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THE GROWTH OF HEALTH ENTITLEMENTS AND THE FEDERAL BUDGET
Statement of Marilyn Moon¹
before the
Subcommittee on Health and Environment
Committee on Commerce
U.S. House of Representatives
March 28, 1995
I appreciate the opportunity to speak to the committee on the issue of health care
spending and the federal budget. My testimony today focuses on Medicare and Medicaid,
which together represent about 32 percent of mandatory spending and are projected to
constitute nearly 40 percent by 2002. Although these two programs are growing rapidly, that
is not necessarily a sign of failure; indeed, these programs play a vital role in our health care
system and changes should be made recognizing their contributions. My testimony
concentrates on four general points:
These two programs have grown rapidly not because they are out of control, but
because they fill important gaps in the need for health coverage and because health
care costs have risen rapidly over time.
And although health care spending by the private sector has slowed substantially in the
last two years, claims that it has been much more efficient than Medicare are
considerably exaggerated.
While it is important to make a number of changes in these programs to slow the rate
of growth of spending over time, there are few quick fixes if we wish to protect health
care coverage for older, disabled and low income Americans.
Moving from the rhetoric of budget cutting to sensible changes in these programs
requires careful attention if spending reductions are to be successful.
¹Senior Fellow, The Urban Institute, Washington, D.C. This statement presents the views
of the author and does not necessarily represent the views of the Urban Institute, its trustees,
or sponsors.
2
WHY HAVE THESE PROGRAMS GROWN so FAST?
It has become fashionable to portray the Medicare and Medicaid programs as failing
because their rate of growth is so high. But, are Medicare and Medicaid out of control?
How should we interpret these high rates of health care spending? Medicare and Medicaid
have both grown rapidly over time, but not all of the growth has been undesirable.
First consider Medicaid. During the 1980s through the present, Medicaid has served
as the insurance program of last resort for many low income Americans. If not for
expansions in Medicaid over the last decade, the number of uninsured persons would be much
higher as the share of Americans receiving insurance from employers has dropped. For
example, between 1988 and 1992, Medicaid coverage of persons with incomes below 200
percent of poverty increased from 9 to 12 percent of that group while employer-subsidized
insurance coverage declined from 67 percent to 63 percent. Thus, without Medicaid, not only
would the share of persons without insurance have gone up leaving them vulnerable to
catastrophic financial problems, burdens on local and state governments to treat the uninsured
would also have risen substantially over the period.
In addition, long term care expenses and care for low income disabled and elderly
persons have also contributed to growth. Many people seem to ignore the fact that spending
on these beneficiaries constitutes about three quarters of total Medicaid spending.
And over and above these expansions, much of the growth in federal spending on the
Medicaid program in the late 1980s and early 1990s reflected states' concerted efforts to
bring more state-only programs under Medicaid's jurisdiction (to qualify for matching
payments) and to use special financing schemes to dramatically expand their disproportionate
3
share programs. These loopholes in Medicaid have now largely been closed, resulting in
much lower projected rates of growth for the future. For example, in 1993, Medicaid grew
by only 11 percent as compared to over 26 percent in each of the previous two years.
Thus, most of the growth in Medicaid in recent years represents expansions in
coverage or state-initiated expansions rather than inefficiencies in the program.
Medicare raises other issues. A number of critics of the Medicare program blame it
not only for the high costs of health care for the elderly, but for aggravating health care
inflation in general. The rapid growth in the program in its early years--expanding well
beyond predicted spending levels--is often cited as an example of why government program
cannot be trusted.
But the original goal of the legislation creating Medicare was to offer mainstream
medical care to older persons and the early fears for the program were that it would not be
accepted by doctors and hospitals. Thus, there was a conscious decision not to undertake cost
containment efforts initially. Medicare likely did contribute to some inflation as it expanded
demand for additional services, but no efforts to counteract this impact were made. And
when cost containment efforts were undertaken in the 1980s, Medicare's track record
improved substantially, doing better than the private sector for a number of years. In the last
two years, private sector growth rates have declined while Medicare's have remained high.
This recent low growth in the private sector as compared to Medicare is now being used as a
justification for making major changes, some of which might involve "privatizing" the
program. But it is extremely difficult to be sure of comparisons made on such short periods
of time.
+
In addition, there are several reasons to expect the rate of growth of Medicare to be
higher than that in the private sector over time. First, it is misleading to compare growth
rates when the base levels of spending are so different. That is, beginning in the mid 1980s.
Medicare held down the rate of growth of payments to hospitals and doctors substantially as
compared to private insurance. In the 1990s, as employers have become more serious about
costs of health care, that sector is now slowing--but it has a considerable way to go before it
matches payment levels in Medicare. There is simply more ability to cut payments to doctors
and hospitals in the private sector because they are substantially higher than what Medicare
pays.
In addition, both technology and the aging of the population affects the rate of growth
of Medicare expenditures, placing special demands on this program. As more people live into
their 80s and 90s, the costs of Medicare rise as a result. Further, improvements in technology
which make procedures safer and more effective are likely to be more heavily used by the
frail for whom riskier procedures were not advisable in the past. For example, cataract, hip
replacement and heart by-pass surgeries are areas where major advances have occurred and all
are procedures disproportionately used by the elderly. CT scans, MRIs and other advanced
imaging techniques also make care safer and more accessible for the elderly and disabled.
I have suggested a number of reasons why we might expect per capita growth in
Medicare to rise faster than that in the private sector. But what do the numbers actually tell
us? First, for seven of the last ten years, Medicare's per capita growth record has been below
that of the private sector. And Medicare's average looks better than the private sector in nine
of those ten years if home health and skilled nursing services are taken out of the rates (since
5
these are largely long term care services which tend not to be covered as extensively by
private insurance). The preliminary numbers for 1994 still look very low for the private
sector as compared to Medicare--but we do not know if this reflects a true slowdown in the
rate of growth of spending or if it mostly captures the one time savings of shifting from more
expensive indemnity programs to managed care. Thus, there is as yet little reason to believe
that the private sector's experience is superior to that of Medicare.
CAVEATS ABOUT MAGIC BULLETS
Although Medicare and Medicaid growth rates make them tempting targets for budget
reduction efforts, simple solutions may be elusive.
Capping Growth as a "Painless" Approach
One popular, but nonspecific proposal for achieving reductions in the federal deficit is
to "cap" the growth of entitlements. In recent years, several bills have been introduced in the
Congress that would place overall limits on the rate at which entitlements would be allowed
to grow. And proposals to make Medicaid a block-granted program also fall into this
category. The appeal is that such proposals sound quite technical, but they do not identify
who might be affected by these limits. Further, since they still allow positive growth over
time, they do not sound very punitive.
But caps themselves are not.a "solution"; once such a commitment is made, there is
still the issue of exactly how cuts would be accomplished. Caps do not solve the problem of
what or how to cut, they simply mandate that some change occurs. And it is when we begin
6
to examine specific changes such as those described below that harder choices have to be
faced.
When Slowing Growth Can be a Cut
One of the major reasons why there is a great deal of focus on entitlement programs--
particularly the health programs--is that their projected rates of growth are higher than for
other items in the budget. And it has become popular to argue that changes will be relatively
painless because they do not result in "cuts" in nominal dollars. But if changes are made to
the programs that reduce the rate of growth below what is needed to meet the legal
requirements--that is, to absorb expansions in participation as more people become eligible
(because of the aging of the population, for example) and as expected inflation in the
provision of health services raise costs of providing the benefits specified by law--it is
legitimate to refer to these changes as cuts in the program, even if they do not represent
dollar cuts in outlays. If the number of persons eligible for a benefit rises by 10 percent, for
example, but the budget for a program is allowed to grow by only 5 percent, payments on
behalf of each eligible person would have to fall. Individual participants in a program would
properly view that as a "cut."
What about the issue of inflation? This is a more complicated question, in part
because it depends upon measuring changes that are difficult to know with certainty. If there
is inflation which makes it more expensive to continue to provide the same benefit through
time, then reductions in the amount available to meet those higher expenses would reduce
what the recipient receives in real terms. Again this is legitimately viewed as a "cut." It may
7
not be possible to "require" that there be no inflation.
On the other hand, if new efficiencies in providing services can be achieved to provide
the same benefits at lower cost than projected in the baseline, it is legitimate to argue that
lower growth would not reflect a cut. For example, many of the changes legislated in the
Medicare program in recent years to slow its rate of growth have focused on payments to the
providers of health care, such as doctors and hospitals. By reducing payments but not
changing the program in other ways, it is often claimed that Medicare benefits have not been
cut. If this reflects efficiencies in the provision of care or reductions in unnecessarily
generous payments, then that would be a reasonable characterization. But as Medicare
payments relative to the rest of the health care system fall, however, further change may
ultimately not only affect providers, but beneficiaries as well in terms of reduced access or
lower quality.
Short Run Vs. Long Run Changes
Finally, part of the debate revolves around the need for reducing spending on the
Medicare program to avoid a future crisis in the trust fund financing of the program itself.
Reductions in Medicare carry the implicit promise of killing two birds with one stone--
reducing the current budget deficit of the federal government and helping the long-run
stability of the trust fund. Current projections by the actuaries suggest that the trust fund for
Part A of Medicare will be depleted by the year 2001. Although that date may slip in the
next trustees' report, Medicare needs to be seriously addressed within the next two or three
years.
# "
8
The problem is that savings that help the federal deficit over the next few years may
not always be the best long run strategies. For example, many Americans carefully make
savings and other long-run decisions on the basis of what they expect to receive from both
Social Security and Medicare. Moreover, once individuals retire, it is difficult to return to the
labor force or make other changes to compensate for benefit reductions to existing
beneficiaries. It is thus important for these programs to change slowly over time in order to
remain valuable sources of protection for retirees. These factors make short run savings
efforts less desirable. Only when opportunities arise that are consistent with the long term
needs of the program does it make sense to take advantage of them for short run relief as
well.
A further mistake of much of the discussion is to treat Social Security and Medicare
as fully separate programs. Social Security and Medicare are linked, so that problems in one
part of our social insurance system will inevitably affect the other parts. Some supporters
view one program as essential and the other expendable. But the large and growing share of
the federal budget devoted to entitlement programs for seniors suggests that we cannot expect
to view each of these programs separately. Some changes will be easier to accomplish in one
venue but not the other. For example, Social Security may be the more amenable to changes
that affect beneficiaries directly since benefit amounts can be fine tuned in ways that an in-
kind benefit program like Medicare cannot. Small adjustments in the benefit formula could.
make Social Security more progressive--a simpler approach than many of the income-related
changes proposed for Medicare.
Thus, putting off any consideration of Social Security, but subjecting Medicare to
9
major modifications may not be a desirable strategy. For example, proposals such as rolling
back the recent increase in taxation of Social Security benefits surely moves in the wrong
direction.
MOVING FROM RHETORIC TO SPECIFIC OPTIONS FOR CHANGE
Although cuts in these programs are not likely to be easy, it is crucial to identify areas
where we could slow the growth of these programs, while keeping intact their basic goals.
Medicare
The pending financial crisis in Medicare affects Part A of the program, which is
funded by payroll taxes. Part A covers hospital services, skilled nursing care and home
health services, and so it is in these areas that reductions will most critically need to be found
over time. However, changes for Part A offer only a limited range of options for cuts.
One set of changes might be to reduce payments to health care providers for Medicare.
This would mean, for example, cutting payments to hospitals, nursing homes, and/or home
health agencies. Since hospital services make up the bulk of Part A spending, many of the
cuts would have to take place there. Continuation of cuts such as lowering the annual
payment updates for hospitals can result in some further decline in Part A spending over its
projected level. Alternatively, some specific areas might be targeted such as payments for
indirect medical education.
Hospitals, however, are already objecting strongly to the levels of payment they
receive under Medicare, arguing that they often do not even cover the costs of such care. To
10
the extent that they are able, hospitals will attempt to shift any shortfall in payments onto
other payers of care, such as private insurance patients. And if there are major shortfalls that
cannot be shifted, hospitals and other health care providers may be forced to close their doors
or stop treating Medicare patients. Both of these effects create problems for our health care
system. Since the early 1980s, Medicare has relied heavily on this type of savings and some
further savings are likely possible. At some point, once the gap between costs and what
Medicare will pay widens enough, this option will cease to be a viable source of new savings,
however.
Another area where change is possible is in seeking better controls on the use of
services such as home health care and outpatient hospital services. Both these areas have
grown rapidly and been subject to little scrutiny.
Nonetheless, it is likely that future proposals for cutting Medicare will look to changes
that would affect beneficiaries directly. These include a new Part A premium or higher cost
sharing for the services received. Medicare has never charged a premium for the Hospital
Insurance portion of the program, so this would mean a major change in the philosophy of the
program. And the existing deductibles and coinsurance under Part A are already very high--
certainly as compared to the private sector. For example, the hospital deductible is $716 for
the first day of a spell of illness (of which there can be several in a given year).
Some of the proposals for a higher hospital deductible or a new premium would make
them income-related. Those with higher incomes would pay more. While this would be
fairer than a flat increase and would make higher premiums or deductibles possible since
lower income beneficiaries would not have to bear the full burden, this would require either
11
setting up a whole new administrative structure or using the income tax for processing
payments. (A fairer way to raise revenues progressively under Part A would be to expand
taxation of Social Security and continue applying it to the Part A trust fund as is now being
done with the 1993 Social Security taxation provisions. This effectively creates an income-
related premium in Part A without adding a whole new benefit structure.)
Finally, one of the more commonly proposed options for helping the Part A trust fund
would be to institute a new coinsurance payment for home health services. The coinsurance
on this service was eliminated in 1972 and a number of health care proposals and deficit
reduction plans have called for reinstituting the coinsurance, particularly since home health
services have been growing rapidly in recent years. Indeed, the Congressional Budget Office
has estimated that a 20 percent coinsurance could raise about $20 billion over 5 years.
However, this option has particularly undesirable effects on low and moderate income
beneficiaries. Because the very old are most likely to use this benefit--and to use it
extensively--they would bear the greatest burden from this change. The average user of home
health services would face a new coinsurance charge of over $700 per year under this
proposal. And because the incomes of these older, frail Medicare beneficiaries tend to be
quite low, this would be a particularly regressive change. For example, beneficiaries aged 85
and over would pay coinsurance rates about five times higher than those aged 65 to 69.
Changes on the Part B side (which covers physician services, outpatient care,
laboratory services, etc.) are more promising. There the deductible of $100 per year is low
by usual standards of comparison with the private sector. And some have suggested raising
the Part B premium, which currently stands at $46.10 per month. This might be either an
12
across the board increase or an income-related one.
The full burden of cost-sharing for the elderly and disabled under Medicare is already
quite high, however. Out-of-pocket spending by the elderly for all acute care services will
average about $1,382 in 1994. To that should be added the amount that individuals must pay
in premiums for Medicare and supplemental insurance--another $1,137. For moderate income
families, this is already a substantial burden well in excess of what younger families pay.
Any further added burdens ought to be viewed in that context.
Changes to improve the structure of Medicare's cost sharing could be undertaken in
such a way as to raise the average burdens somewhat, while protecting the most vulnerable.
For example, a lower Part A deductible and coinsurance structure would benefit the oldest old
more who are least likely to be able to pay. The Part B deductible could be raised to offset
this change and since its burden is more evenly distributed, it would result in a fairer
targeting of cost sharing. If raised enough, net savings could be achieved. And some
expansion of the Part B premium, likely with an income-related component could also help
defray some of the costs of the program.
The limitations of reducing Medicare's growth over time through lower provider
payments or higher patient cost sharing lead many to consider a more aggressive strategy for
putting Medicare beneficiaries into managed care. This change offers some promise for the
future, but we should be wary of moving too rapidly in this direction.
Medicare's experience suggests protections for consumers and careful oversight will be
needed to avoid major problems and scandals that could taint reform. HMOs have found it
difficult to bring the elderly and disabled into their programs. These patients do not always
13
behave like younger HMO patients and hence HMOs have sometimes found it more difficult
to hold down the costs of care. Policies such as limiting access to specialists may not work
well with a population with multiple health care problems, for example. As a result, they
have not always been able to cover patients adequately with the payments that Medicare
makes on behalf of beneficiaries. There have been some notable crises with HMOs suddenly
dropping Medicare enrollees because of such financial difficulties.
