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The MedPAC Report on Medicare Reform

Posted on Feb 28, 2013 by Ailee Slater ()

We talk about a fiscal cliff, but the United States' financial problems are really more like a picture by M.C. Escher - the government keeps going round and round, and for every fiscal cliff avoided, there's another one just around the corner. Although the federal government avoided billions of dollars in cuts just last month, the next cliff is coming - at the end of the week, to be precise.

On Friday, automatic cuts will kick in, and Washington must reduce spending by $85 billion in order to, say, keep the military running. The President and Congress are spending this week in a flurry of budget meetings to discuss how to save the country from financial ruin - higher taxes, cuts in defense, education and public workers are just some ideas on how to prevent the crisis. Of course, as always, health care reform is also on the table. The House Ways and Means Committee will meet before Friday to discuss a recent report on Medicare, and how making just a few key changes to Medicare's payment system could save the government billions of dollars every year. Will this be the plan that saves the United States from financial free fall? Maybe not. But it is an important example of Medicare reform, and how this public health insurance program might change in the future.

The Medicare report in question comes from the Medicare Payment Advisory Committee, or MedPAC. MedPAC is an independent congressional agency responsible for advising congress on Medicare issues, and analyzing Medicare in terms of quality and ease of access. In June 2012, MedPAC published a report evaluating payment issues and making recommendations to congress; this June report was especially interesting because it focused not on health care providers, but on reducing Medicare costs by targeting the patients themselves. After all, if patients have incentives to seek out less costly care, the federal government can save money. In their evaluations of the Medicare payment system, MedPAC came up with recommendations on reforming benefit design, with a specific interest in copayments, deductibles and coinsurance; that is, the money not paid by Medicare which a patient must put toward his or her own care. Following is a summary of four major MedPAC benefit design recommendations - how each idea would alter Medicare as we currently know it, and what financial and health care benefits could be provided.

1) Establish an out of pocket maximum through focus group studies, MedPAC found that Medicare beneficiaries were willing to pay higher insurance premiums to be on a plan with a maximum yearly out of pocket limit. With this limit, beneficiaries could be assured that even in the case of a sudden illness or injury, the patient's share of hospital costs would never exceed a set amount. Medicare plans at the moment do not include this out of pocket maximum, and so patients with very high hospital bills may face huge financial problems having to cover even 10 percent of these costs. An option to pay more for an out of pocket limit is win-win - Medicare beneficiaries get peace of mind from knowing their spending limit, and Medicare gets more financial support from higher premiums.

2) Deductibles for Part A and Part B services Medicare Part A pays for inpatient hospital care, whereas Medicare Part B pays for general visits to the doctor and other outpatient care. At the moment, inpatient care incurs a higher deductible than outpatient care, which means that a patient must pay more out of pocket before insurance coverage kicks in. MedPAC finds a few problems with this system. It doesn't make sense to charge a patient more money for inpatient rather than outpatient care; inpatient care is rarely optional. If, however, Medicare were to combine Part A and Part B deductibles, it would mean better coverage for inpatient services, and provide a financial incentive for beneficiaries to reduce nonessential outpatient health services.

3) Replacing coinsurance with copayments Here, MedPAC is recommending the use of set fees (copayments) rather than percentage-based charges (coinsurance). MedPAC believes that copayments are more easily understood by beneficiaries; patients prefer to see their health care costs as a set number, and in fact, seeing the cost of a copayment rather than an uncertain coinsurance percentage might encourage Medicare beneficiaries to take a bigger lead in seeking out cost effective health care. Copayments would be determined depending on the type of service provided, which again would make more sense than a blanket, percentage-based fee for the patient.

4) An additional charge on supplemental insurance Medicare does not provide beneficiaries with total insurance coverage, and in fact patients pay an average 20 percent of their own medical bills; therefore, many beneficiaries also purchase private, supplemental insurance. Supplemental insurance, often known as Medigap, helps beneficiaries cover the cost of deductibles, copayments and coinsurance to Medicare. The issue, according to the MedPAC report, is that having supplemental insurance may be causing patients to spend more money on medical care. MedPAC found that Medicare beneficiaries with supplemental insurance averaged 25 percent more Medicare spending than the average recipient; perhaps these supplemental insurance users were truly in need of more care, or perhaps they were simply comfortable spending more money thanks to the presence of additional insurance.

MedPAC has recommended that to cover increased costs to Medicare, a surcharge on supplemental insurance should be created. Although there are clear benefits to set fees, copayments and surcharges to dissuade Medicare beneficiaries from using non-essential medical services, there is a danger that encouraging less care will result in poorer health and more costs to Medicare in the long run. The MedPAC report looked at this potential for offset effects, and found a frightening 2010 case in California - when retired public employees faced higher copayments for physicians visits and prescription drugs, hospital spending was significantly higher. Neither MedPAC nor any member of the federal government wants a Medicare system wherein beneficiaries are discouraged from seeking care due to high costs. However, developing incentives for Medicare recipients to smartly and safely lower their cost of care could mean big savings for the country. For congress, for Medicare, and for patients themselves, it is a delicate line to toe.

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