Medicare’s Future

Professor Zack Cooper sees Medicare as a vital program for America’s seniors, but argues that its health and that of the nation necessitate reform.  

Zack Cooper is an assistant professor of public health and economics at the Yale School of Public Health and the University’s Faculty of Arts and Sciences and a Resident Fellow at the Yale’s Institution for Social and Policy Studies (ISPS). His work examines the intersection of health policy and economics and is focused on identifying the impact of monetary and non-monetary incentives on health care organizations’ and health systems’ productivity. He is currently studying the impact of competition on hospital pricing, the impact of management quality on firm behavior and identifying the relative contribution of prices, care intensity and care volume to rising U.S. health care spending. Professor Cooper recently participated in an ISPS forum on the future of the Medicare program. He and his colleagues agreed that reforms are needed to control Medicare’s costs — but that, unfortunately, political gridlock is blocking substantive progress.

Medicare provides critical health services to millions of Americans, but spending on Medicare seems to be growing at an unsustainable rate. How much longer can this continue?

ZC: This is a really important point. I do not believe there is an apocalyptic, short-term Medicare spending issue. However, I do think we need to start addressing Medicare spending now before we confront a major crisis in 20 years. My real concern is that Medicare spending is crowding out other imperative investments that are crucial to making the United States more competitive.  

If we look at the big picture, entitlement spending – mainly Medicare – is the reason we’re having these big fiscal cliff and sequestration showdowns. Each year, Medicare accounts for a larger share of overall government spending. This means that in order for us not to pile on major debt, we either need to reform Medicare, raise taxes or cut spending in Medicare program or elsewhere in government. Unfortunately, our political system is failing us at the moment and can’t seem to address these longer-term issues.

The impetus for addressing this now is that we don’t want to have these fiscal cliff debates year in and year out. This Kabuki theatre fiscal policy spooks the markets, slows growth and is just a bad ways to make policy. 

Some have likened Medicare to an 800-pound gorilla in budget talks. Is it?

ZC: Medicare is the reason we have a debt issue. Take Medicare away and look at our 10-, 20-, and 40-year deficit projections and we’re actually in surplus. However, the real problem is growing health care spending, not Medicare per se. Rising overall health care spending is why we have a Medicare crisis. Framed differently, even if we got rid of Medicare, health care in the United States would still be expensive and we’d be talking about why health care is bankrupting the elderly and occupying a larger and larger share of most families’ income. Across the U.S. health system, we need to figure out how to promote wellness and get better outcomes at a lower cost.

President Barack Obama has spoken passionately about defending, and improving, Medicare. Has he?

ZC: The President is tweaking Medicare; he’s not introducing large-scale structural changes. Now, I don’t want to fault him too much because if I were running for office, I’d probably do the same thing. Restructuring Medicare is the political equivalent of juggling chainsaws.

The President has focused on improving the way Medicare pays for health care. Right now, we have a system that pays for quantity; do more, get more. The President is trying to pay for quality by, for example, paying less to hospitals that have high readmissions or infection rates. The Administration is banking that if the dominant player in the health care space – Medicare—introduces major payment reforms, these reforms will trickle down, impact other players in the health space and reduce overall spending. 

How will the Affordable Care Act affect Medicare?

ZC: Most Americans will not see a difference in their health care as a result of the Affordable Care Act. The Affordable Care Act mostly worked below the hood of Medicare, making payment changes to reward quality over quantity, but these will be absolutely imperceptible by the average Medicare user. 

You participated in a panel discussion at Yale recently on the future of Medicare. What is its future?

ZC: It was a great panel. We had David Brooks from the New York Times, Tom Scully, who ran Medicare under President George W. Bush, Sarah Kliff from the Washington Post and Jacob Hacker, who’s also on the faculty at Yale.  We didn’t have set speeches; we just had a great discussion

We all agreed that the United States needs to rein in Medicare spending. We talked at length about what policy-makers could do, but unfortunately, I’d say that we all agreed that the future of Medicare, at least over the next decade, is going to look a whole lot like the present. There are big changes that you could make to Medicare, but right now, there just isn’t the political will to reform the system and the trust isn’t there between the parties. 

What are some of the essential things that need to be changed in order to preserve Medicare’s future and improve its performance?

ZC: There are big-ball and small-ball policy responses that could impact spending.  The small-ball policies mainly focus on payment changes and rationalizing out of pocket spending.  The big-ball policies would involve a widespread change to how Medicare is structured.

The main small-ball issue I’d focus on right now is improving the way deductibles are structured. Today, Medicare beneficiaries often face substantial out-of-pocket spending and idiosyncratic cost sharing. Because out-of-pocket spending is high, a market has developed for insurance that covers out-of-pocket costs (so-called Medigap Insurance).  Medigap is garbage insurance and it needs to be eliminated. It shields individuals from the cost of health care and perpetuates our current problems.  