And those HMOs that have attracted seniors have sometimes done so selectively,
seeking beneficiaries whose average costs will be lower than Medicare's per capita payment
not because of better management and oversight of care but because of selecting low-risk
patients. Once patients become very ill, some HMOs encourage them to disenroll. The
easiest ways for an HMO to limit costs of Medicare enrollees is still to carefully choose those
who enroll. And this adverse selection results in a perverse system where Medicare pays too
much to HMOs.
But this is not an easy flaw to fix, since most analysts recognize that there is great
difficulty in determining a reasonable payment to make to HMOs for each enrollee--a critical
factor in assuring that competition among plans occurs fairly. Evidence to date suggests that
the voluntary system in Medicare has not reduced Medicare costs. It would be a mistake to
move prematurely into this area for Medicare without first resolving a number of these issues.
If this is to be the strategy for Medicare for the future, we should proceed slowly to.
assure that the system offers protections for beneficiaries, providers, and the government
alike. Medicare is too large and the benefits too important to its enrollees to engage in crass
experimentation. This suggests that while there may be savings over time from managed
14
care, it is best to provide for a reasonable transition.
Medicaid
Changes in the Medicaid program ought to also proceed with caution. As the safety
net for insurance that protects both vulnerable populations and state and local governments
from expenses they would otherwise face, this program is an essential part of our health care
system and the only safety net we have. Even though it is expensive, Medicaid does not
cover even all of the poor, and its payments to providers are notoriously low. It is not a
program for which cuts are easily identified. Nonetheless, Medicaid is particularly at risk,
however, because its constituency is less popular than that for Medicare.
Two of the major areas for cutting the program have focused on establishing caps in
payments to the states or on expanding managed care. In fact, the claim is often made that
states could save enough from managed care to function within very stringent growth rates.
Some states are enthusiastically embracing managed care as a means for holding down the
costs of existing populations and of expanding coverage to others. Indeed, a growing share of
Medicaid beneficiaries are already in managed care arrangements. If these programs move
additional Medicaid beneficiaries into good systems of managed care that replace
inappropriate use of hospital emergency rooms with early intervention by primary care
physicians and other similar changes, then everyone may be better off. This is particularly
the case with populations that have lacked reliable providers.
But there are several caveats. We do not know how well these newly emerging
managed care programs will do over time: will they be able to serve their clients at the very
15
low premium levels being offered? This is an experiment and one for which the results are
not fully digested. For example, enormous changes will occur in the delivery of care, with
fewer resources going to public hospitals that have traditionally served this population and
flowing instead into new managed care entities. In many cases, the equation also depends
upon moving non-Medicaid uninsured persons into similar arrangements to reduce the burdens
of uncompensated care on various providers. Without this concurrent expansion, some of the
lower payment levels for existing Medicaid recipients may not be sustainable. In those cases,
Medicaid is not seeking savings, but rather a re-arrangement of dollars.
Moreover, many of these exercises that may save Medicaid money concentrate on the
under-65, nondisabled population. Moms and kids represent a large number of the
participants in Medicaid, but only a small share of the costs. And already, many states have
already made such changes, so that some of the savings have already been absorbed. What
will happen when we try to move the disabled and elderly into managed care plans, many of
which have never treated such populations? This is where the money is and where additional
problems and complications are likely to crop up.
Caps on Medicaid in the 5 percent range will likely not be able to achieve their targets
without some reductions in services even if states move into more managed care. If states are
given greater flexibility, there will likely be reductions in populations served or in services
provided.
But even if the decision is made to move in that direction, a substantial problem will
arise in deciding how to treat the states. In the case of a cap, for example, one option might
be to allow each state no more than 103 or 105 percent of current federal dollars received.
16
States vary enormously in their programs, however, so that a cap that might be reasonable for
a state that is already generous and considering cutting back its program (New York, for
example) would be in a much better position to absorb the limit than a state with a less
generous program that would like to expand.
The current formula for establishing federal matching rates is acknowledged by many
to be in need of substantial change. The level of current federal spending is also affected by
states' current abilities and willingness to fund the program. This has led to some states with
many needy individuals having very small programs relative to others. How would new
formulas or limits deal with these challenges? If we shift from a matching formula to
outright block grants, will it still seem fair to have payments to Connecticut be much higher
per eligible persons than in Mississippi or Georgia, for example? This is likely to be a very
tough issue and one likely to exacerbate rather than improve the inequities in access to a
health care safety net across the United States.
CONCLUSIONS
There are no easy solutions for reducing federal spending on health entitlements. Such
programs play an essential and valuable role in protecting millions of Americans.1 But if
cuts are to be made, there are certainly more and less desirable ways to do so.
First, the long run problems of Medicare suggest that changes will need to be made in
this program over time. Some changes would be consistent with short run budget savings,
but others ought to be phased in very slowly. Reordering the cost sharing in Medicare,
raising Part B premiums in an income-related manner, and some further limits on provider
17
payments can achieve short-run savings. More work on identifying unnecessary spending on
home health services and outpatient hospital care should certainly be undertaken. Over the
longer run, it is reasonable to consider further moves into managed care, but a lot of work is
needed before moving aggressively in that direction.
Medicaid is more problematic since it serves as a critical safety net for the poorest of
our citizens. Some increased flexibility to states might be offered in exchange for lower
federal payments, although such reductions or limits on growth should not be applied across
the board; a fairer system for establishing payment level changes is needed. In addition,
further efforts to reduce misuse of disproportionate share payments could save some federal
revenues without putting more vulnerable persons at risk. Managed care is promising as well,
but the savings there are likely to be much more modest than many now assume.
Whatever changes are made, it is essential to be honest with Americans when making
such cuts: there are few easy or painless ways to do so.
HEALTH CARE SPENDING AND THE FEDERAL BUDGET
Statement by Marilyn Moon¹
before the
Committee on the Budget
United States Senate
February 1, 1995
I appreciate the opportunity to speak to the committee on the issue of health care
spending and the federal budget. Identifying reasonable options for changes in entitlements in
general and engaging in a measured and careful discussion of the pros and cons of such
options pose formidable tasks. Both those who argue for no change under any conditions and
those who would dramatically cut popular and successful programs do a disservice to the goal
of finding workable solutions to the future challenges that entitlements will surely face.
My testimony today focuses on the two major health programs in the federal budget--
Medicare and Medicaid. These two programs now represent about 32 percent of mandatory
spending and are projected to constitute nearly 40 percent by 2002. While it is not possible
to address all the issues that ought to be considered in a careful review of these two
programs, my testimony concentrates on four general points:
Rhetoric on the issue of entitlement changes can be misleading, making it important to
sort out the basic principles behind some of the common claims made about these
programs;
Although Social Security is not on the table as a current budget issue, its long run
inter-relationship with Medicare needs to be kept in mind;
Medicare and Medicaid tend to be maligned because of their rapid rates of growth, but
it is important not to assume that they can be readily brought down to match the rate
of growth of federal spending in general; and
Moving from the rhetoric of budget cutting to sensible changes in these programs
requires careful attention if spending reductions are to be successful.
THE PRINCIPLES BEHIND THE RHETORIC
In order to make the business of reducing the federal budget less distasteful, many
proponents of major change refer to "reducing the rate of growth of out-of-control
'Senior Fellow, The Urban Institute, Washington, D.C. This statement presents the views
of the author and does not necessarily represent the views of the Urban Institute, its trustees
or sponsors.
2
entitlements." This implies mild and relatively painless adjustments, mere technical fine
tuning of these programs. Opponents charge that "major cuts would destroy Social Security
and health programs." Which set of claims is more accurate? To understand these issues. it
is important to examine basic definitions and principles.
Entitlements
In recent years, the term "entitlement" has taken on a pejorative connotation, implying
that such programs are easily abused by their recipients. But in actuality this is merely a
technical budget term that refers to programs not subject to the annual appropriations process.
One is entitled through eligibility and other program rules. The intent of such programs was
that they would rise and fall each year in concert with changes in eligibility or to meet other
specific requirements (such as the cost of health coverage). There is no inherent reason why
entitlements must grow at an unusual pace. It is also likely, however, that few expected such
rapid growth in many of the programs at the time of their passage. Thus, it is certainly
appropriate to periodically reevaluate whether such preferential treatment is still desired and
whether the same level of commitment is appropriate.
If this special budget treatment is deemed to be warranted, the growth of entitlements
should be viewed as an intended consequence over time. If not, then like other government
programs, the entitlements in question need to be amended.
When a Cut is a Cut
One of the major reasons why there is a great deal of focus on entitlement programs--
particularly the health programs--is that their projected rates of growth are higher than for
other items in the budget. Baseline projections for the future assume that the programs will
grow in a manner sufficient to absorb expansions in participation as more people become
eligible (because of the aging of the population, for example) and as cost of living
adjustments and expected inflation in the provision of health services raise costs of providing
the benefits specified by law.
If changes are made to the programs that reduce the rate of growth below what is
needed to meet the legal requirements, it is legitimate to refer to these changes as cuts in the
program, even if they do not represent dollar cuts in outlays. If the number of persons
eligible for a benefit rises by 10 percent, for example, but the budget for a program remains
fixed, payments on behalf of each eligible person would have to fall. Individual participants
in a program would properly view that as a "cut."
What about the issue of inflation? This is a more complicated question, in part
because it depends upon measuring changes that are difficult to know with certainty. If there
is inflation which makes it more expensive to continue to provide the same benefit through
3
time. then reductions in the amount available to meet those higher expenses would reduce
what the recipient receives in real terms. Again this is legitimately viewed as a "cut."
On the other hand, if we find ways to more accurately measure inflation that
effectively slows the rate of growth of spending over what was anticipated, then it would be
unfairly labeled a cut. That said, however, it is not clear that the ways in which we measure
inflation now err only in the direction of overstating inflation. We do not know and so it is
important to move slowly in this area. Careful study is needed and it is inappropriate to
prematurely conclude that we can "save" a particular amount of money from this exercise.
Changes in the Consumer Price Index will have important policy implications, but the
exercise should not get entangled in the political process.
Sometimes interpretation of the term "cuts" in programs also depends upon who is
being disadvantaged. For example, many of the changes legislated in the Medicare program
in recent years to slow its rate of growth have focused on payments to the providers of health
care, such as doctors and hospitals. By reducing payments but not changing the program in
other ways, it is often claimed that Medicare benefits have not been cut. If this reflects
efficiencies in the provision of care or reductions in unnecessarily generous payments, then
that would be a reasonable characterization. As Medicare payments relative to the rest of the
health care system fall, however, further change may ultimately not only affect providers, but
beneficiaries as well in terms of reduced access or lower quality.
Capping Growth as a "Painless" Approach
One popular, but nonspecific proposal for achieving reductions in the federal deficit is
to "cap" the growth of entitlements. In recent years several bills have been introduced in the
Congress that would place overall limits on the rate at which entitlements would be allowed
to grow. And proposals to make Medicaid a block-granted program also fall into this
category. The appeal that the proposal sounds quite technical, but does not identify who
might be affected. Under these proposals, entitlements would sometimes be linked together
with each taking a proportionate hit; in other versions, each program would be bound by its
own growth limit. But this is not in itself a "solution"; once such a commitment is made,
there is still the issue of exactly how cuts would be accomplished. Caps do not solve the
problem of what or how to cut, they simply mandate that some change occurs. And it is
when we begin to examine specific changes such as those described below that harder choices
have to be faced.
Short Run Vs. Long Run Changes
Finally, part of the debate revolves around the need for cuts in the Medicare and
Social Security programs to avoid a future crisis in the trust fund financing of the programs
themselves. Reductions in these two programs thus carry the implicit promise of killing two
+
birds with one stone--reducing the current budget deficit of the federal government and
helping the long-run stability of the trust funds that finance these two programs.
The problem is that savings that help the federal deficit over the next few years may
not always be the best long run strategies. The unique role that Social Security plays in the
lives of Americans is that of a floor of income protection during retirement. Many
Americans carefully make savings and other long-run decisions on the basis of what they
expect to receive from Social Security and Medicare. Moreover, once individuals retire, it is
difficult to return to the labor force or make other changes to compensate for benefit
reductions to existing beneficiaries. It is thus important for these programs to change slowly
over time in order to remain valuable sources of protection for retirees. These factors make
short run savings efforts less desirable. Only when opportunities arise that are consistent with
the long term needs of the program does it make sense to take advantage of them for short
run relief as well.
THE SPECIAL CHALLENGES OF MEDICARE AND SOCIAL SECURITY
Both Social Security and Medicare will face unprecedented challenges as the Baby
Boom generation approaches retirement age. And, for Medicare, the problems are projected
to come upon us soon because of the additional burdens of rapidly rising health care costs.
Current projections by the actuaries suggest that the trust fund for Part A of Medicare will be
depleted by the year 2001. Although that date may slip in the next trustees' report, Medicare
needs to be seriously addressed within the next two or three years. Solvency for Social
Security will also become a major issue but well after the turn of the century, meaning that
adjustments to the Social Security program can be put off for a longer period. But here too
the earlier we begin to tackle the problem, the less pain will likely be inflicted on anyone.
Any current proposal that affects Social Security or Medicare needs to be viewed in the
context of this looming financing crisis.
A further mistake of much of the discussion is to treat Social Security and Medicare
as fully separate programs. Social Security and Medicare are linked, so that problems in one
part of our social insurance system will inevitably affect the other parts. Some supporters
view one program as essential and the other expendable. But the large and growing share of
the federal budget devoted to entitlement programs for seniors suggests that we cannot expect
to view each of these programs separately. Some changes will be easier to accomplish in one
venue but not the other. For example, Social Security may be the more amenable to changes
that affect beneficiaries directly since benefit amounts can be fine tuned in ways that an in-
kind benefit program like Medicare cannot. Small adjustments in the benefit formula could
make Social Security more progressive--a simpler approach than many of the income-related
changes proposed for Medicare.
It is difficult to find ways to subdivide Medicare, which is defined as a given level of
insurance coverage. One way to do this, for example, would be to income-relate the premium
5
or to fully means test eligibility. But both of these changes represent major philosophical
shifts in the program and would require a substantial new (and expensive) administrative
mechanism to enforce those changes. Moreover, Medicare is already a more progressive
benefit than Social Security because its value does not rise with the level of contributions
made in the past to the program. High wage contributors still receive the same basic benefit
as those who contribute substantially less over their working lives.
Thus, putting off any consideration of Social Security, but subjecting Medicare to
major modifications may not be a desirable strategy. Proposals such as rolling back the
recent increase in taxation of Social Security benefits surely moves in the wrong direction.
THE HEALTH ENTITLEMENTS
It has become fashionable to portray the Medicare and Medicaid programs as failing
because their rate of growth is currently above that of the private sector. Moreover, this
suggests that "privatizing" of these programs or at least partially contracting out to the private
sector will result in substantial savings to the federal government. Are Medicare and
Medicaid out of control? How should we interpret these high rates of health care spending?
Medicare and Medicaid have both grown rapidly over time, but not all of the reasons for this
growth will be tackled by privatization; indeed, not all of the growth is undesirable.
First consider Medicare. A number of critics of the Medicare program blame it not
only for the high costs of health care for the elderly, but for aggravating health care inflation
in general. The rapid growth in the program in its early years--expanding well beyond
predicted spending levels--is often cited as an example of why government program cannot be
trusted.
But the original goal of the legislation creating Medicare was to offer mainstream
medical care to older persons and the early fears for the program were that it would not be
accepted by doctors and hospitals. Thus, there was a conscious decision not to undertake cost
containment efforts initially. Medicare likely did contribute to some inflation as it expanded
demand for additional services, but no efforts to counteract this impact were made. And
when cost containment efforts were undertaken in the 1980s, Medicare's track record
improved substantially, doing better than the private sector for a number of years. In the last
two years, private sector growth rates have declined while Medicare's have remained high.
This recent low growth in the private sector as compared to Medicare is now being used as a
justification for privatizing the program. But it is extremely difficult to be sure of
comparisons made on such short periods of time.
In addition, there are several reasons to expect the rate of growth of Medicare to be
higher than that in the private sector over time. First, it is difficult to compare growth rates
without knowing the base in both sectors. Beginning in the mid 1980s, Medicare held down
the rate of growth of payments to hospitals and doctors substantially as compared to private
6
insurance. In the 1990s, as employers have become more serious about costs of health care.
that sector is now slowing--but it has a considerable way to go before it matches payment
levels in Medicare.
