup of the patient base—federal employees—is a big reason for the program's success: FEHBP beneficiaries are either still in the work force or retired and receiving a federal pension. Compared to average Medicare beneficiaries, they can better afford to pay the difference between the defined contribution and the actual cost of insurance.
Medical Savings Accounts (MSAs) are another form of defined contribution voucher program that create strong incentives for buyers to avoid unnecessary medical services. Under a Medicare MSA, the government would give beneficiaries catastrophic health care coverage with a high deductible. The government would also take funds currently in Medicare and deposit cash into beneficiary savings accounts reserved for medical expenditures. Beneficiaries would pay for any medical expenses from this account.
Parsimonious beneficiaries would save the balance in their accounts at the end of each year. That way, when serious illness struck, they could pay for their deductible with the money and reduce their out-of-pocket expenses. Beneficiaries, however, would be free to spend whatever money was left over at the end of the year on consumer goods.
For a number of reasons, MSAs illustrate the dark side of arrangements that allow healthy people to take money out of Medicare. Remember that most Medicare beneficiaries require very few services during a year. In fact, the top 10% of Medicare users account for 68% of Medicare expenses, while the bottom 50% of users account for only 1.6% of the expenses. In effect, money put into Medicare for healthy beneficiaries pays for most of the care of the sick.
MSAs will attract healthy people who don't expect to become sick and have to pay the deductible. The money that the government deposits in their savings accounts will not be available to help pay the costs of sick people, who will likely stay in fee-for-service Medicare, where they have guaranteed benefits.
Medicare could avoid depleting fee-for-service Medicare by adjusting its contribution to a beneficiary's MSA so that the contribution closely matched the individual's expected Medicare expenses. Techniques for risk-adjustment are not yet ready for widespread use. They still need to be fine-tuned and tested.
ACP-ASIM's Health and Public Policy Committee has taken a strong stand against defined contribution plans. If the Board of Regents approves this position, the College will have to make a very strong case to legislators. Potentially, every ACP-ASIM member who agrees with this stance will have a role to play in persuading members of Congress to proceed with caution on defined contribution plans.
Before moving ahead, we need a track record of success in risk-adjusting payments in Medicare+Choice. We also need to measure the effects of defined contribution plans in small-scale demonstration projects. Fee-for-service Medicare is a national treasure and a lifeline for older Americans. Just ask your patients how they feel about changing it.
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