Coalition or Collision? Medicare and Health Reform

There is a remarkable consensus that the American medical care system needs a major overhaul. The critical unanimity on this point bridges almost all the usual gaps-- between old and young, Democrats and Republicans, management and labor, the well paid and the low paid. We spend more and feel worse than our economic competitors, with nine out of ten Americans telling pollsters health care requires substantial change. This is the good news for medical reformers in the Clinton administration and the Congress.

The bad news is that, for a variety of ideological, economic, and institutional reasons, our politics have frustratingly failed to coalesce around a solution that satisfies the reasonable conditions for a medical care system worthy of a civilized society. We have no assurance that the rare agreement on the nation's medical ills will generate the legislative support required for a substantively adequate, workable program of reform.

What President Clinton will propose cannot possibly be specified in detail from his campaign. As a campaigner, he understandably avoided concentrating on the details of health policy or its implementation. As president, however, he has different opportunities and risks. In health, he must specify workable means to his reform aims that can command a majority in the Congress.

That task is one of the most difficult a presidential reformer faces. Reformers in the Progressive era and the New Deal, under President Truman, and during the early 1970s thought universal health insurance was imminent and were bitterly disappointed. Now, as then, entrenched interests try to block change by skillfully manipulating our deepest fears and beliefs to maintain their privileges. In 1993, to be sure, those interests seem to be on the defensive; the time for reform does appear to have arrived. But before the new administration and the Congress can resolve the challenges of reform, they will have to resolve some nasty and hardly trivial budget problems stemming from Medicare and other current federal health programs. And that sets the stage for what could become a nightmare of conflicting agendas.

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We had a premonition of conflicts to come last July, when Budget Director Richard Darman predicted that Medicare outlays would have to be drastically reduced to cut the budget deficit. Hence Darman proposed a "cap" on Medicare and Medicaid to reduce federal health spending between 1993 and 1997 by some $260 billion. In response, Clinton charged such a policy would eviscerate federal health programs. Kenneth E. Thorpe, an economist advising the Clinton campaign, warned that enforcing such caps without more far-reaching medical care reforms would destroy Medicaid, increase cost-shifting from Medicare to employment-based insurance, and thus lead to the loss of millions of jobs. The Bush campaign claimed this was nothing but the familiar scare tactics of Democrats. Nonetheless, Bush tried to distance himself from the flareup by calling Darman's proposal merely one "option."

As president, Clinton cannot easily escape the problem that Darman identified. It will be no easy matter for his new administration to deal with Medicare and its constituencies while taking steps toward universal health insurance and a transformation of how we pay for and deliver medical care. If the Clinton plan doesn't incorporate the elderly, and quickly, Medicare is at political and fiscal risk in the interim. The danger here is a potentially serious clash between the constituencies of Medicare and of universal health insurance and the reawakening of the ugly generational politics that marked the debacle over Medicare catastrophic coverage--the program that Congress enacted in 1988 only to repeal the following year after an eruption of discontent from the affluent elderly.

Were it possible to enact universal health insurance immediately and to fold Medicare into such a program, a generational conflict would not necessarily arise. But universal health insurance simply may not proceed that fast. Clinton himself has signaled as much. His aim is to reach universal coverage by several transitional steps, meanwhile setting in place the elements of overall cost control. He has proposed requiring employers to pay for health insurance, with public financing for the unemployed, and suggested folding Medicaid beneficiaries as well as some of the employed into health insurance purchasing groups. President Clinton's hope, quite clearly, is to produce by the end of his first term a coherent amalgam of the fragmented arrangements we euphemistically call the American health care system. But what about Medicare in the here and now?

Although Medicare's costs are not growing as rapidly as those of private insurance, they pose big budgetary problems. Compared with other federal programs, Medicare's 30 percent growth in cost over the past four years makes it one of the most rapidly expanding items in the budget. That's why Budget Director Darman spoke of "capping" Medicare's expenditure increases. But any attempt to do so, without controls on the rest of the health economy, would exacerbate one of the worst trends in health finance during the 1980s: the shifting of Medicare expenses from public accounts to private insurance and patient bills.