In addition, both technology and the aging of the population will affect the rate of
growth of Medicare expenditures, placing special demands on this program. As more people
live into their 80s and 90s, the costs of Medicare rise as a result. Further, improvements in
technology which make procedures safer and more effective are likely to be more heavily
used by the frail for whom riskier procedures were not advisable in the past. For example,
cataract, hip replacement and heart by-pass surgeries are areas where major advances have
occurred and all are procedures disproportionately used by the elderly. CT scans, MRIs and
other advanced imaging techniques also make care safer and more accessible for the elderly
and disabled.
In the case of the Medicaid program, a number of different factors apply. During the
1980s through the present, Medicaid has served as the insurance program of last resort for
many low income Americans. If not for expansions in Medicaid over the last decade, the
number of uninsured persons would be much higher as the share of Americans receiving
insurance from employers has dropped. And without Medicaid, burdens on local and state
governments to treat the uninsured would rise substantially. In addition, long term care
expenses and care for low income disabled and elderly persons have also contributed to
growth.
But even with these expansions, much of the growth in federal spending on the
Medicaid program in the late 1980s and early 1990s reflected states' concerted efforts to
bring more state-only programs under Medicaid's jurisdiction (to qualify for matching
payments) and to use special financing schemes to dramatically expand their disproportionate
share programs. These loopholes in Medicaid have now largely been closed, resulting in
much lower projected rates of growth.
All of this suggests that while there are likely opportunities for scaling back these
programs, simple solutions may be elusive.
MOVING FROM RHETORIC TO SPECIFIC OPTIONS FOR CHANGE
Since this hearing is focused on the short run budget changes that might be made in
entitlement programs and since Social Security is not on the table for discussion, I focus
below only on some of the options for changing Medicare and Medicaid.
Medicare
The pending financial crisis in Medicare affects Part A of the program, which is
funded by payroll taxes. Part A covers hospital services, skilled nursing care and home
7
health services, and so it is in these areas that reductions will most critically need to be found
over time. However, changes for Part A offer only a limited range of options for cuts.
One set of changes might be to reduce payments to health care providers for Medicare.
This would mean, for example, cutting payments to hospitals, nursing homes, and/or home
health agencies. Since hospital services make up the bulk of Part A spending, many of the
cuts would have to take place there. Hospitals, however, are already objecting strongly to the
levels of payment they receive under Medicare, arguing that they often do not even cover the
costs of such care. To the extent that they are able, hospitals will attempt to shift any
shortfall in payments onto other payers of care, such as private insurance patients. And if
there are major shortfalls that cannot be shifted, hospitals and other health care providers may
be forced to close their doors or stop treating Medicare patients. Both of these effects create
problems for our health care system. Since the early 1980s, Medicare has relied heavily on
this type of savings and some further savings are likely possible. At some point, once the
gap between costs and what Medicare will pay widens enough, this option will cease to be a
viable source of new savings, however.
A number of proposals for cutting Medicare thus look elsewhere to changes that
would affect beneficiaries directly. These include a new Part A premium or higher cost
sharing for the services received. Medicare has never charged a premium for the Hospital
Insurance portion of the program, so this would mean a major change in the philosophy of the
program. And the existing deductibles and coinsurance under Part A are already very high--
certainly as compared to the private sector. For example, the hospital deductible is $716 for
the first day of a spell of illness (of which there can be several in a given year).
Some of the proposals for a higher hospital deductible or a new premium would make
them income-related. Those with higher incomes would pay more. While this would be
fairer than a flat increase and would make higher premiums or deductibles possible since
lower income beneficiaries would not have to bear the full burden, this would require either
setting up a whole new administrative structure or using the IRS. As described above, a
fairer way to raise revenues progressively under Part A would be to expand taxation of Social
Security and continue applying it to the Part A trust fund (as is now being done with the
1993 Social Security taxation provisions).
Finally, one of the more likely options for helping the Part A trust fund would be to
institute a new coinsurance payment for home health services. The coinsurance on this
service was eliminated in 1972 and a number of health care proposals and deficit reduction
plans have called for reinstituting the coinsurance. Indeed, the Congressional Budget Office
has estimated that a 20 percent coinsurance could raise about $20 billion over 5 years.
However, this option has particularly undesirable effects on low and moderate income
beneficiaries. Because the very old are most likely to use this benefit--and to use it
extensively--they would bear the greatest burden from this change. The average user of home
health services would face a new coinsurance charge of over $700 per year under this
proposal. And because the incomes of these older, frail Medicare beneficiaries tend to be
8
quite low, this would be a particularly regressive change. For example, beneficiaries aged 85
and over would pay coinsurance rates about five times higher than those aged 65 to 69.
Changes on the Part B side (which covers physician services, outpatient care.
laboratory services, etc.) are more promising. There the deductible of $100 per year is low
by usual standards of comparison with the private sector. And some have suggested raising
the Part B premium, which currently stands at $46.10 per month. This might be either an
across the board increase or an income-related one.
The full burden of cost-sharing for the elderly and disabled under Medicare is already
quite high, however. Out-of-pocket spending by the elderly for all acute care services will
average about $1,382 in 1994. To that should be added the amount that individuals must pay
in premiums for Medicare and supplemental insurance--another $1,137. For moderate income
families, this is already a substantial burden well in excess of what younger families pay.
Any further added burdens ought to be viewed in that context.
Changes to improve the structure of Medicare's cost sharing could be undertaken in
such a way as to raise the average burdens somewhat, while protecting the most vulnerable.
For example, a lower Part A deductible and coinsurance structure would benefit the oldest old
more who are least likely to be able to pay. The Part B deductible could be raised to offset
this change and since its burden is more evenly distributed, it would result in a fairer
targeting of cost sharing. If raised enough, net savings could be achieved. And some
expansion of the Part B premium, likely with an income-related component could also help
defray some of the costs of the program.
The limitations of reducing Medicare's growth over time through lower provider
payments or higher patient cost sharing lead many to consider a more aggressive strategy for
putting Medicare beneficiaries into managed care. This change offers some promise for the
future, but we should be wary of moving too rapidly in this direction.
Medicare's experience suggests protections for consumers and careful oversight will be
needed to avoid major problems and scandals that could taint reform. HMOs have found it
difficult to bring the elderly and disabled into their programs. These patients do not always
behave like younger HMO patients and hence HMOs have sometimes found it more difficult
to hold down the costs of care. As a result, they have not always been able to cover patients
adequately with the payments that Medicare makes on behalf of beneficiaries. There have
been some notable crises with HMOs suddenly dropping Medicare enrollees because of such
financial difficulties. And those that have attracted seniors have sometimes done so
selectively, seeking beneficiaries whose average costs will be lower than Medicare's per
capita payment not because of better management and oversight of care but because of
selecting low-risk patients. Once patients become very ill, some HMOs encourage them to
disenroll.
9
Consequently, such activities cast doubt on whether these arrangement truly save costs
for the Medicare program at present. Moreover, the program has had difficulty in
determining a reasonable payment to make to HMOs for each enrollee--a critical factor in
assuring that competition among plans occurs fairly. Evidence to date suggests that the
voluntary system in Medicare has not reduced Medicare costs. It would be a mistake to
move prematurely into this area for Medicare without first resolving some of these issues.
Medicaid
Changes in the Medicaid program ought to also proceed with caution. As the safety
net for insurance that protects both vulnerable populations and state and local governments
from expenses they would otherwise face, this program is an essential part of our health care
system and the only safety net we have. Even though it is expensive, Medicaid does not
cover even all of the poor, and its payments to providers are notoriously low. It is not a
program for which cuts are easily identified. Nonetheless, Medicaid is particularly at risk,
however, because its constituency is less popular than that for Medicare.
Two of the major areas for cutting the program have focused on establishing caps in
payments to the states or on expanding managed care. Some states are enthusiastically
embracing managed care as a means for holding down the costs of existing populations and
of expanding coverage to others. Indeed, a growing share of Medicaid beneficiaries are
already in managed care arrangements. If these programs move additional Medicaid
beneficiaries into good systems of managed care that replace inappropriate use of hospital
emergency rooms with early intervention by primary care physicians and other similar
changes, then everyone may be better off.
But there are several caveats. We do not know how well these newly emerging
managed care programs will do over time: will they be able to serve their clients at the very
low premium levels being offered? This is an experiment and one for which the results are
not fully digested. For example, enormous changes will occur in the delivery of care, with
fewer resources going to public hospitals that have traditionally served this population and
flowing instead into new managed care entities. In many cases, the equation also depends
upon moving non-Medicaid uninsured persons into similar arrangements to reduce the burdens
of uncompensated care on various providers. Without this concurrent expansion, some of the
lower payment levels for existing Medicaid recipients may not be sustainable. In those cases,
Medicaid is not seeking savings, but rather a re-arrangement of dollars.
Moreover, many of these exercises that may save Medicaid money concentrate on the
under-65, nondisabled population. Moms and kids represent a large number of the
participants in Medicaid, but only a small share of the costs. What will happen when we try
to move the disabled and elderly into managed care plans, many of which have never treated
such populations? This is where the money is and where additional problems and
complications are likely to crop up.
10
Caps on Medicaid will likely not be able to achieve their targets without some
reductions in services even if states move into more managed care. If states are given greater
flexibility, there will likely be reductions in populations served or in services provided.
But even if the decision is made to move in that direction, a substantial problem will
arise in deciding how to treat the states. In the case of a cap, for example, one option might
be to allow each state no more than 103 or 105 percent of current federal dollars received.
States vary enormously in their programs, however, so that a cap that might be reasonable for
a state that is already generous and considering cutting back its program (New York, for
example) would be in a much better position to absorb the limit than a state with a less
generous program that would like to expand. The current formula for establishing federal
matching rates is acknowledged by many to be in need of substantial change. The level of
current federal spending is also affected by states' current abilities and willingness to fund the
program. This has led to some states with many needy individuals having very small
programs relative to others. How would new formulas or limits deal with these challenges?
This is likely to be a very tough issue and one likely to exacerbate rather than improve the
inequities in access to a health care safety net across the United States.
CONCLUSIONS
There are no easy solutions for reducing federal spending on health entitlements.
Because such programs play an essential and valuable role in protecting millions of
Americans and cuts in these programs would not be my preferred means for achieving a
balanced budget over time. But if cuts are to be made, there are certainly more and less
desirable ways to do so.
First, the long run problems of Social Security and Medicare suggest that changes will
need to be made in these programs over time. Some changes would be consistent with short
run budget savings, but others ought to be phased in very slowly. To the extent that
reasonable short run changes can be identified, there is no valid reason for protecting Social
Security but not Medicare since the impacts on beneficiaries will often be similar.
In the health area, some changes are possible. Reordering the cost sharing in
Medicare, raising Part B premiums in an income-related manner, and some further limits on
provider payments can achieve short-run savings. Over the longer run, it is reasonable to
consider further moves into managed care, but a lot of work is needed before moving
aggressively in that direction. Medicaid is more problematic, but further efforts to reduce
misuse of disproportionate share payments could save some federal revenues without putting
more vulnerable persons at risk.
Whatever changes are made, it is essential to be honest with Americans when making
such cuts: there are few easy or painless ways to do so.
Copyright 1994 by
The Gerontological Society of America
The Gerontologist
Vol. 34, No. 5, 606-611
Lessons From Medicare
Marilyn Moon, PhD,¹
The Medicare program poses many challenges for
problems that may be created by establishing what
health care reform. And many of these create difficult
would effectively become two separate systems for
tradeoffs for the Clinton Administration and the Con-
providing health care in the United States. Although
gress in the debate to shape a viable health care policy
the Clinton proposal will not survive this debate
for the nation. This is particularly difficult since Ameri-
intact, its details are illustrative of many of the ap-
cans hold conflicting views about the role of govern-
proaches under discussion.
ment and the success of the Medicare program. De-
spite Medicare's popularity, policy makers and the
Medicare and the Clinton Health Plan
public tend to be suspicious of government and its
The proposal of the Clinton Administration sought
ability to tackle health care reform. Consequently, the
massive changes in the health care system (U.S.
health care reform proposal presented to the Con-
Congress, 1993). The plan would achieve universal
gress by the Clinton Administration in the fall of 1993
coverage through an employer-based financing ap-
took a very different approach than that of Medicare,
proach supplemented with government subsidies
and essentially would result in a two-tiered system:
for nonworkers. Employers' required payments
Medicare, and "everything else."
would take the form of premium contributions of
In the early stages of forming the Clinton proposal,
approximately 80% of the costs of a generous plan.
the Administration was guided by a number of pre-
Special subsidies would be offered to employers
sumptions: that the elderly and disabled wanted to
with fewer than 75 workers whose average wages are
keep Medicare a separate program, that elderly
below $24,000 per year, in order to reduce the dis-
groups could be satisfied with a few key expansions
proportionate burdens that group would bear. There
of benefits, and that Medicare was loaded with ineffi-
would also be an upper bound guarantee for all
ciencies that make it a reasonable source of "sav-
employers that required payments would not exceed
ings" to be used to fund the program. The Adminis-
7.9% of payroll. The plan would also offer subsidies
tration relied on feedback from groups such as the
to low-income individuals and families who do not
American Association of Retired Persons; the early
receive coverage through the work force. Reliance
signals were that protection of the fee-for-service
on an employer mandate maintains a major role for
structure of Medicare, expanded prescription drug
the private sector, and thus limits the amount of tax
coverage, and some new long-term care benefits
dollars necessary to obtain universal insurance cov-
were the most critical concerns of older persons.
erage. It would effectively eliminate Medicaid as a
Moreover, a key figure in the development of the
separate program, folding that population into the
health care plan, Ira Magaziner, was highly critical of
alliance system.
the way in which Medicare has controlled spending,
Most people would receive their insurance cover-
leading him to push for a cost containment structure
age by choosing among several qualifying plans of-
for the rest of the health care system that further
fered by a regional alliance. The alliances operate as
isolated Medicare. For a number of reasons, how-
clearinghouses, overseeing the operation of the
ever, these early assumptions have resulted in a
plans and enrollment by individuals and families.
proposal that does not comport with the lessons that
Employers would make their required contributions
we should draw from Medicare and that ultimately
to these alliances, but the choice of specific plan
may not satisfy older Americans.
would be up to each family. Similarly, individuals
This article examines a number of the lessons that
now in Medicaid or otherwise subsidized by the
can be drawn from Medicare and explores how both
federal government would also enroll in health plans
the Medicare program and the system in general
via these alliances.
might be further improved. Before turning to these
Another major piece of this proposal, the cost
issues, however, it is important to consider how
containment portion, would rely upon competition
Medicare is treated in the Clinton proposal and the
among these health plans to hold down costs (re-
ferred to as "managed competition"). Plans would
be encouraged to operate in a managed care envi-
¹Senior fellow, The Urban Institute, 2100 M Street NW, Washington, DC
ronment (also expected to reduce the costs of care),
20037.
but fee-for-service accountable health plans would
606
The Gerontologist
Clinton Presidential Records
Digital Records Marker
This is not a presidential record. This is used as an administrative
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This marker identifies the place of a publication.
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of digitization. To see the full publication please search online or
visit the Clinton Presidential Library's Research Room.
Critical Issues
in U.S. Health Reform
EDITED BY
Eli Ginzberg
1994
WESTVIEW PRESS
BOULDER
SAN FRANCISCO
OXFORD
9
The Role of Medicare in Reform
Marilyn Moon
Medicare is a critical piece of our current health care system. In fact, many
reform proposals treat Medicare's basic structure as "untouchable," sug-
gesting only modest changes in the program while significantly altering
many other aspects of the health care system. Nevertheless, it would be a
mistake to view Medicare as irrelevant to the reform process. First, Medi-
care's experience offers important perspectives-both positive and nega-
tive-for reform. Moreover, changes elsewhere in the system will have an
effect on the Medicare program; it is not possible to enact reforms that
dramatically change the delivery of care without also affecting Medicare,
even if no formal provisions of the program are altered. And the one area
in which most proposals would affect Medicare-cuts in payments to pro-
viders to help fund other expansions-may place the program at risk.
Medicare also has a number of problems, acknowledged by even its
most fervent supporters, that might be improved as part of overall health
care reform. At a minimum, changes in Medicare ought to be considered
to ensure its coordination with the rest of the new system. Furthermore,
many observers predict that if there is major legislation in the next year or
so, we are unlikely to revisit this issue again for some time. If that is the
case, major reforms that could improve Medicare deserve attention.