For a big-ball change, we need to focus on how to get individuals to avoid consuming health care that offers little value. Here are two easy examples of outrageous benefits. Medicare currently pays for proton beam therapy for prostate cancer.  Proton beam therapy costs tens of thousands more than standard treatments and doesn’t deliver better outcomes. Likewise, we currently pay for a drug known as Avastin for breast cancer. The problem is that it isn’t approved by the FDA and it isn’t efficacious. Paying for this stuff just doesn’t make sense. 

In the broadest sense, the best thing that could happen to the country on the debt front is to insulate health care from politics.  We can do that by increasing the role for markets in Medicare or giving the directors of Medicare some distance from political winds and create a Federal Reserve equivalent for health care.  At the end of the day, benefits decisions are never easy, but we cannot give everything to everyone.  So, there are two ways to rationalize this spending: government can restrict benefits or we can create a market to determine what care gets purchased. The government option involves essentially stating that unless there’s an evidence base for a particular treatment and that it is proven to be cost effective, Medicare won’t cover it.  The market option is creating a larger role for private insurers in Medicare and giving individuals a voucher to purchase insurance.  

Given the political divide, how likely are these changes to occur?

ZC: There’s bipartisan agreement that Medicare, in the long term, is unsustainable. There’s also agreement on some of the smaller tweaks to payments and deductibles that need to be made. Indeed, the savings in the Affordable Care Act that Democrats produced were included in Congressman Paul Ryan’s proposals. We just don’t have much agreement on the big-ball issues. The polling on Medicare is fascinating. Basically, we want everything available, don’t want to subsidize care for anyone else, and want care rapidly. Well, it turns out that politicians listen pretty well and that’s about what we get.  The problem is that it’s just not sustainable. 

Medicare now represents about 13 percent of the United States’ annual budget, or about $455 billion. What should these figures be ideally?

ZC: I don’t know that there’s a magic number that constitutes the ideal share of government spending that goes to Medicare. Clearly, we need to guarantee financial security for older Americans. However, what does worry me is that when Medicare spending increases, it means less money for other programs, like early childhood education, public health investment and infrastructure. We also have a political system that is geared toward spending on the elderly. The elderly vote in big numbers; they have interest groups like AARP. Right now, Medicare beneficiaries spend about 300 percent more than they contribute. As a result, Medicare is a substantial wealth transfer from young to old. My instinct is that while we need to guarantee senior’s health and financial security, we should focus more of our money on investing in infrastructure, reducing unemployment and improving early childhood education. 

Even though the United States spends enormous sums of money on heath care, in fact more than any other country, it does not have the healthiest population by any number of measures. Generally speaking, why is this?  

ZC: Let’s be really clear about where we do well and where we fall behind. If you’re fully insured, the United States has some of the best cancer outcomes in the world and our heart attack survival rate is excellent. We fall behind on life expectancy and premature mortality. That’s because a great deal of our health and our life expectancy is a function of elements far outside of the health system. It gets back to, at some level, what I was saying before: The United States spends more on health when other public policies, like education, housing programs and public health, can do vastly more for the elements where we fall behind, like life expectancy and infant mortality. 

Is Medicare living up to its original intent, delivering access to quality health care to those who might otherwise go without?  

ZC: Before Medicare, we had older Americans and their families who were left financially destitute; we had seniors unable to afford the care they need.  Medicare guarantees that the elderly aren’t bankrupted by health care costs and that they have access to extraordinary care. So, it is a hugely important program. Now we just need to figure out how to provide excellent health care and financial protection without breaking the bank.  

Some people advocate reforms that encourage turning Medicare into a voucher and allowing private competition. What do you think of this approach?

ZC: This is something that’s gotten wildly politicized. The politics of health care are pretty unfortunate and they distort complicated policies. I wish we could cut through the political noise. 

Think about some of the recent debates. On the left, Democrats favor private insurance for those under 65; the centerpiece of the Affordable Care Act is a push to create a voucher system for private insurance that is designed to make these markets more competitive. However, Democrats have been very skeptical this could work for those over 65.  I don’t think 65 is some magical age that changes incentives dramatically. On the other side, we had the Republican candidate for president who had introduced a mandate in his state, but did not favor it for the rest of the country.     

So, in theory, I think a private system could work, if it was well regulated. However, I just don’t think that we could get this well-designed system in our current political climate. The issue today is that many of the folks who are pushing for a voucher system for Medicare do so not because they believe in competition, but rather because they dislike government. 

Unfortunately, when it comes to competition in health care, we need a strong government to regulate the market. Governments and competition are not separable in health care. If I could start from scratch, I’d design a system where everyone was guaranteed an affordable, private insurance plan. We’d eliminate the distinction between over 65 and under 65 and give private insurers the incentive to keep individuals healthy for their life, not until they qualified for a public program. 

Are you encouraged by the current political climate in the United States and what it means for the future health of Medicare?

ZC: I’m more encouraged by our Yale students than by our politicians. I’m banking on our students solving these issues by the time I’m eligible for Medicare.









This article was submitted by Denise Meyer on May 8, 2013.

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Zack Cooper

Assistant Professor of Public Health (Health Policy ), Assistant Professor of Economics, and Assistant Professor in the Institution for Social and Policy Studies