If Clinton intends to make good on his promise to cut half the budget deficit by 1996, he will have to show how Medicare outlays will be constrained. After all, the economic plan he released during the campaign presumed "savings" of scores of billions of Medicare outlays over the Bush administration's fearful forecasts that uncapped Medicare expenditures would grow at 15.8 percent annually. Those savings must come from either reductions in what Medicare pays or increased Medicare taxes, or both.

To get savings amounting to $145 billion over this period, the Bush Administration proposed what amounts to Draconian burdens on our elderly, our hospitals, and some of our physicians. A quick review makes plain why Darman's proposed cap excited such outrage last summer. To save nearly $64 billion in Medicare's physician insurance program, Bush proposed increases in the premiums and cost-sharing for which the elderly are responsible. Such changes, the Congressional Budget Office estimated, would, along with increased payments for supplementary private policies, raise the elderly's spending on medical care from 7 percent of their incomes to nearly 12 percent by 1997. Other proposed spending cuts in physician coverage ($14 billion over five years) presumed reductions in payments to doctors.

Other savings, estimated at $68.8 billion, would come from Medicare's hospital program. Today, Medicare pays something like 90 percent of reported hospital costs. Bush proposed to pay hospitals about 72 percent of their costs by 1992. On the basis of past experience, hospitals would expect to shift much of those reductions to other payers. Thus, spending cuts in Medicare alone would likely mean higher medical bills for the elderly (cost-shifting backwards), increased burdens on employers (cost-shifting sideways), and decreased revenues or higher fees for physicians (cost-shifting forward). Such a policy would enrage those groups and complicate enormously any other more fundamental reform of the way American medical care is organized and financed.

The short-run problem facing Clinton is obvious. Medicare appears a voracious consumer of public dollars. On its present course, an unreformed Medicare seems certain to defeat hopes for deficit reduction. How can the Clinton administration get Medicare's outlays under control without the full fright (and fight) sketched above?

At its inception in 1966, Medicare was seen as a way to bring the elderly into the mainstream of American medicine. Its hospital coverage and medical insurance mirrored the dominant forms of Blue Cross-Blue Shield and commercial health insurance in the postwar period. For nearly fifteen years, the program's costs grew rapidly, rising from 9.2 percent of national health expenditures in 1967 to 16.7 percent in 1984. During this period, the program paid hospitals "reasonable costs" and physicians "reasonable and customary fees." But the unreasonable result was that Medicare helped to promote seemingly uncontrollable health care inflation.

Since the mid-1980s, however, the Medicare program has had far less rapid growth than medical care generally. Few people are aware of it, but the facts are undeniable: the rate of increase in Medicare outlays fell sharply from an average of 16 percent between 1980 and 1985 to an average of 9 percent between 1986 and 1990. The increase in outlays for 1991 was only 6.3 percent.

As Marilyn Moon, a health care analyst at the Urban Institute, shows in a forthcoming book, Medicare controlled its costs more tightly than did private health insurers during this same period. So, despite the fiscal strain of the recent recession and the undeniable cost-shifting that Medicare has prompted, its health budget pressures are less than those facing American businesses and workers. The fearsome picture of Medicare's future stems from the rapid inflation officially projected for the rest of the 1990s. For example, the Congressional Budget Office estimates that Medicare outlays will increase at approximately 11 percent every year from 1993 through 1997.


The Bush administration's answer to rising Medicare costs was to cut Medicare benefits and reimbursement rates and to increase costs to the elderly. The alternative is to restructure Medicare, and American health care more generally, to put both on a more affordable trajectory. But the hardest questions remain: Which strategy of reform to choose and what steps are required for implementation?

One strategy would be to reform Medicare as a first step in the process of making the transition to national cost controls and universal coverage. That presumes Medicare expenditures simply cannot be permitted to grow at rates of 11 to 15 percent per year. So, by Medicare reform, I mean two things. The first is to restrict Medicare's budget growth to a rate comparable to general inflation, not twice that; the second is to embrace a program of long-term care and catastrophic coverage to relieve the elderly's legitimate anxieties.

Restraining the rate of Medicare's current budget growth would head off some of the direct conflict among Medicare and universal health insurance constituents provided that cost controls were imposed throughout the medical economy and precluded another orgy of cost-shifting. The generality of the cost controls--not whether national expenditure limits are enforced through price and volume controls or produced through managed competition--is the crucial element in this approach.