The Importance of Medicare
Medicare serves those most in need of medical care-the elderly and dis-
abled. It remains one of the most popular federal programs, having
changed little in its first 27 years. But this important program also carries a
substantial price tag; spending in 1993 totaled about $144 billion for 34
million enrollees. Expenditures of over $4,000 per enrollee accounted for
over 18 percent of total spending on health services.¹ As a large and visi-
171
172
Marilyn Moon
The Role of Medicare in Reform
173
ble part of our health care system, Medicare's importance should not be
for the entire population, as indicated in Figure Thus, even in the area
underestimated.
of cost containment, Medicare deserves more credit than its critics often
allow.
Medicare as a Provider of Mainstream Services
At its passage in 1965, the overriding goal of the Medicare program was to
Positive Lessons from Medicare
assure access to mainstream care for persons over the age of 65. The el-
Over the last 27 years, Medicare has had a considerable record of success
derly were underserved by the health care system, largely because many
that offers some positive lessons for those who would reform the health
older persons could not afford care. Insurance coverage as a part of retire-
care system. While the Clinton Administration's proposal consciously
ment benefits was often the exception, not the rule.² Moreover, private in-
takes an approach quite different from Medicare, many others have incor-
surance companies had shown a reluctance to offer coverage to older per-
porated pieces of the program into their proposals, particularly the benefit
sons, even when they could afford it. Even in the 1960s, risk selection was
package and some of the cost-containment mechanisms.
a barrier to achieving broad coverage. In the early part of the decade, the
One of the most important lessons of Medicare is that government pro-
country began to separate into two camps, the health care haves and have-
grams can be viewed favorably by the population they serve and by the
nots, as defined by access to insurance protection. The elderly comprised a
public-at-large. In general, Medicare is well liked by its beneficiaries and
disproportionate share of the have-nots.
has significantly enhanced their economic well-being and access to main-
Strong opposition to a public program by groups like the American
stream health care. Medicare is consistently rated as one of the most val-
Medical Association meant that most of the attention was devoted to
ued government programs, its benefits are clear and highly visible, and it
allaying fears about government control. Consequently, the rules estab-
is supported by a dedicated revenue source that constitutes a popular
lished to govern Medicare did little to disrupt or change the way that
means of financing. Despite the Clinton Administration's skepticism
health care was practiced or financed in the United States. Claims process-
about a publicly funded "single-payer" system, Medicare demonstrates
ing resembled the method used in the private sector, and Medicare stat-
that such a program can operate successfully in the United States.
utes specifically assured free choice of provider and no interference in the
Medicare's innovations include new payment mechanisms for provid-
routine practice of medicine. Payment rates also were similar to those fol-
ers, and while hospital administrators and physicians have grumbled
lowed by the private sector, both in the mechanics and the level of remu-
about the changes, they have generally adjusted quickly to these new in-
neration. Physician and other provider groups would at least not be put at
centives. As a result, Medicare has been relatively successful in holding
a financial disadvantage if they participated in the new program.
down costs, particularly those of hospital services in the late 1980s. The
By most accounts, Medicare achieved the goal of improved access to
prospective payment system for hospitals has been widely accepted as an
health care for the nation's elderly and disabled. Boycotts, which had been
improvement over the old cost-based method. It changed the basic incen-
threatened by groups of health care providers, did not take place. By 1970,
Medicare had enrolled nearly all of the elderly, and after 1972 it added a
tives which guided hospitals and made them more conscious of ways to
substantial number of disabled people.³ However, the relative success of
improve efficiency. In addition, the new Medicare fee schedule for physi-
the program contributed to a rapid growth in federal costs, thus ushering
cians, payment.⁵ while controversial, is likely to become a standard for physician
in the second phase of Medicare-a concern for cost containment. Atten-
These two reform efforts, particularly hospital reform, reflected major
tion turned to restraining the growth in program spending.
While critics are quick to point out Medicare's rapid growth, which has
changes in the way payments were made and required new accounting
systems and behavioral responses to the new incentive structures. While
outpaced all cost projections, they ignore the fact that this was not the
most important element of Medicare in the early years. When attention
not all the responses were positive, the delivery of health care did change
did turn to costs in the late 1970s, Medicare continued to grow faster than
rapidly. For example, the average number of days in a hospital stay
dropped dramatically when hospitals were paid on a per case rather than
the rest of the system, perhaps in part because of the program's unique as-
per diem basis.ᵇ While a study of the response to these hospital reforms
pects, which will be discussed below. But in the late 1980s, Medicare's rate
of spending growth declined faster than the rate of health care spending
uncovered some problems, particularly regarding patient stability upon
discharge, it concluded that quality was not seriously compromised.⁷
174
Marilyn Moon
The Role of Medicare in Reform
175
Figure 9.1: Ratio of Per Capita Medicare Benefits to Per
get reduction efforts. And although public financing may increase sup-
Capita Spending on Health
port for tighter restraints on Medicare than on the rest of the health care
system, there are major factors that boost the costs of the program-the
1.6
demands on services near the end of life, the aging population, advancing
technology, and the consequences of omitting long-term care services
from Medicare. These constraints need to be considered when assessing
how Medicare should be treated relative to the rest of the health care sys-
1.4
tem, particularly with regard to expected rates of growth.
Ratio
The Special Pressures on a Public Program
Relative to total health care costs, Medicare performed rather well in the
1.2
1980s, but it is still viewed as a runaway line item in the federal budget.
Since Medicare is funded with tax dollars in an era of anti-tax sentiment, it
gets more scrutiny than health expenditures paid for by individuals or
1.0
businesses. Moreover, its absolute size and rate of growth distinguish it
1975
1980
1985
1990
from most other domestic programs. In the 1970s Medicare accounted for
Year
only 3.5 percent of the federal budget; by 1990, it consumed 8.6 percent.
Even with the cuts instituted in 1993, Medicare's budget share in 1995 will
Source: U.S. Congress, Committee on Ways and Means, 1993 Green Book:
Overview of Entitlement Programs (Washington D.C., USGPO, July 7, 1993).
likely total more than 11 percent.9 In the view of many policymakers,
Medicare may be crowding out expenditures on other domestic programs
Overall, these transitions suggest that the health care system can respond
and/or standing in the way of curbing the overall growth in federal out-
to change without experiencing significant disruption of services or qual-
lays. Critics often argue that Americans will only accept a certain level of
public spending, so if Medicare grows rapidly, it hurts other programs
ity of care.
Finally, one of the major Medicare successes is its low administrative
even if it has its own revenue source. This alone makes it a potential mark
for budget reduction.
overhead, which accounts for less than 3 percent of spending compared to
about 10 percent for private health insurance for large groups and as
The most recent example of Medicare as a target is the Penny-Kasich
much as 40 percent in the small-group market.8 Proponents of a com-
budget amendment. Offered in the fall of 1993, it aimed to further slash
pletely public system of health care use these administrative cost differ-
Medicare spending by $37 billion for the purpose of reducing the deficit. 10
ences to calculate what could be saved by moving away from private in-
This cut would have come over and above the $56 billion, five-year sav-
surance. While these comparisons can be overblown (and admittedly,
ings included in the Omnibus Budget Reconciliation Act (OBRA) of 1993.
Medicare is sometimes faulted for too little beneficiary service), Medicare
The Penny-Kasich amendment failed by just a few votes in the House of
administration is often cited as a positive model for the rest of our health
Representatives; similar measures will likely surface in the 1995 budget
cycle regardless of the status of health care reform.
care system.
A second fiscal pressure faced by Medicare is linked with the status of
the Hospital Insurance (HI) trust fund. Current law provides a fixed
Unique Issues Confronting Medicare
source of funding for HI, and these revenues are not growing as fast as the
level of spending, thus creating a likely future crisis when the trust funds
Medicare differs from other parts of our health care system in a number of
are exhausted. That day of reckoning has been postponed several times,
aspects which pose unique challenges for reform and may argue for some
thanks to cost-cutting efforts and an increase in the wage base subject to
special considerations, especially regarding cost containment. First, as a
publicly funded program, Medicare is vulnerable to the pressures of bud-
taxation. The last formal projection placed the trust fund's expiration at
1999," but that will probably be delayed for a few years by the OBRA 1993
176
Marilyn Moon
The Role of Medicare in Reform
177
provisions. Thus even strong supporters of the Medicare program face the
prospect of further alterations involving either an increase in the payroll
But a careful look at the data suggests that the answer is not
tax rate devoted to Medicare or a reexamination of the program itself.
simple. the First, if technology is being used extensively in futile cases nearly involv- S0
In addition to these budget pressures, Medicare is treated to the same
ing of very old, the share of resources devoted to health care in the
skepticism about government spending that affects Americans' view of all
claim. year life should be rising. The evidence, however, does not this last
public programs. There is a perception that, because it is a government
Anne Scitovsky discovered that high expenditures were support not
program, Medicare is by definition bureaucratic and wasteful. In fact, the
More phenomenon; in fact, they preceded Medicare's introduction in a new
evidence suggests that while Medicare is not perfect, in some cases its
and recently, Lubitz, updating an earlier study, found that between 1965.
shortcomings may stem more from too little spending on administration
increase 1985, a period of enormous cost growth in health care, there 1976
rather than too much. For example, complaints about poor services and
of life. 14 The in the share of Medicare resources going to those in the last was no
program complexity may result in part from tight claims-processing bud-
of Medicare proportion of decedents increased slightly but the proportion year
gets. (As mentioned above, Medicare administrative costs are compara-
dollars fell slightly.
tively low.)
Further disaggregation of Medicare data also reinforces this
Under the reform proposals of the Clinton Administration and others
Looking at Medicare expenditures by age, the familiar pattern analysis. of
that rely on a private/public system of financing, Medicare would retain
its unique position as a highly visible public program, while the rest of the
life, with show exactly the opposite pattern for persons in their last However,
the port data about disproportionate spending on the very old. sup-
spending claims on the very old emerges again (Figure 9.2), thus seeming to more
system would essentially be kept "off budget." Medicare is thus more
likely to be a target in each fiscal year's budget, over and above proposals
decedents considerably more spent on 65 to 69 year olds who died than year of
designed to restrain health care spending. Ironically, for some of the rea-
ciaries over age 85. That is, more is spent on younger Medicare on
sons detailed below, Medicare spending may be more difficult to control
health who are more likely to recover-a result consistent with benefi-
than other types of health spending.
care policy. Since life expectancy at age 65 is now about reasonable
spending few on the younger old is not necessarily just "cheating death" 17 years, for a
The End of Life
These months, but rather treating patients with many useful left. 15
Since Medicare covers the population over the age of 65, and since most
Americans now live into their 70S and 8os, many who die each year were
ing not decisions. always know that death is imminent when making health
findings suggest several important points. First, years physicians do
Medicare beneficiaries. Medical expenses in the last year of life are quite
cal And since people often die after being ill or care spend-
high on average, resulting in high average spending levels for Medicare.
for treatment, those in it is only natural to see extraordinary health requiring care medi-
Average acute care spending for persons over age 65 is about 3.8 times as
illness. More the last year of life, as well as for those who survive spending a
great as that for those under age 65, and Medicare expenditures on behalf
of the disabled are even higher than those for elderly beneficiaries.¹²
lays inordinately on those with no chance of survival, and whether spend
appropriately stated, the issue is whether or not we major
Many casual observers suggest that controlling the use of services in the
last year of life may be the "magic bullet" needed to control health care
be is much weaker. Compared to the young, there spending. does Here
the evidence contribute substantially to the boom in health care such out-
spending. But like most "magic bullets" aimed at the health care system,
that a decisions dip in spending on the very old in their last year of life, suggesting seem to
there is more to the story than just excessive spending on hopeless cases.
The are being made to resist heavy acute care expenditures.
For instance, are we devoting an increasing share of health resources in
penditures overstated. Probably the most that can be said is that we should is
dilemma of excessive use of medical care by the elderly thus
vain attempts to forestall death, often through use of new technology?
Certainly, few numbers sound as compelling as the widely quoted statis-
tic that 28 percent of Medicare spending went to the 5 percent of enrollees
but Certainly, some things could be done to try to reduce these of death.
to be high for those who are gravely ill and at risk expect ex-
living their last year of life. 13 Such statistics are cited by those who believe
the quick and dirty solutions are probably not the answer for expenditures,
that a key to controlling health care costs will be to limit spending on the
rest of the health care system. However, Medicare does Medicare face or
very old.
manage unique challenges a in assessing inappropriate care and in finding ways some to
disproportionate number of high cost cases.
178
The Role of Medicare in Reform
179
Figure 9.2: Per Capita Medicare Spending by Age as
The Aging Population
Compared to Overall per Capita Medicare Spending
It is not just end-of-life spending that leads to higher costs for Medicare
than for the rest of the population. The number of Medicare enrollees is
All Enrollees, 1986
growing at a faster rate than the population in general, and most of that
1.5
growth is occurring among the very old who have higher than average
levels of expenditure. As a result, we should expect more rapid growth
per capita, as well as on a population basis.
Ratio to Average
1.0
The aging of the population probably adds about 1 percentage point to
the growth of Medicare spending each year relative to the rest of the pop-
ulation. 16 This is not a large amount, but it will become more significant as
0.5
pressures rise to hold down the cost of care. And it means that just to keep
Medicare on an even footing with the rest of the health care system,
spending growth per capita should be higher for Medicare.
0.0
The Role of Technology
65-69
70-74
75-79
80-84
85+
One of the significant pressures on health care spending arises from the
Age
use of new technology, but these pressures may be disproportionately
large for the Medicare population. Technology has given us new tools
Decedents, 1985
such as computerized tomography (CT) scans and magnetic resonance
1.5
imagers (MRIs), and new procedures such as endoscopies and arthros-
copies. These new sources of health care spending tend to operate as extra
goods and services consumed rather than as replacements for old technol-
Ratio to Average
1.0
ogies or procedures. For example, people may now receive x-rays, CT
scans and MRIs to diagnose a problem where before only x-rays (and per-
haps exploratory surgery) were available. And it is now as easy to subject
a blood sample to 30 or 40 different tests as it is to one. These new technol-
0.5
ogies are often less invasive, and consequently less risky, than earlier
means of detecting illness. For example, an MRI is often safer than explor-
atory surgery for many older or disabled patients. Thus it is no surprise
0.0
that these new tests constitute the fastest rising categories of services un-
65-69
70-74
75-79
80-84
85+
der Medicare.¹ 17
Age
Although increasingly more complex and expensive over time, the use
of surgery and other technical procedures also continues to grow. For ex-
Sources: U.S. Department of Health and Human Services, Health Care Financing
ample, cardiac bypass surgery rates for men over the age of 65 rose from
Administration, Medicare and Medicaid Data Book, 1990, HCFA Pub. 03314
2.6 per 1,000 in 1980 to 10.4 per 1,000 in 1989. 18 The increasing success
(Washington D.C., USGPO, 1991); and James Lubitz Use and Costs of Medicare
Services in the Last Year of Life. 1976 and 1985 (mimio, Baltimore, May 11, 1990).
rates for procedures such as hip replacement and cataract surgery trans-
lates to lower surgical risks and improved outcomes. In such cases, higher
rates of use would certainly be appropriate since the value of these proce-
dures to individuals has increased over time. And again, lower risks mean
that older or disabled patients are particularly more likely to benefit. It
should not be surprising then that cost of care for these groups is rising
rapidly.
Marilyn Moon
The Role of Medicare in Reform
181
180
With such changes pervading the U.S. health care system, technology
program to be part of this new "experiment," and (2) the costs of fully in-
may have an even greater impact on Medicare spending and rates of ser-
tegrating Medicare with the rest of the plan.
vice use within the older population. The combination of an aging popula-
Nevertheless, the separation is likely to create at least the perception of
tion and the special benefits of new technology for frail populations un-
inequity and to generate undesirable complications. Once the reality of
derscores the belief that Medicare will have difficulty holding down its
the discrepancy in benefits and cost sharing is realized by Medicare bene-
rate of growth, both absolutely and relative to the rest of the population.
ficiaries, there will likely be an enormous outcry. The Clinton approach to
reform also maintains, and perhaps enlarges, a "wedge" between what
Medicare and the proposed insurance purchasing alliances for younger
The Challenges Posed by the Need for Long-Term Care
families would pay for physician, hospital and other services. This arises
Although Medicare covers only acute care services, recipients are also
from the use of Medicare savings to help fund expansions in the rest of the
likely to need long-term care. Because such services are expensive and
program. Any modification of these two parts of the Clinton proposal
public coverage is limited to the welfare-based Medicaid program, avail-
would be enormously expensive, however. Consequently, the costs of full
able acute care services may be substituted for inadequate long-term care.
integration into a single health care system might require some changes
As the major insurer affected, Medicare likely has higher costs as a result
that Medicare beneficiaries would find undesirable, such as greater con-
of this misuse. For example, Medicare's home health benefit is intended to
tributions toward the cost of expanded care.
provide rehabilitation and other medical services, but it may also serve as
a long-term home care benefit. Rapid growth in home health care since eli-
Perceived Inequities
gibility regulations were eased in 1989 may be attributable to its increas-
Although the Clinton proposal would improve benefits under the Medi-
ing use as a chronic care, as well as an acute care, benefit. 19 Pressures to
care program by adding new prescription drug coverage, beneficiaries are
use skilled nursing facility beds to meet long-term care needs also have
likely to compare their benefit package to that guaranteed to younger
helped raise Medicare spending, particularly since 1988. And before hos-
families and individuals. What they will soon discover is that while the
pital reforms shortened lengths of stay, Medicare often paid for extra in-
list of benefits is comparable, required deductibles and protections for cat-
patient days while patients waited for nursing home placement.
astrophic expenses are more generous in the Clinton proposal. The benefit
Expansion of long-term care coverage merits more careful analysis, and
package for those in the alliances is intentionally established to be equal to
any revision should be well-coordinated with other reforms. While im-
or better than 80 percent of existing private, employer-sponsored plans.
proved long-term care coverage makes sense for meeting the needs of the
This was done to replicate or improve the coverage of working families
elderly and disabled and to reduce inappropriate reliance on acute care
and thus gain middle-class support. But because reform would enrich in-
services, its prohibitive costs probably preclude significant relief in this
surance coverage for many Americans, basic coverage for the under-65
area. However, if little expansion of long-term care is included in reform,
population would exceed protections for the disabled and for those over
the pressures to misuse Medicare will persist.
65 in the two areas of deductibles required before benefits and limits on
out-of-pocket expenses would begin (referred to as "stop loss" protec-
tions). Medicare currently has no stop loss protection, while the Clinton
The Lack of an Integrated Approach in Reform Options
plan provides a $1,500 limit per individual. Moreover, one of Medicare's
One of the most troubling aspects of the Clinton Administration's health
weaknesses is its complicated deductible and cost-sharing structure. Ben-
care reform proposal is its attempt to establish an elaborate new structure
eficiaries now pay a $676 hospital deductible (with the chance of more
for young, nondisabled families and individuals while keeping Medicare
than one such charge per year) and a $100 deductible for physician and
a separate program. 20 But the Clinton proposal should not be singled out
ambulatory services. This compares to a $200 deductible for all services
for criticism; except for the single-payer approach of Senator Wellstone
under the Clinton proposal.²¹
and Congressman McDermott, the other major reform proposals now be-
Thus, one of the great ironies of this plan is that despite $65 billion in
ing debated would also keep Medicare separate while cutting its expendi-
proposed new spending on the Medicare prescription-drug benefit in the
tures. There are two compelling reasons for this: (1) the strong, early sig-
first five years of implementation, and about $64 billion in new monies for
nals from interest groups that Medicare beneficiaries did not want their
long-term care that would largely go to the Medicare population, there
182
Marilyn Moon
The Role of Medicare in Reform
183
will likely be complaints from beneficiaries over both the diminished gen-
sector providers would be reduced. In such circumstances, providers
erosity of Medicare relative to the under-65 plan, and new cost-sharing re-
might not be as willing to overlook the differential.
quirements for drugs, home health care, and laboratory services. Support-
Second, while limits on Medicare growth are intended to be slightly
ers of the Administration's proposal can rightly claim that there would be
higher than limits on premium growth in alliance plans, the rates of
substantial improvements in benefits under Medicare; but this may afford
growth are not very different. The Administration's stated goal is to re-
little solace to those who will strenuously object to a less-generous benefit
duce the differential to 0.5 percentage points. Consequently, it would take
package for persons who need coverage the most.
many years for this mechanism to yield similar payment levels. For exam-
The problem would be most visible for those turning 65 after health re-
ple, if payments in Medicare were 80 percent of the level of the alliance
form begins under the Clinton proposal. Becoming Medicare eligible
sector, and Medicare payment rates rose at 6 percent per year compared
would mean choosing between lower benefits under Medicare or substan-
to 5 percent per year for alliance plans, it would take about 25 years to
tially higher premiums in an alliance. This discontinuity between the alli-
equalize the payment levels.
ance system and Medicare would dramatically highlight the two-tiered
It is even possible that the "wedge" between payment levels might
system created by the proposal. This awkward transition mechanism is a
acutally force them further apart. If this happens, specific reductions in
major weakness of the Administration's plan.
payment levels for Medicare could be enacted into law, or cost contain-
ment in the rest of the system might be enforced by caps on the rate of pre-
The Medicare "Wedge"
mium growth so fees might not be as directly affected. Whether payment
Medicare's current payment levels are lower than the amount allowed by
rates will converge depends on how alliance plans reduce costs. Some of
most private insurers. Indeed, much criticism has been leveled at the cur-
the claims about obtaining savings in alliance plans emphasize greater ef-
rent system over "cost shifting"-the process which results in some pri-
ficiencies in the delivery of care and lower administrative costs. If that oc-
vate payers being charged more to help compensate providers for the low
curs, payment levels could remain higher for alliances than for Medicare
payment levels of Medicare and Medicaid. Under the Clinton proposal,
indefinitely, and the percentage gap might actually widen. On the other
Medicaid beneficiaries would receive a health security card exactly like
hand, by obtaining provider discounts managed care plans have had
that given to workers; doctors and hospitals would receive the same pay-
great success in holding down costs.
ments for these patients regardless of who helps to pay for their insur-
The provider-payment differential creates a problem only if it affects
ance. Only Medicare would have a completely separate payment system.
patients' access to care. While an undetermined amount of discrimination
Because Medicare payments are now substantially below those for the pri-
may occur, the differential could reduce access to care if, for example, doc-
vate sector,²² and since both Medicare and the rest of the system would
tors refuse to accept new Medicare patients. And the entire health care
experience stringent limits on spending growth, a payment differential
system could be affected if hospitals that serve a disproportionate share of
would initially be "locked in place" at the outset of reform. This effec-
Medicare patients become trapped in such a tight financial bind that they
tively institutionalizes "cost shifting."
are forced to close. If this occurs in underserved areas, all patients, not just
The Administration contends that, because there is no current problem
Medicare beneficiaries, would suffer.
with providers refusing to take Medicare patients, this payment differen-
tial can be maintained until payments for the rest of the system are
brought into line with Medicare.²³ It is anticipated that payments and fees
Meeting the Challenges
in the alliance plans would be rapidly reduced, but it is difficult to deter-
Even if Medicare remains largely intact after reforms in other parts of the
mine with certainty what would happen. First, while the differential as a
system, the program needs to be coordinated with the imminent cost-cut-
proportion of payment might remain the same, if both Medicare and other
ting alterations in coverage for those under 65 years old. Including Medi-
payment levels come down over time, providers may not view such
care in reform could also offer an opportunity to treat all groups fairly and
changes as business as usual: Providers who feel squeezed from all sides
to reduce or eliminate distinctions based on age. These changes would
may favor non-Medicare patients for whom fees are not as low. The cur-
substantially raise the cost of any reform option, however. If Medicare
rent cost-shifting "cushion" provided by generous payments to private-
were included in overall reform, it would be reasonable to also raise con-
184
Marilyn Moon
The Role of Medicare in Reform
185
tributions from beneficiaries and, ultimately, to subject Medicare to the
costs. Contributions by working families would be set at about 20 per-
same cost containment methods used in the rest of the system.
cent in the Clinton proposal. Thus, it may be reasonable to substantially
raise the premium on the basic program, as well as to assess a premium
The Benefits Structure
contribution for any expanded benefits.
Ideally, the generosity of basic benefits under reform would be balanced
Asking that Medicare beneficiaries contribute to the program on the
between Medicare and the rest of the system. Prescription drug coverage,
basis of ability to pay would represent another change consistent with
preventive services, and stop-loss protections are considered essential ele-
health care reform for working-age families. Premium requirements un-
ments of reform under most plans, but not all of these would be added to
der many proposals vary by income, and it makes sense to change Medi-
Medicare. For example, the Clinton proposal would only expand cover-
care in that direction as well. In fact, tying Medicare reform to health care
age for prescription drugs.²
reform for the under-65 population may lower one of the major obstacles
In the interest of fairness, Medicare enrollees should be treated the
to more progressive financing of Medicare. That is, one of the objections to
same as younger insured groups, perhaps not in terms of identical bene-
the Medicare Catastrophic Coverage Act was that a small group of the el-
fits, but at least through consistent criteria. And in instances where cost is
derly and disabled were being asked to subsidize the poor in their own
an issue, it would be more equitable to cover fewer expanded benefits for
group. When the entire population is involved and new financing mecha-
everyone than to offer enhanced coverage only to the young, while argu-
nisms are being considered, it will likely be easier to make the case for fair-
ing that a lack of funding makes the same package unavailable for Medi-
ness and spread the responsibility across all age groups so that no one
care beneficiaries.
group feels overburdened.
One of the most troubling omissions for Medicare beneficiaries is the
Medicare cost sharing is also imbalanced-for example, deductibles are
lack of stop-loss protection for limiting catastrophic burdens. Although
unusually high for hospitals and nursing facilities and low for physician
stop-loss protection was undervalued by the elderly when it was pro-
services. Hospital care deductibles do little to discipline use of services
vided in the Medicare Catastrophic Coverage Act (later repealed), it is
and, at $676 in 1993, the deductible is well above that found in private
part of any good insurance program and should be provided under Medi-
plans. A higher deductible on physicians' services (or a combined deduct-
care. However, this is one area where a case might be made for a different
ible) could help control the use of physician services and would not be un-
limit for older persons than for the young on grounds of expense. A larger
duly harsh. Cost-sharing for home health services, which are growing
proportion of Medicare beneficiaries will exceed the upper limit on cost
very rapidly, may be in order. In this area, even a cost-neutral change-
sharing than will nondisabled individuals under the age of 65, conse-
raising some cost-sharing requirements while lowering others-would
quently, the same stop-loss limits would benefit more elderly than young
lead to better coordination with benefits for younger families and a more
persons. On the other hand, if stop-loss limits were expressed as a share of
rational cost-sharing policy.
income, the elderly and disabled need as much or more protection than
Improved protection for those with low and moderate incomes should
others in the U.S. Making treatment "consistent" may imply different
occur simultaneously with changes in cost sharing. Those with modest in-
rules depending upon one's starting assumptions. But the decision would
comes now have difficulty paying Medicare's cost sharing, thus reducing
be very important because of the high potential costs. For example, if the
their access to the program. The Qualified Medicare Beneficiary (QMB)
stop loss were set at $1,500 (the level in the Clinton proposal), Medicare
program now pays the premiums, deductibles and coinsurance of Medi-
costs would rise by at least $10 to $12 billion per year.
care beneficiaries whose incomes are below poverty. By 1995, it will also
cover premiums for those with incomes of up to 120 percent of poverty.
Premiums and Cost Sharing
QMB protection should extend beyond the poverty line, particularly if
protections for younger families are established at 150 percent of the pov-
Expanding Medicare coverage to be consistent with coverage for the
erty level.
young would require additional resources. Therefore, it is not only rea-
The Clinton proposal does provide some changes in what Medicare
sonable, but equitable, to include the elderly and disabled in revenue rais-
beneficiaries would pay, including adding coinsurance for home health
ing for such expansions. At present, Medicare's required premium is 25
care and laboratory services and a new income-related premium for per-
percent of the cost of Part B (physicians') services. If viewed in the context
sons with incomes over $90,000.27 But these changes are part of the $124
of all Medicare spending, premiums now total only about 10 percent of
billion in savings aimed at funding not only the new prescription drug
186
Marilyn Moon
The Role of Medicare in Reform
187
benefit but also expansions elsewhere in the system. More generous treat-
hold down its own costs. Patients are more likely to accept constraints if
ment of Medicare benefits might thus require even more dramatic in-
they feel they are equitably applied rather than being part of a group
creases in premiums and cost sharing.
which has been singled out for special treatment. It is easier to make the
case that a change will lead to better health care if it is applied to everyone.
Cost Containment Reforms
And certainly to hold down Medicare's costs over time will require close
Cost containment mechanisms, to be effective and to reduce complexity in
scrutiny of the use of services in addition to limiting the payment levels for
providers.
administration, ought to be applied equally throughout our health care
system. The most obvious example is payment of providers. If there are
Thus, one necessary step for successfully implementing the "next gen-
limits on payment or volume of services allowed, the rules should apply
eration" of cost restraint will likely be the presence of more universal con-
equally across all payers of health care. This would mean that providers
trols and coordination. Otherwise, Medicare may suffer. Including Medi-
cannot shift costs from one source of payment to another. For example, as
care in the broad strategy for reform is likely a desirable approach, as long
a result, providers would have to seek greater efficiencies in the provision
as it allows a gradual transition to managed care.
of care, rather than charging private insurers more to make up for Medi-
care's restrictive payments. Or, in the case of the various proposals for re-
Administrative Streamlining
form which continue a differential between Medicare and other payers,
Another change that might initially add to Medicare's costs, but should
the differential may lead to discrimination against Medicare beneficiaries.
improve the efficiency of the system over time, would be administrative
Cost shifting is undesirable currently and locking it in place for Medicare
streamlining. Simplified billing and administration of Medicare could
for the purpose of saving federal dollars does not make good policy sense.
substantially improve the program in the eyes of beneficiaries and provid-
On the other hand, moving Medicare immediately into a managed
ers. And, almost by definition, it makes sense to do this in conjunction
competition framework would create disruption and uncertainty that
with changes in the rest of the system. Medicare beneficiaries (along with
many advocates of reform wish to avoid. Consequently, most proposals
all other Americans) could be given a card to be presented to providers.
leave out Medicare and assume it will continue to operate much as it does
All billing could be done via the card so that beneficiaries would not have
now. But, if we move to a system of managed competition for the work-
to file separately or handle multiple forms. The government could require
ing-age population where private insurers make arrangements with
that all doctors use the same forms for billing patients, thus ensuring uni-
health care providers individually and with no overall controls, Medicare
formity. Imagine an environment in which the patient presents a card to
could be caught in the bind of being out of sync with the rest of the sys-
the physician in the same way they now use credit cards. A simple com-
tem. Its current low payment levels (from 25 to 40 percent below the cur-
puter link would provide information on how much would be paid by in-
rent private sector) could mean that beneficiaries will find it increasingly
surance and how much would be owed by the patient in the same way
difficult to obtain care from providers of their choice. Moreover, it is pos-
that merchants now run the card through a scanner to obtain approval.
sible, for example, that many providers would join formal network deliv-
Separate insurance claim would be unnecessary-the physician would
ery systems and thus limit their availability to Medicare patients. Medi-
only have to complete a simple form signed by the patient concerning
care, as a fee-for-service model and with strict price limits on its providers,
what services were delivered, and the system could track use of health
would subject elderly and disabled beneficiaries to a system very different
services in a uniform way. It could track the plans and requirements of
from one that emphasizes organized delivery systems. Thus, even if
multiple insurers as well, much like the system that accepts credit cards
Medicare is kept on a separate track, changes in the delivery system for
regardless of type or issuer.
the rest of the population will certainly affect how beneficiaries receive
Beneficiaries could receive one or two bills per month and would pay
care as well.
just once per month for any cost sharing owed. Clear language would in-
The application of practice guidelines or limits on ineffective treat-
dicate what Medicare contributes-helping to underscore the substantial
ments will also be substantially more effective if done in a concerted way.
amount that Medicare provides-and what is paid by private insurers.
Since such activities will be most effective if they change the attitudes of
Streamlining the billing process could lead to administrative savings,
both providers and patients, efforts to influence practice must be viewed
both in terms of lower health care spending, and by saving time and frus-
as a systemwide activity and not just a gimmick by one public program to
tration for patients and health care providers.