But such reforms require incorporating Medicare's constituencies into the demand for overall cost control. It is here that the clash of generational politics is most dangerous. To avoid that means a serious commitment to relieving the continuing health worries of the elderly.

To reformMedicare as part of the transition to national cost controls and universal coverage offers a difficult politics. We need to acknowledge honestly the elderly's fears of economic insecurity from the costs of catastrophic illness and long-term care. To address those problems requires adding to Medicare by the end of 1996 a social insurance program covering long-term care and catastrophic medical expenses. This, of course, raises the risk of the legislative disaster acted out over Medicare catastrophic coverage in 1987-89. On the other hand, the linking of increased benefits to earmarked social insurance taxes has considerably more popular support than the oft-cited American aversion to taxes would suggest. A 1988 survey reported that 63 percent of Americans favor increasing access to medical care rather than lowering the nation's health spending.

The long-term care and catastrophic proposals raise, however, somewhat different issues. Long-term care is not an ordinary medical matter and there are legitimate disputes over whether it should be part of health insurance at all. What is not in dispute is that Americans fear impoverishment from frailty in old age and the dread of Alzheimer's disease has universalized this anxiety. No system of private insurance--without cross-subsidization and extensive regulation--can spread the financial risks of long-term frailty widely enough to be affordable to those with modest incomes. Social insurance, with small payments spread out over a lifetime of work, is precisely the risk-spreading device called for in such circumstances. As with catastrophic protection against the costs of acute care, the burden of financing should be distributed over both time and income classes. An increase in Medicare taxes so justified would be far more compelling than non-earmarked tax increases, the polls (and common sense) tell us.

The political disaster that resulted when catastrophic insurance was repealed because the elderly resented paying for it entirely themselves was not the result of taking on the wrong problem. Rather, an analysis reveals calculated misinformation, poor legislative design of an otherwise sound program's financing, and ill-managed politics. The "rationale behind the ill-fated Medicare catastrophic coverage legislation was compelling and remains compelling in the aftermath of its repeal," Edward Lawlor of the University of Chicago has rightly argued.

The disaster was largely the result of departing from social insurance principles of finance, concentrating tax increases solely on the current elderly, and failing to explain why that choice made sense, particularly to the more comfortable elderly with their own supplementary policies. The experience offers a lesson for reform. Both for catastrophic protection against the costs of acute illness and for the social and economic problems of long-term care, social insurance financing makes most sense. Administering either will be difficult, and the political fears each will excite are considerable. But there is reward here as well as risk.

The reward would be a dampening of the fears of elderly constituents and their pressure groups about their interests being sacrificed in budget deficit struggles and the transition to universal health insurance. However, meeting these concerns of the elderly also may re-ignite the political hostility toward the elderly evident in the battle over Medicare catastrophic. Two decades of fiscal strain have worsened intergenerational strains in American public life.

Because our welfare state has concentrated on programs for the elderly--as with social security pensions and Medicare--welfare state critics have seized on the image of "greedy geezers" as the explanation for our woes. The scapegoating, led by the Americans for Generational Equity and supported by Wall Street gurus like Peter Peterson, is an unanticipated consequence of how we have structured our public household. Canada, for instance, has a nearly identical proportion of elderly citizens and similar rates of medical care use by its elderly; it has also experienced comparable economic strain during the 1970s and 1980s. But its universal medical program addresses the sick, not the elderly, and so Canada has nothing comparable to our handwringing about the "graying of the federal budget."

The implication is that we should address the real problems facing the elderly while taking deliberate steps to incorporate their health insurance into a wider, less age-graded system. Convincing the Congress that this is both possible and desirable will not be easy. Many will remember the catastrophic episode bitterly, buttressed by the image of Congressman Rostenkowski being hounded on a Chicago street by what amounted to a mob of older Americans. A presidential commitment to addressing Medicare reform while moving toward universal health insurance would help enormously. Making sure that the controls on cost bring genuine savings, not cost shifting from Medicare, is crucial. The task of designing that transition is an unheralded but central element in the new administration's agenda.

Such reform, of course, is easier to propose than to produce. Could we reform Medicare as suggested above and simultaneously place a budget limit on overall health expenditures? Could we at the same time add a program for pregnant women and children, thus addressing one of our most pressing needs in access? And could we also address the concerns about financial disaster for the uninsured and underinsured by a temporary program of refundable tax credits for medical expenses beyond, for example, 15 percent of annual income? No one would want such a program permanently, but as a stopgap isn't it administratively workable and relatively free of bureaucratic complexity?