188
Marilyn Moon
The Role of Medicare in Reform
189
11. Board of Trustees, Federal Hospital Insurance Trust Fund, 1993 Annual Re-
Conclusion
port of the Board of Trustees of the Hospital Insurance Trust Fund (Washington, D.C.:
At first glance, leaving Medicare largely out of the process of health care
U.S. Government Printing Office, 1993).
reform seems to make sense. The program already guarantees nearly uni-
12. Diane Lefkowitz and Alan Monheit, Health Insurance, Use of Health Services
versal coverage for all persons over age 65 and most long-term disabled
and Health Care Expenditures, AHCPR Pub. No. 92-0017, National Medical Expendi-
persons. It is a popular and stable program. And since health care reform
ture Survey Research Findings 12, Agency for Health Care Policy and Research
(Rockville, MD: Public Health Service, 1991).
poses many daunting problems and promises to disrupt the system for
13. James Lubitz and Ronald Prihoda, "Use and Costs of Medicare Services in
many, why add Medicare at this time? The answer is that there undoubt-
the Last Two Years of Life," Health Care Financing Review 5 (Spring 1984): 117-131.
edly will be enormous pressure from interest groups to add the same ben-
14. Anne Scitovsky, "The High Cost of Dying: What Do the Data Show?"
efits guaranteed to everyone else and there are strong practical reasons to
Milbank Memorial Fund Quarterly 62 (1984): 610-615; and James Lubitz, "Use and
make cost containment efforts apply to everyone. The uneasy relation-
Costs of Medicare Services in the Last Year of Life, 1976 and 1985," Health Care Fi-
ships that would result from keeping Medicare separate suggest a very
nancing Administration, mimeo, May 11, 1990.
unstable environment for achieving the broad goals of health care reform.
15. Ways and Means, Green Book.
But better integration of Medicare would make it more difficult to keep
16. Ways and Means, Green Book.
the costs of reform "off the books." Beneficiaries and/or taxpayers would
17. Robert Berenson and John Holahan, "Sources of Growth in Medicare Physi-
have to be asked to directly contribute more. Unfortunately, the current
cian Expenditures," Journal of the American Medical Association 267 (February 1992):
environment for reform may preclude a careful debate over the dilemma
687-691.
18. NCHS, Health USA.
that Medicare poses for reform.
19. Moon, Medicare.
20. U.S. Congress, Senate, S. 1757, Health Security Act, November 1993.
Notes
21. U.S. Congress, Health Security Act; and Moon, Medicare.
22. Mark Miller, Stephen Zuckerman, and Michael Gates, "How do Medicare
1. U.S. Congress, House Committee on Ways and Means, 1992 Green Book: Back-
Physician Fees Compare with Private Payers?" Health Care Financing Review 14
ground Material and Data on Programs Within the Jurisdiction of the Committee on Ways
(Spring 1993): 25-39.
and Means (Washington, D.C.: U.S. Government Printing Office, June 1992).
23. Bruce Vladeck, Department of Health and Human Services, testimony be-
2. Karen Davis and Cathy Schoen, Health and the War on Poverty: A Ten-Year Ap-
fore the Committee on Ways and Means, November 18, 1993.
praisal (Washington: The Brookings Institution Press, 1978).
24. U.S. Congress, Health Security Act.
3. Robert Myers, Medicare (Homewood, IL: Richard D. Irwin, Inc., McCahan
25. Author's calculations using the National Medical Expenditure Survey.
Foundation Book Series, 1970).
26. Moon, Medicare.
4. Marilyn Moon, Medicare Now and in the Future (Washington, D.C.: Urban In-
27. U.S. Congress, Health Security Act.
stitute Press, 1993).
5. Physician Payment Review Commission, Annual Report to the the Congress
(Washington, D.C.: U.S. Government Printing Office, 1993).
6. U.S. Department of Health and Human Services, National Center for Health
Statistics (NCHS), Health, United States, 1990 (Hyattsville, MD: Public Health Ser-
vice, 1991).
7. Katherine Kahn, Lisa V. Rubenstein, David Draper, Jacqueline Kosecoff, Wil-
liam H. Rogers, Emmett B. Keeler, and Robert H. Brook, "The Effects of the DRG-
Based Prospective Payment System on Quality of Care for Hospitalized Medicare
Patients," Journal of the American Medical Association 264 (1990): 1953-1955.
8. Congressional Research Service, Health Insurance and the Uninsured: Back-
ground Data and Analysis, Senate Committee on Education and Labor, Print 100-2,
122-23, 1989.
9. Ways and Means, Green Book.
10. Penny/Kasich Bipartisan Task Force, A Common Cents Plan, Washington,
D.C., mimeo, October 27, 1993.
ARE PRIVATE INSURERS REALLY CONTROLLING
SPENDING BETTER THAN MEDICARE?
Marilyn Moon
Stephen Zuckerman
The Urban Institute
July 1995
This research was supported by a grant from the Henry J. Kaiser Family Foundation, Menlo
Park, California. The contents of this paper are solely the responsibility of the authors and do
not necessarily represent the views of the Urban Institute or the Henry J. Kaiser Family
Foundation. The authors are grateful for the helpful suggestions of John Holahan and Len
Nichols, and for the assistance of Crystal Kuntz.
Executive Summary
Reducing the rate of growth of the Medicare spending is an essential policy goal both
for putting the program on firmer financial footing and for achieving the budget savings
outlined in the recently passed budget resolution of the Congress. The targets established in
that resolution--of $270 billion in savings over the next seven years--will require major
changes in the Medicare program. In searching for ways to achieve savings, some have
suggested adopting principles developed in the private insurance market.
Indeed, many Americans seem to take for granted claims that Medicare spending is
out of control and do not question comparisons suggesting large differentials between
Medicare and private insurance spending growth. However, these comparisons prove difficult
to interpret because the private insurance estimates use data from surveys of employer health
plan costs that are often affected by shifts in enrollment across types of plans as well as
changes in costs sharing, service coverage and utilization review that are hard to quantify.
Instead, we use the National Health Expenditure (NHE) accounts data which capture spending
by category of service for both Medicare and private insurance and these data allow us to
make consistent adjustments. It is important to calculate growth per capita and to limit the
data to categories where both Medicare and private insurance provide coverage of services.
While these are simple adjustments, they have a dramatic impact on the comparisons shown
in the accompanying chart. Viewed over the years 1990 to 1993 (the last year when the full
NHE data set is available), Medicare spending grows substantially slower than spending from
private insurance until 1992, then private insurance gains a 0.3% advantage.
Looking down the chart, it is easy to see how much the numbers can differ depending
upon how growth is measured. On a per capita basis, Medicare still fares well as compared
to private insurance even when all categories of spending are included, but in the last two
years, its growth is higher than the private sector. This differential largely occurs because
home health services and skilled nursing services (both of which are less important to those
covered by private insurance) have been growing very rapidly under Medicare.
Comparison of Growth Rates
Per Capita Growth in Services Covered by Both Medicare and
Private Insurance
13.0%
12.0%
11.0%
10.0%
Private
9.0%
8.0%
7.0%
Medicare
6.0%
5.0%
1990
1991
1992
1993
Per Capita Growth in Total Expenditures
13.0%
12.0%
11.0%
Medicare
10.0%
9.0%
8.0%
Private
7.0%
6.0%
5.0%
1990
1991
1992
1993
Aggregate Growth in Total Spending
13.0%
12.0%
Medicare
11.0%
10.0%
9.0%
8.0%
Private
7.0%
6.0%
5.0%
1990
1991
1992
1993
The bottom graph shows aggregated growth rates--the least desirable way to compare
Medicare and private insurance, although it is often used (Freudenheim 1995). Since 1990,
the numbers of persons covered by private insurance has been dropping, while the number of
Medicare beneficiaries has grown by about 2% per year on average. In that case, much of
the positive differential between private insurance and Medicare aggregate spending growth is
driven by how many people receive coverage, certainly not a factor that should be included in
any measure of how well the private sector is controlling spending nor one that is often
acknowledged.
But even with the consistent data methods we use in making comparisons, several
other factors need to be kept in mind in thinking about how much Medicare can benefit from
adopting the techniques of the private insurance industry. For example, one way in which
private insurers are slowing growth rates is to pay less for services than in the past. But
since the level they start from is much higher than the levels that Medicare already pays, this
source of savings would largely be unavailable to Medicare. For example, government
studies show that in 1993 hospitals receive payments equal to 89 percent of their costs of
treating Medicare patients as compared to 129 percent of their costs from private payers.
Medicare was well ahead of private insurers in realizing it could benefit from low levels of
hospital and physician payment.
Finally, this study uses data on actual experience and thus does not capture
information for 1994. Preliminary numbers for 1994 growth rates do indicate a stronger
showing for private insurance relative to Medicare. But we do not yet know whether such
results can be sustained over time since some of the savings being achieved in the private
sector represent one time gains as employees shift from expensive to less expensive plans.
While Medicare could also achieve such savings, they are likely to be short term in nature
and, thus, would not necessarily result in the low rates of growth needed year after year to
achieve the federal budget targets set for Medicare.
ii
INTRODUCTION
Part of the current debate over the federal budget focuses on the rapid growth in
Medicare spending. Further, Medicare's growth is being contrasted unfavorably with some
estimates of growth in private health insurance spending.¹ The argument becomes that "the
Medicare program could be rescued if only the Government would adopt some of the cost
controls that employers have imposed on their workers under the banner of 'managed care"
(Freudenheim, 1995).
Before concluding that enormous savings are readily available by simply moving
beneficiaries into private plans, however, it is important to take a closer look at the numbers
people cite and what they mean. How fast is Medicare growing? Why is Medicare growing
so rapidly? Is the rate of growth so different between Medicare and the private sector?
Many Americans seem to take for granted claims that Medicare is out of control and do not
question comparisons suggesting large differentials between Medicare and private insurance.
But careful answers require consistent data between the public and private sectors, a
reasonable time horizon for meaningful comparisons, and careful discussion of what the
various numbers mean. At worst, the comparisons may reflect an "apples vs. oranges"
problem in which comparisons are made on noncomparable data. But even when total
comparability is not possible due to data limitations, it is still useful to look closely at
Medicare and the private sector for some lessons for the future.
'See, for example, Hage and Black, 1995; and The Heritage Foundation, 1995.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
This paper begins with a discussion of some of the most commonly cited numbers on
the growth in Medicare and private insurance, finding a broad array of differences that make
comparisons potentially misleading. We then turn to a more consistent set of comparisons
based on the National Health Expenditure data that allow us to examine changes over time in
a number of subcategories of health care services. We conclude that growth rates between
private insurance and Medicare have actually been quite similar--a very different finding than
casual comparisons often suggest. Moreover, growth rate comparisons need to be viewed
cautiously given the different payment levels for services under Medicare as compared to
private insurance. Sharp declines in the private sector may reflect discounting off of a very
generous level, for example. Finally, we conclude with a look at how changes in the mix of
persons covered by Medicare and private insurance might affect rates of growth over time.
COMMON PRIVATE SECTOR COMPARISONS
When people try to assess the size of Medicare spending growth relative to the private
sector, they are typically drawn to the results from two national employer-based surveys, one
sponsored by Foster Higgins (1995) and the other by KPMG (1994). Although there are
differences in the sampling frames for these two surveys, both are trying to estimate the
change in the total cost of the employer-sponsored health insurance package, including both
the employers' and employees' contributions. Foster Higgins estimates a 1.1% reduction in
health benefits costs per employee between 1993 and 1994, while KPMG estimates a 4.8%
increase. The KPMG number is probably more useful because it represents the average
i:\bp\mmoon\growth\ 7/18/95 3:09pm
2
change in costs for the same plans at the same employers. Thus, it is essentially a genuine
year to year "apples to apples" comparison.
The Foster Higgins estimate, on the other hand, is hard to interpret because of the way
it treats retiree health costs.² In addition, the 1.1% reduction is greatly influenced by shifts
in enrollment among types of health plans. In fact, Foster Higgins explicitly cautions that a
large part of this "favorable experience in 1994 is a one-time savings due to moving
employees from a higher cost plan to a lower cost plan." What this means is that the
underlying growth rate in health plan costs may have changed imperceptibly, but that the
downward shift in the cost of an average plan is producing a short-term adjustment rather
than a long term trend.
A simple example based on premiums and the distribution of covered individuals
across plans similar to that in the Foster Higgins data highlights this point. Suppose that
there are two types of health plans in 1993--indemnity and managed care --and that covered
individuals are evenly split among these plans. In addition, assume the indemnity plan has a
premium of $4000 and the managed care plan a premium of $3500 in 1993. If the premium
for the indemnity plan increases by 10 percent in 1994, the managed care plan premium
increases by 5 percent, and the insured remain evenly split, then the average plan costs would
change from $3750 to $4038, an increase of 7.7 percent. However, if the insured shift among
plans in the direction of the lower cost managed care plan so that in 1994, say, 35 percent are
²The Foster Higgins data shows that fewer firms provided retiree benefits in 1994 than in
1993. This would tend to bias the change in health plan costs per active employee (the
widely-cited 1.1 percent reduction downward by reducing aggregate health plan costs via the
retiree portion without necessarily lowering the number of active employees covered.
i:\hp\moon\growth\ 7/18/95 3:09pm
3
in managed care and 65 percent in indemnity, the average plan costs increase to only $3929,
or by 4.8 percent. Thus, as individuals shift to lower cost plans, overall health care cost may
grow at rates below those reflected in the experience of any single health plan. Moreover,
when the shift toward lower cost plans stabilizes, the annual change in health care costs will
likely increase.
Can either of the Foster Higgins or KPMG estimates of private spending growth be
used as a basis for comparison to Medicare? For several reasons, these estimates of private
premium growth per employee may not be comparable to Medicare program spending growth.
Since these surveys measure private spending from the perspective of a health plan's costs,
their results will be affected by changes in health plan characteristics. Changes in
deductibles, copayments, service coverage, and utilization review will all affect these
estimates of spending growth. Changes as a result of some of these plan characteristics might
be viewed as a "success" in holding down health care spending (e.g., utilization review), but
others make claims about slowing spending difficult to interpret. For example, if increasing
deductibles and copayments lower health premiums over time by shifting costs to patients, we
should not conclude that the underlying growth in total health care spending has necessarily
slowed.
Unfortunately, it is difficult to determine just how much private sector cost sharing has
changed. If health plans were still generally traditional indemnity insurance, it would be
easier to correlate increasing deductibles and copayments with lower premium growth.
However, in a world of rapidly changing types of plans, new cost sharing structures are being
developed and the implications of these changes are more difficult to assess, particularly on a
i:\hp\moon\growth\ 7/18/95 3:09pm
4
year-to-year basis. For example, KPMG data suggest that deductibles have been increasing in
Preferred Provider Organization (PPO) and Point of Service (POS) plans--both for in-plan and
out-of-plan users. While this implies that PPO and POS premium growth is lower than it
would have been with constant deductibles, it is impossible to determine the actual average
cost sharing within PPO and POS plans since that depends on the extent of in-plan or out-of-
plan use and such information is not reported in the current surveys.
Medicare, on the other hand, has maintained a fairly stable schedule of deductibles and
copayments, particularly under Part B where most of the cost sharing occurs.³ The Part B
deductible, originally $50, is still only $100. The copayment for Part B services has always
been 20 percent. On the hospital side, cost sharing, particularly for the deductible has risen
steadily over time, but it remains a small share of total cost sharing. Overall, the share of
acute care spending covered by Medicare has remained relatively constant since the 1970s
(Moon, 1993).4
In addition, although the core set of services covered (e.g., physician and hospital
care) by private plans might appear reasonably stable over time, plans may add or subtract
benefits such as dental care, vision services and prescription drugs annually. Mental health
and substance abuse benefits represent another area where employers have been establishing
³Part B of Medicare covers physician and other ambulatory services, while Part A covers
hospital, skilled nursing and home health care.
4The presence of private supplemental coverage and the Qualified Medicare Beneficiary
program means that many of the elderly have nearly first dollar coverage for acute care
services. This likely affects the level of Medicare spending, but not necessarily the rate of
growth over time since the share of the elderly with such protection has remained relatively
constant.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
5
special limits (Foster Higgins, 1995). Thus, if services paid through private health plans have
been reduced, insurance is effectively a different product than it was several years ago and
growth rate figures may thus be misleading.⁵ In contrast, we know that Medicare's coverage
has changed little, with the exception of home health and skilled nursing services where
regulatory control and other limitations have alternatively eased and tightened at various
points in time.
An area where changes in the private sector could legitimately be used to tout success
is control over the use of services. Private plans differ markedly from Medicare in their
adoption of utilization review, including pre-admission certification for non-emergency care
and case management. The goal of utilization review is to reduce the volume of unnecessary
services and hence to make the delivery of care more efficient. HMOs and other new forms
of managed care have moved aggressively into these areas of control. Although Medicare has
some review activities that occur through Professional Review Organizations (PROs), it does
not have the prospective review employed in the private sector. Although KPMG data show
that the share of plans with utilization review has been fairly stable over the last few years,
there is little hard evidence to indicate how the criteria upon which this review is based may
have changed. If these criteria are becoming stricter, they could explain some of the slowing
of the growth in spending in both the Foster Higgins and KPMG surveys.
Although changes in cost sharing, service coverage, and utilization review can all lead
to a short-term slowdown in health care spending growth, they do not alter the determinants
⁵Such changes are more likely to show up as long term trends, however, and hence may
also not be very important for annual growth rates.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
6
of the longer-run trends. Long-run trends in health care spending can only be lowered by
slowing the rate at which new technologies are developed, adopted, and used or by continued
reductions in the overall volume of service use. This would imply both an evolution of a new
set of standards of care and lower expectations about the ability of the system to address
health care needs.
TRENDS WITH NATIONAL HEALTH EXPENDITURE DATA
To effectively compare Medicare and private insurance, it is important to use a
consistent data base. For this, we use the National Health Expenditure (NHE) accounts.
Produced each year by the Health Care Financing Administration, these data draw on actual
public spending and a variety of surveys of the private sector's health care providers to give
detailed numbers of spending by type of service and by payer (Levit et al., 1994). While the
data on payments by Medicare and private insurance plans in the NHE accounts do come
from different sources, there is an attempt to produce numbers that conceptually track the
same components of spending for payers. These are the best available data for this purpose.
Further, since the number of Medicare beneficiaries is growing more rapidly than the
number of persons covered by private insurance, a first step in this analysis is to focus on per
capita numbers. This is essential because the number of enrollees in Medicare has been
rising steadily while the absolute number of enrollees in private insurance plans has been
falling since 1990.6 Without such an adjustment, aggregate Medicare spending would grow
⁶Since 1982 Medicare's beneficiary growth has averaged about 1.9 percent per year
(Committee on Ways and Means, 1994).
i:\hp\mmoon\growth\ 7/18/95 3:09pm
7
more rapidly than aggregate private insurance spending even if both payers experienced the
same growth in costs per enrollee.
If we begin with the standard overall personal health expenditure category, per capita
growth rates in Medicare and private insurance spending for the most recent year, 1993, were
9.5% and 7.1% respectively--important differences, but not on the order of two-to-one (or
more) as has sometimes been suggested.⁷ Preliminary projections by the Health Care
Financing Administration indicate a wider difference for 1994 of 9.1% and 4.6%.⁸ These
savings in the private sector relative to Medicare for the past two years may prove to be an
important turning point. But we do not yet know whether they can be sustained over time,
since two years represents a very short period for tracking health care spending. In terms of
trends, Medicare fares very well over the last decade as compared to the private sector in
which it bested the private sector in seven of the last ten years (See Chart 1).9
But it is somewhat misleading to look only at overall personal health expenditures
since Medicare and private insurance often cover very different services. For example, home
For example: "while private health insurance is not rising on average this year because
of the competition, expenditures for Medicare is (sic) rising 10.5 percent" (Burrelle's
Information Service, 1995).
⁸Arguably, there might be some interest in also deflating Medicare and private insurance
spending trends to net out differences in price growth. However, there is legitimate
disagreement regarding the appropriate price deflators to use with these data (see Levit, et. al,
1994 and Huskamp and Newhouse, 1994). Therefore, we choose to report all trends in
nominal terms.
⁹Moreover, 1989 should be treated as an anomalous year since the short-lived catastrophic
program led to modest increases in hospital spending, but a dramatic 261% growth in skilled
nursing spending. It is also interesting to compare Chart 1 with Appendix Chart A which
shows the same growth rates on an aggregate rather than per capita basis and illustrates how
important just this one adjustment can be.
i:\hp\moon\growth\ 7/18/95 3:09pm
8
Chart 1
Per Capita Growth Rates of Total Personal Health Expenditures
1976-1993
20.0%
18.0%
16.0%
14.0%
Private
12.0%
Growth Rate
10.0%
8.0%
Medicare
6.0%
4.0%
2.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
health care and skilled nursing services--which are two of the fastest growing parts of
Medicare--are much less important for younger families covered by private insurance. If
these two benefits were truly post-acute care services and hence served as substitutes for
hospital care, it might still be important to include them with other acute care coverage. But
a post-acute care response to hospital changes should have occurred between 1985 and 1988
(when hospital growth was lowest). But both SNF and home health services showed little or
even negative per capita growth during that period (See Appendix Table C). Instead, much of
the growth of these benefits has occurred since 1989 and reflects an expansion of Medicare
into long term care types of services.¹⁰
And, on the other side, private insurance often includes some prescription drug
coverage, and sometimes dental insurance, while Medicare does not. Consequently, to offer a
more accurate picture of differences in spending growth between these two payers, we focus
on those services where both Medicare and private insurance play a substantial role. Our
efforts are limited by the fact that the National Health Expenditure (NHE) numbers combine a
number of categories that we would like to be able to disaggregate.¹¹ For example, vision
¹⁰In the case of skilled nursing facility services (SNF) a court case in 1988 and then the
Medicare Catastrophic Care Act in 1989 loosened substantially the restrictions on receipt of
these benefits (for example, by eliminating the three day prior hospital stay requirement).
Skilled nursing benefits expanded substantially, in part substituting for Medicaid long term
care (Liu et al., 1995). A similar legal challenge in 1989 for home health services seems to
have opened the door for some beneficiaries to receive large numbers of visits--particularly
for nonskilled home health aide services (Kenney and Moon, 1995; Bishop and Skwara,
1993).
"In addition, 1994 numbers are only available for total spending, so the disaggregations
we show below cannot yet be updated for 1994. When we are able to do so, the numbers
will likely show a more favorable tilt to the private sector. Finally, it is not possible to pull
out insurance that supplements Medicare ("medigap"), but if it were that would result in an
i:\hp\moon\growth\ 7/18/95 3:09pm
9
Table I
Share of Total Personal Health Expenditures
Medicare
Private Insurance
Health Expenditure Categories
1975
1993
1975
1993
Consistently Covered Services
Hospital Services
73.3%
61.3%
62.0%
45.6%
Physician Services
21.5
23.0
29.1
32.6
Other Professional Services
1.3
3.7
1.3
6.1
Vision and DME
0.8
2.5
0.6
0.3
Other
Nursing Homes
1.9%
4.1%
0.3%
0.7%
Home Health
1.2
5.3
0.2
1.0
Drugs and other Nondurables
0.0
0.0
3.4
7.1
Dental Services
0.0
0.0
3.2
6.5
Source: National Health Expenditures. Health Care Financing Administration.
g:\moonm\6548\totexp.t July 5. 1995
care and durable medical equipment (DME) are combined in the NHE data. The first of these
is less well covered by Medicare while DME represents an area of considerable growth for
Medicare in recent years.
Nonetheless, we concentrate much of our attention on four of the NHE categories:
hospital services, physician services, other professional services, and vision/DME services.
Altogether these services accounted for 90.6% of what Medicare covered in 1993 and 84.7%
of what private insurance covered in that year. Home health and skilled nursing care made
up the rest of Medicare services, while they accounted for only 1.7% of private insurance
coverage. Drugs and dental services account for the rest of private insurance coverage not
reported here and were negligible for Medicare. Table 1 indicates the importance of each of
these categories to Medicare and private insurance.
Two years of data are presented in Table 1 to also illustrate how these shares have
shifted since 1975--another factor which is important to understanding growth in spending as
well. Over time, for example, hospital services have become much less important to
Medicare while all other categories of covered services have increased. The same hospital
trend holds for private insurance, although hospital services have never been as important as
under Medicare. The share of private insurance spending for drugs and dental services has
more than doubled, two areas not covered by Medicare.
By concentrating on the first four categories of Table 1, we are able to examine
spending growth across the two sectors for a more consistent set of covered services.
Medicare's spending growth in 1993 is much closer to that for private insurance among this
improved estimate between Medicare and private insurance for younger families.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
10
set of services. Per capita numbers for the four combined NHE categories yield average rates
of growth of 7.4% for Medicare versus 7.1% for private insurance. And, when comparing the
patterns of these two sectors over time, Medicare does better than the private sector in eight
of the last ten years (Chart 2). In some of those years, particularly during the late 1980s,
Medicare's growth rates are substantially below those for private insurance.
Even more interesting patterns emerge if we look at each of the four service groups
separately. For both hospital and physician services, the effects of changes in Medicare's
payment policies are quite clear. Rates of change in spending for hospital services (Chart 3)
were comparable for Medicare and private payers prior to 1985. The last two years of this
period cover the start-up period for Medicare's Prospective Payment System (PPS) during
which Medicare rates were set quite generously. Between 1985 and 1988, Medicare corrected
for these initially high payment rates by establishing very low update factors and kept hospital
spending growth well below that of private payers.¹² This caused hospitals' PPS margins to
fall from over 14 percent in 1985 to 1.4 percent in 1989. After 1988, Medicare continued
with growth rates that were closer, but still below, private payers in all years except 1992.
In contrast to the PPS, Medicare approached changes in physician payment policies
in a more piecemeal fashion during the 1980s. It was not until 1992 that comprehensive
physician payment reform was implemented. Nevertheless, the effects of the 1980s policies
can be seen in Chart 4. Until 1983 Medicare and private payer rates of change in physician
¹²The increase in the growth in privately-insured hospital spending may be due to cost-
shifting, a revenue-enhancing strategy through which hospitals, as a whole, offset losses on
some patients by earning more on others. However, there is wide variation across hospitals in
the ability to undertake cost shifting (ProPAC, 1992).
i:\hp\mmoon\growth\ 7/18/95 3:09pm
11
Chart 2
Per Capita Growth Rates of Services Covered by Both Medicare and Private Insurance
1976-1993
20.0%
18.0%
16.0%
14.0%
Private
12.0%
Growth Rate
10.0%
8.0%
6.0%
Medicare
4.0%
2.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
Chart 3
Per Capita Growth Rate of Hospital Services
1976-1993
20.0%
18.0%
16.0%
14.0%
12.0%
Growth Rate
10.0%
8.0%
Private
6.0%
4.0%
Medicare
2.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
Chart 4
Per Capita Growth Rate of Physician Services
1976-1993
20.0%
18.0%
Private
16.0%
14.0%
12.0%
Growth Rate
10.0%
8.0%
Medicare
6.0%
4.0%
2.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
spending were bouncing around; in some years Medicare was higher and vice-versa.
However, in 1984 Medicare froze physician fees for almost two years and achieved a
dramatic slowdown in spending growth relative to the private sector. Once the freeze was
lifted in 1986, Medicare spending growth exceeded that of private payers for two years. By
1988, there was general agreement about the likely shape of the reforms that would ultimately
take place in 1992. 13 As such, Medicare gradually began to move fees for specific services
toward the reform target, while keeping overall fee growth to moderate levels. These
concerted efforts allowed Medicare physician spending to grow at lower rates than private
payers in every year starting in 1988.
Other professional services constitute another category where both Medicare and
private insurance provide substantial coverage (Chart 5). These include spending for services
provided by independently practicing licensed health care practitioners other than physicians
and dentists. Such professionals include private duty nurses, psychologists, and podiatrists.
They also cover services in freestanding outpatient clinics such as mental health and
rehabilitation centers. After substantial declines earlier in the rates of growth in these
services, they again picked up in the early 1990s under Medicare. The patterns are quite
different for private insurance. Rates of growth were much higher there than under Medicare
for most of the period before 1990. Since then, there has been a dramatic decline in private
sector growth. Could this reflect some of the tightening on services such as mental health by
13 The basic notion was that fees for procedures and diagnostic testing were "too high"
relative to fees for evaluation and management services and that this could be corrected if a
payment system were established under which relative fees were based on relative resource
costs. This objective was achieved through adaptation of the Resource-based Relative Value
Scale developed at Harvard University (Hsiao, et. al, 1979).
i:\hp\mmoon\growth\ 7/18/95 3:09pm
12
Chart 5
Per Capita Growth Rate of Other Professional Services
1976-1993
45.0%
40.0%
35.0%
Private
30.0%
25.0%
Growth Rate
20.0%
15.0%
10.0%
Medicare
5.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
private plans? If costs of care are shifted to consumers, there should be a concurrent increase
in out-of-pocket spending in this category in the 1990s. Rates of growth in out-of-pocket
spending for the services have not, however, shown a consistent trend that would substantiate
a shifting of burdens onto consumers.¹⁴ It may be, however, that restrictions have occurred
in this area without shifting costs onto patients.
Vision services and durable medical equipment constitute the last area of comparison
between private plans and Medicare. In looking at Chart 6, it appears there are few
consistent patterns. Perhaps most impressive is the steady decline in the rate of growth of
spending by private insurance in this area since 1987. Again, an examination of out-of-
pocket spending growth does not indicate any clear evidence of shifting of burdens onto
individual consumers in this category.
The excluded categories of spending are also interesting (as shown in Appendix Table
C). Part of the reason that Medicare looks so much better than the private sector in recent
years within our framework is the exclusion of SNF and home health services. These two
areas have grown very rapidly under Medicare, particularly since 1989, largely as a result of a
relaxation in regulatory oversight.¹⁵ But our choice of categories for inclusion in Chart 2
does not work exclusively in the favor of Medicare. The excluded categories have grown
¹⁴It is important, however, to view this with caution since we are not able to link the rise
in out of pocket spending to those with private insurance. Rather our out-of-pocket numbers
refer to all Americans. More detailed databases would be needed to determine whether the
"success" of private plans in this spending category is merely a shifting of burdens onto
consumers.
15 And, 1989 was an anomalous year for skilled nursing care under Medicare. Benefits
were expanded and cost sharing changed for that year only as a result of the Catastrophic
legislation.
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13
Chart 6
Per Capita Growth Rate of Vision and DME
1976-1993
35.0%
30.0%
Medicare
25.0%
20.0%
Growth Rate
15.0%
10.0%
5.0%
Private
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
-5.0%
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
faster than the included ones for the private sector as well. In particular, private insurance
spending on drugs and other nondurables have grown at a per capita rate greater than overall
private insurance spending in every year since 1981. Dental services also grew rapidly in the
early years, but their growth rates have slowed substantially since then.
PAYMENT LEVELS AND GROWTH RATES
Despite the low rates of growth private insurers have achieved in recent years, it is
still the case that, on average, they pay more than Medicare for most services in most areas of
the country. Given the current direction of the policy debate, an obvious question that would
be useful to answer is "what would it cost to insure Medicare beneficiaries through private
health plans?" While this is a complex question to answer precisely, based on what is well
known about what private payers pay for hospital and physician services, Medicare payments
would rise substantially if the program paid for these services at average private rates. The
Prospective Payment Assessment Commission reports that revenues from private payers were
29 percent above hospital costs in 1993, down from 31 percent above costs in 1992.
Although there may be reasonable expectation of a continued decline, it would take many
years for these rates to converge to Medicare payment levels, which are, on average, 11
percent below the costs of treating its beneficiaries (ProPAC, 1995).
A similar pattern exists in the physician services market. Based on 1993 data, the
Physician Payment Review Commission estimates that Medicare fees were, on average, 38
i:\hp\mmoon\growth\ 7/18/95 3:09pm
14
percent below those of private payers (PPRC, 1995). 16 Although the precise size of this
differential may be somewhat sensitive to the methodology used in the calculation (e.g.,
Miller, Zuckerman, and Gates, 1993), all studies suggest that average Medicare physician fees
are below those of private insurers. Obviously, many Preferred Provider Organizations are
entering into contracts with physicians that contain fees well below those that existed under
payment systems based on, say, "usual, customary and reasonable" charge screens. A recent
Urban Institute study shows that PPO discounts can be substantial--averaging 24 percent for
one large national insurer in 1993 (Zuckerman and Verrilli, 1995). However, even with these
discounts, Medicare's average physician fees were still about 30 percent below those paid by
this insurer's PPO.