These are questions, not firm answers. But with budget limits, improved access in stages, and time to augment America's supply of capitated health care systems, these are worth raising while admitting uncertainty about their feasibility. Most important, such transitions attend to political fissures that exist quite beyond the traditional opposition to the combination of universal health insurance and cost controls among private insurers and their allies.

This approach to incremental reform brings enormous risks of misinformation. None of the elderly constituencies will be fooled by vague promises of attending to Medicare after introducing a new program for those under sixty-five built on principles different from Medicare's. So, it is worth sketching out an alternative scenario.

The most appealing, yet difficult, approach would be to introduce simultaneously a national budget for medical care and an insurance program for all those under sixty-five. As Clinton has suggested, a national health care commission would set a budget limit for expenditures, allocate subnational limits to the states, and hold Medicare to a specified share of that budget. There are daunting tasks of implementation here, but the general idea would be to incorporate Medicare budget constraints into an overall cap on health expenditures and to fold Medicare into the decentralized administration of cost control planned for the nation as a whole.

If the Congress enacted universal coverage by aggregating separate programs for the employed, the unemployed, veterans, the poor, and Medicare, the result would be administratively complex. "Play-or-pay" plans would require not only budget limits, but state rate setting to control the pressures on expenditures. Evidence from the 1970s and 1980s, developed by Thorpe, shows that states which implemented rate-setting had rates of medical inflation comparable to Canada. But such programs would have to cover all health insurance plans within a state, and Medicare would have to be incorporated in such efforts. The appeal to the elderly constituencies would arise from the benefit additions suggested above, with the funds drawn from earmarked Medicare taxes spread over the entire working population and increased Medicare premiums. Were the Congress to mandate universal coverage for those under sixty-five on terms commonly described as "managed competition," other options for Medicare remain. One approach, as Paul Starr has suggested in his recent book, The Logic of Health-Care Reform, would be to offer the new program as an option to people over sixty-five. This could be made attractive to many now in Medicare with the inclusion of catastrophic coverage, and the new program might very well become mandatory for new cohorts reaching age sixty-five. On that model, Medicare itself would fade away over time.

In each of these options, the central political feature is that Medicare beneficiaries are promised improvements in their circumstances as part of a broader health care reform. Under some, the program continues but is subject to administrative cost controls on the entire medical care industry. Many analysts doubt whether such administered prices can work well in an industry as complex and changing as medical care. But we have ample experience from Canada and Australia that countervailing public power can restrain medical inflation more readily than our current system. Whether the prospects of price and volume controls are better than the promise of managed competition is a question no one can answer with confidence. Nearly two decades of managed care programs should leave no one smug about those prospects. Managed competition has never been tried comprehensively and, necessarily, cannot be said to have been proven in practice. But, whether through monopsony bargaining over budgets, rates, and allocations or through a decentralized system of health maintenance organizations, the double task for health care reform is to dampen medical inflation while widening access. I am suggesting that options exist to do so without re-enacting the generational warfare that marked the ill-fated catastrophic reforms of the late 1980s.

One such option, seemingly the most straightforward, would subsume medical care for the elderly under the new universal plan; Medicare as a separate program would cease to exist. This option, however, has three necessary preconditions. First, the basic benefits of the universal program would have to be at least as comprehensive as Medicare's current physician and hospital coverage; second, its administration would have to be simpler and more responsive; and third, the new universal plan would have to be implemented speedily enough so that Medicare would not continue to bleed red ink during a long interim.

There are valuable lessons we can draw from the frustrations of the past two decades. One is that the opportunities for reform are few and precious, not to be squandered. The excellent but undoable should not be allowed to defeat what is both good and doable. Another is that piecemeal change, without a clear timetable, design, and commitment to where one wants to get, is both frustrating and politically wasteful. There is no easy escape from addressing problems simultaneously, even if the steps of reform must be sequenced. Cost control without increased access to health insurance was a disaster in the late 1970s. Expanding access without reforming the financial structure of American medicine is no better, as the catastrophic debacle illustrates. But reforming Medicare while moving toward universal financial coverage and workable restraints on health expenditures should, in 1993, be within our grasp.

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