The role these payment differences play in understanding the National Health
Expenditure analysis presented above is important. The differentials imply that some part of
the success that private insurers have achieved in controlling spending in the last two years is
the result of negotiating discounts from historically-high provider payment rates. Given the
levels that these rates were starting at and the excess supply of provider capacity in many
areas, it is not surprising that large discounts can be obtained, enabling large reductions in
spending growth. 17 However, the spending growth slowdown that would be observed as a
16 The PPRC analysis of private fees uses a weighted average of fees from both indemnity
and PPO payers, suggesting that it is not a worst case scenario for Medicare fee generosity.
17 However, our analysis of NHE data through 1993 does not suggest that private insurers
have slowed spending growth below Medicare for comparable sets of services. Further
declines may be noted in the future.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
15
result of this realignment of prices would represent only a transition from a high-level of
spending to a moderate-level of spending, with little impact on underlying long-term trends.
CASE MIX DIFFERENCES AND SPENDING GROWTH
Not only are the populations served by Medicare and by private insurance quite
different, but they may be changing over time in ways that affect rates of growth. For
example, for the last few years, fewer people are being covered under private insurance each
year; if those losing coverage have health problems and thus cannot get insurance, then their
exclusion would move growth rates of private insurance spending downward. On the other
hand, if those who drop coverage are younger workers who feel that coverage is not worth
the premiums they would have to pay, this would shift growth rates upward. Unfortunately,
data on the health status of persons with private insurance coverage is almost nonexistent SO
we are only left to speculate about the extent to which the reported growth rates are reflecting
differences in the cost of insuring a changing mix of patients.
Medicare data, on the other hand, do allow us to look at what impact a changing
composition over time of at least age and a few other factors have on the costs of insurance.
As part of the analysis for this project, we examined whether the aging of the Medicare
population contributes substantially to Medicare's growth rates. A positive finding in this
regard would suggest that Medicare spending growth should be higher than that for the rest of
the population even after controlling for all other factors. We found that the aging of the
population covered by Medicare does add to the rate of growth of spending since the
i:\hp\mmoon\growth\ 7/18/95 3:09pm
16
proportion of oldest and sickest beneficiaries is rising, but by less than might be expected.1⁸
Specifically, we compared Medicare spending in 1977 and in 1992 by detailed age
groupings for those aged 65 and above and for the disabled as a group. We then considered
whether overall spending would have been lower in 1992 if we allowed average spending for
each age group to change but held the share of the population in each group constant at the
1977 level. 19 This essentially allows us to consider what spending would look like if the
age distribution of the population (and the share of disabled versus elderly) did not change
over time.
Under this exercise, average per capita spending for all Medicare beneficiaries would
be lower in 1992 than the actual number, indicating that the aging of the population does
slightly bias spending upward. The 1992 actual per capita amount was $3391, while our age-
controlled simulation yielded a per capita average of $3324. Translating this into growth
rates implies that spending each year is about 0.2 percent higher as a result of the changing
demographics within the elderly population.
CONCLUSION
While we find little evidence to support the claims that the private sector is doing
dramatically better than Medicare, this should not be interpreted as a claim that nothing can
1⁸Actually, this finding is consistent with other analysis suggesting that attributing the
high costs of medicare to the very old or those at the end of life usually overstates that
impact (Lubitz and Riley, 1993).
¹⁹We also conducted this exercise using 1992 age distributions as the control factor and
the results are essentially the same.
i:\hp\moon\growth\ 7/18/95 3:09pm
17
or should be done to try to slow the rate of spending in the Medicare program. Indeed, high
growth rates in this program create problems for federal government financing and for out-of-
pocket burdens on older and disabled Americans who pay a share of these costs. Serious
efforts will need to be made in the future to slow these growth rates. Medicare could and
should do better; indeed even within its current structure a number of efforts could slow
growth--particularly in the areas of home health, skilled nursing facility care and outpatient
hospital services, for example. But such efforts will require us to face up to tough choices if
health care spending is to be controlled.
Unfortunately, some of the debate on slowing Medicare's growth has suggested that by
simply adopting principles developed in the private insurance market, Medicare's problems
can easily be resolved. Discrepancies in growth in spending between Medicare and private
insurance are used to support such claims.
Our findings indicate that growth rates in Medicare and private insurance are quite
similar when carefully measured. Historically, Medicare stacks up very well with the private
sector. And, even if private insurance does well in the next few years, no one knows very
much about the sustainability of these low growth rates over time. In fact, it should not be
surprising for Medicare and private insurance per capita rates to turn out to be very similar,
since all health care spending shares technological change and improvement as a common
major determinant of growth (Newhouse 1993). Reining in use of services will constitute a
major challenge for both private insurance and Medicare in the future.
If the private insurance market, through the expansion of managed care, is truly
successful in restraining growth, Medicare may be able to benefit from adopting some or all
i:\hp\mmoon\growth\ 7/18/95 3:09pm
18
of the techniques. However, the emerging forms of managed care (e.g. POS and PPO plans)
have little experience in covering elderly and disabled populations. And as yet, techniques
for determining the appropriate payments to make to plans that cover beneficiaries are not
well developed. Careful consideration will be needed to determine how these plans control
expenditures, how this affects patient outcomes, and whether these methods should be adopted
by Medicare. For example, if managed care reduces spending by eliminating not only
unnecessary services, but some necessary ones as well, it may be difficult for a public
program to adopt such stringent controls (Newhouse, et al., 1982). As yet, however, there is
little evidence to reassure us that such success has yet been established or will be painless in
its implementation.
i:\hp\mmoon\growth\ 7/18/95 3:09pm
19
APPENDIX
Most of the analysis in this paper uses data from the National Health Expenditure
accounts (Levit et al. 1994). These data are available on disk and allowed us to examine
eight categories of spending (as shown in Tables B and C) by type of payer. These data are
gathered in different ways, but there is an attempt to assure that these figures conceptually
track the same components of spending and that they are national in scope. As a result these
are the most consistent data available. Most of our analysis concentrated on Medicare and
private insurance. The private insurance data include all types of private insurance:
employer-based and privately purchased plans for younger families and medigap policies for
the elderly and disabled. Our preference would have been to take medigap out of these
numbers, but that was not possible.
Growth rates for aggregate data were calculated by dividing nominal dollars in year
one by year two. That growth rate is shown as year two's growth rate. For purposes of this
analysis we used data back to 1975. By that time, the disabled population had been
assimilated into Medicare and it was during that period that interest in containing costs began.
Per capita dollar spending values were created using numbers supplied to us by the Office of
the Actuary of the Health Care Financing Administration (HCFA). The private insurance
numbers were adjusted to create an unduplicated count of the number of persons with some
type of private health insurance. After calculating per capita spending numbers, we then
estimate annual growth rates for each of the various spending categories.
We used two criteria for determining which categories to include in our comparative
measure: the figure had to be positive for both Medicare and private insurance (which ruled
out drugs and dental services as shown in Table 1), and the categories needed to primarily
capture acute care benefits. This second criterion is somewhat more controversial since it
omits nursing home and home health services, both of which are growing rapidly under
Medicare at present. Moreover, in theory, these services might have grown because of the
rapid changes in inpatient hospital lengths of stay after the introduction of the hospital
prospective system under Medicare in 1984. But between 1985 and 1989, home health
spending under Medicare declined in per capita terms and skilled nursing facility services
grew quite slowly(see Appendix Table C). The rates of growth for both picked up at the end
of the 1980s and continued into the 1990s. From other analysis in this area, we find that
much of the recent growth in these programs is in a shift toward long term care, particularly
in the case of home health services (Kenney and Moon 1995). Much of the growth in home
health services, for example, is for home health aides rather than for skilled services.
Our analysis of whether the aging of the Medicare population over time contributed to
its rate of growth used HCFA data on per capita spending over four different years and used
two different index calculations. Detailed results are not presented here since we found that
the increasing share of Medicare beneficiaries over the age of 85 and under the age of 65 (the
disabled) did not add substantially to growth over time. This is consistent with findings on
other studies about expenditures at the end of life (Lubitz and Riley 1993).
Appendix Chart A
Aggregate Growth in Medicare and Private Insurance Spending
1976-1993
25.0%
20.0%
15.0%
Growth Rate
Private
10.0%
Medicare
5.0%
0.0%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Year
Source: National Health Expenditure Data,
Health Care Financing Administration
Appendix Table A
Comparison of Growth Rates for Alternative
Measures of Health Care Spending
Aggregate
Per Capita
Per Capita Subtotal
Total Personal
Total Personal
of Consistently
Health Expenditures
Health Expenditures
Covered Services
Dates
Medicare
Private
Medicare
Private
Medicare
Private
1976
20.5%
17.1%
17.2%
15.8%
17.0%
14.4%
1977
17.7%
17.0%
14.1%
12.3%
14.2%
11.9%
1978
15.9%
14.2%
13.0%
14.5%
13.1%
13.1%
1979
16.5%
18.2%
13.6%
17.0%
13.6%
16.5%
1980
21.3%
19.1%
18.7%
17.9%
18.9%
17.3%
1981
19.7%
17.8%
17.7%
16.4%
17.6%
15.7%
1982
17.5%
15.5%
15.5%
14.1%
15.3%
13.1%
1983
14.0%
10.7%
12.1%
10.1%
12.0%
9.4%
1984
11.3%
10.5%
9.4%
10.0%
9.3%
8.9%
1985
8.3%
12.3%
6.2%
11.9%
6.4%
11.0%
1986
6.8%
10.0%
4.5%
8.1%
4.8%
7.6%
1987
7.2%
12.9%
5.2%
11.7%
5.4%
11.1%
1988
8.3%
12.1%
6.3%
10.9%
6.0%
11.4%
1989
14.9%
11.9%
12.9%
10.7%
9.9%
10.7%
1990
9.5%
10.6%
7.5%
9.7%
8.1%
9.1%
1991
9.9%
8.3%
7.7%
9.2%
6.7%
9.0%
1992
12.4%
8.2%
10.2%
8.6%
8.1%
8.4%
1993
11.6%
6.6%
9.4%
7.2%
7.4%
7.1%
Source: National Health Expenditure Data,
Health Care Financing Administration
Appendix Table B
Per Capita Growth Rates for
Medicare and Private Insurance
for Consistently Covered Services
Hospital
Physician
Other Professional
Vision and
Subtotal of Consistently
Total Personal
Services
Services
Services
DME
Covered Services
Health Expenditures
Dates
Medicare
Private
Medicare
Private
Medicare
Private
Medicare
Private
Medicare
Private
Medicare
Private
1976
17.7%
14.9%
13.6%
13.0%
32.2%
27.6%
18.6%
4.8%
17.0%
14.4%
17.2%
15.8%
1977
13.1%
11.7%
17.1%
11.6%
26.2%
25.0%
25.4%
13.9%
14.2%
11.9%
14.1%
12.3%
1978
12.3%
14.6%
14.4%
9.2%
22.2%
22.7%
30.1%
20.4%
13.1%
13.1%
13.0%
14.5%
1979
13.2%
16.0%
14.7%
16.8%
11.3%
23.0%
21.2%
27.0%
13.6%
16.5%
13.6%
17.0%
1980
18.8%
17.1%
19.1%
17.4%
12.7%
16.4%
29.5%
23.6%
18.9%
17.3%
18.7%
17.9%
1981
17.8%
14.0%
16.4%
18.1%
13.4%
41.8%
31.0%
6.4%
17.6%
15.7%
17.7%
16.4%
1982
14.4%
13.5%
17.2%
11.6%
24.3%
21.5%
26.3%
10.0%
15.3%
13.1%
15.5%
14.1%
1983
10.2%
7.1%
16.0%
13.9%
20.9%
16.8%
28.8%
5.3%
12.0%
9.4%
12.1%
10.1%
1984
9.1%
4.3%
9.4%
15.9%
13.9%
36.1%
14.1%
14.8%
9.3%
8.9%
9.4%
10.0%
1985
5.0%
5.2%
9.7%
19.3%
13.4%
33.8%
11.9%
14.3%
6.4%
11.0%
6.2%
11.9%
1986
1.8%
4.9%
11.9%
10.7%
17.9%
20.4%
11.6%
-3.2%
4.8%
7.6%
4.5%
8.1%
1987
2.1%
9.6%
13.2%
12.1%
12.4%
22.5%
12.4%
10.6%
5.4%
11.1%
5.2%
11.7%
1988
4.5%
9.1%
9.3%
12.1%
8.1%
32.0%
9.6%
6.9%
6.0%
11.4%
6.3%
10.9%
1989
9.5%
9.6%
10.2%
11.0%
18.4%
19.4%
10.7%
4.6%
9.9%
10.7%
12.9%
10.7%
1990
7.2%
7.6%
8.0%
10.8%
25.6%
12.1%
15.8%
0.2%
8.1%
9.1%
7.5%
9.7%
1991
7.1%
8.3%
2.7%
8.9%
23.0%
15.8%
20.5%
-0.9%
6.7%
9.0%
7.7%
9.2%
1992
10.2%
6.5%
1.1%
10.3%
20.9%
13.0%
10.4%
-1.0%
8.1%
8.4%
10.2%
8.6%
1993
8.0%
8.5%
5.5%
6.2%
10.0%
2.7%
8.2%
-2.4%
7.4%
7.1%
9.4%
7.2%
Source: National Health Expenditure Data,
Health Care Financing Administration
Appendix Table C
Per Capita Growth Rates for
Medicare and Private Insurance
for Other Spending Categories
Nursing
Home
Drugs and other
Dental
Subtotal of Other
Homes
Health
Nondurables
Services
Spending Categories
Dates
Medicare
Private
Medicare
Private
Medicare
Private
Medicare
Private
Medicare
Private
1976
14.2%
17.6%
40.8%
70.8%
0.0%
13.1%
0.0%
56.5%
24.8%
34.5%
1977
-1.0%
15.6%
25.2%
38.9%
0.0%
6.6%
0.0%
23.2%
10.7%
16.7%
1978
-1.7%
31.4%
20.2%
56.7%
0.0%
25.1%
0.0%
31.6%
9.4%
30.0%
1979
2.7%
26.7%
21.0%
21.4%
0.0%
22.2%
0.0%
21.4%
12.9%
21.8%
1980
7.9%
22.8%
16.2%
20.5%
0.0%
24.4%
0.0%
22.9%
12.8%
23.3%
1981
8.1%
32.7%
27.8%
13.0%
0.0%
16.1%
0.0%
25.4%
20.2%
21.8%
1982
6.8%
37.0%
26.4%
22.9%
0.0%
28.2%
0.0%
17.1%
19.6%
21.8%
1983
4.3%
29.7%
20.7%
19.6%
0.0%
17.1%
0.0%
14.1%
15.6%
16.0%
1984
5.7%
25.3%
15.7%
18.1%
0.0%
20.7%
0.0%
15.3%
12.9%
17.8%
1985
1.4%
25.8%
-0.6%
16.8%
0.0%
24.3%
0.0%
13.7%
0.0%
18.4%
1986
-2.4%
21.8%
-6.5%
23.3%
0.0%
11.2%
0.0%
9.5%
-5.4%
11.3%
1987
6.0%
20.2%
-5.8%
13.8%
0.0%
13.4%
0.0%
16.6%
-2.6%
15.5%
1988
47.6%
9.2%
6.3%
6.9%
0.0%
9.3%
0.0%
7.1%
18.6%
8.1%
1989
261.2%
3.2%
22.4%
30.8%
0.0%
16.4%
0.0%
6.2%
111.1%
10.9%
1990
-31.3%
16.0%
49.5%
29.7%
0.0%
21.0%
0.0%
5.0%
-1.8%
13.3%
1991
16.1%
5.2%
38.5%
5.5%
0.0%
17.7%
0.0%
4.3%
28.5%
10.3%
1992
55.2%
2.7%
36.3%
25.1%
0.0%
8.7%
0.0%
9.4%
43.9%
9.5%
1993
32.7%
-5.4%
33.9%
18.7%
0.0%
8.0%
0.0%
6.4%
33.4%
7.3%
Source: National Health Expenditure Data,
Health Care Financing Administration
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Health Policy Center
UNDERSTANDING THE GROWTH OF
MEDICARE HOSPITAL OUTPATIENT
DEPARTMENT SERVICES
Mark E. Miller
Margaret B. Sulvetta
Clinton Presidential Records
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197-08
March 1993
HOW DO MEDICARE PHYSICIAN FEES
COMPARE TO PRIVATE PAYERS?
Mark E. Miller
Stephen Zuckerman
Michael Gates
Clinton Presidential Records
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of digitization. To see the full publication please search online or
visit the Clinton Presidential Library's Research Room.