Across the political spectrum, alarm bells are ringing about Medicare, America's giant health program for the aged and disabled. To conservatives, Medicare is a huge, Kremlin-esque bureaucracy destined to soak up more and more of the American economy. To critics on the left, it's an inadequate program that nonetheless siphons off increasingly limited funds that could be used to broaden coverage for children and working families.
The White House–backed Medicare reforms passed late last year only confirmed each side's worst fears, promising a meager and ill-designed drug benefit at a hugely inflated price. While millions go without basic coverage and budget deficits explode, critics asked how we can countenance pouring hundreds of billions of dollars into a system for the aged that already provides pretty decent protection.
Here's how: Make improvement and expansion of Medicare the route to universal health coverage in the United States. Medicare does badly need upgrading. Medicare does do too little to help the non-elderly. But the solution isn't to tear down Medicare; it's to build up the program to make it a stable foundation for providing health care for all Americans without access to good workplace coverage. In all the talk about skyrocketing health costs and the uninsured, everyone seems to have forgotten about the one program that can realistically get America to affordable universal insurance in the coming decades.
Ironically, the potential for expanding Medicare to all Americans owes much to past initiatives -- mostly pursued by conservatives -- that have enhanced beneficiaries' enrollment in private health plans. For all their shortcomings, these proposals have made it possible for Medicare to offer a broad array of private plans, as well as traditional fee-for-service insurance, to young and old alike. But this strategy will succeed only if Medicare also continues to provide the broad risk sharing that is vital to the program's long-standing success -- and to the future of American health insurance.
For a program so loved by the public that even anti-government ideologues tread lightly around it, Medicare has come in for a surprisingly heavy critical barrage. The fusillade consists of two main volleys: that America can't afford Medicare and that the program is built on an irremediably antiquated model. Each of these claims is arresting and superficially attractive. Yet each is wrong, both in its diagnosis and in its prescriptions.
Affordability is the more bipartisan concern -- and the one with the stronger basis in fact. The aging of America and the rise of health costs promises to make Medicare much more expensive in the future. According to some estimates, Medicare could represent as much as 7 percent of the economy in 2050, up from about 3 percent today.
All of this is cause for concern, but by no means despair. In the last half-century, the United States has experienced swings in social spending much larger than those predicted by even the direst estimates, with nothing like the crises now prophesied. More important, while Medicare will cost more in the future, Americans will also be much richer, allowing them to devote a larger share of income to it. The issue isn't whether we can pay for Medicare; it's whether we want to. And polls resoundingly indicate that nearly all Americans do.
What's more, the frightening image of Medicare sucking away nearly a tenth of the national income isn't likely to materialize. Every previous Medicare spending “crisis” has prompted serious and effective efforts to rein in costs without cutting benefits. A number of European countries, moreover, are much farther along the demographic road to gerontocracy than is the United States, yet have still sustained their publicly funded health benefits without having medical spending take a larger share of the national income or restricting access for older patients to a level below Medicare's current coverage.
Lurking beneath claims about affordability is the seemingly fixed American belief that all government programs are less efficient and more costly than their private counterparts. That's simply not true of Medicare. In fact, Medicare has contained its spending better than has private insurance over the past two decades. Nor have politicians given away the bank to older Americans. Medicare is remarkably less generous than typical private health plans. A private plan with Medicare's current benefit package would cost about $2,300 for a single non-aged adult, compared with a current average for private plans of about $3,600 with the sort of benefits negotiated at the typical workplace.
Of course, to some, this is the real problem: Medicare is just an outdated model, period. The complaints take many forms -- Medicare has an antique payment policy, it doesn't effectively “manage” care, it makes patients pay too much out of pocket -- but most of these criticisms boil down to a simple battle cry: Medicare needs radical modernization to encourage competition and incorporate the private sector more fully.
This call was most alluring during the mid-1990s, when managed-care enthusiasts promised that their plan would decisively rein in costs and stimulate innovative service delivery. Of course, that was before the managed-care backlash sent private insurers scurrying back to arrangements that allow free choice of providers and require cost sharing by patients -- in short, the very model that old-fashioned Medicare has retained all along.
Medicare could certainly be a more effective insurance program. It should better manage chronic medical conditions, for example, and provide more extensive preventive outreach and better coverage of rehabilitative services. But there is nothing inherent in the Medicare model that makes these innovations less possible than in the private sector. And when it comes to providing timely access to care and financial security, recent surveys of Americans' health-care experiences suggest that conventional Medicare considerably outperforms the average private insurance policy.
Indeed, it's crucial to recognize that today's Medicare is very different from the model of 30 or 40 years ago. That's because Medicare now allows beneficiaries to choose among a growing variety of private managed-care and fee-for-service options. And these choices meet with overwhelming popular approval: Two-thirds of all Americans favor giving Medicare beneficiaries a choice among insurance plans so long as this does not increase the cost of staying in the conventional Medicare program.
But wait, haven't private health plans failed Medicare? Stories of them pulling out in droves and increasing deductibles certainly suggest so. But the disruptions of recent years can be exaggerated. At its peak, the turnover rate of plans in Medicare was about the average experienced in the much-lauded Federal Employees Health Benefits Program. Meanwhile, the rewards that private plans have delivered to the program are often neglected. For many beneficiaries who have enrolled in private plans, the broader coverage and coordination of care that private plans can offer has been a boon.
Still, private plans have caused special problems for Medicare's beneficiaries. The aged are an especially difficult group to offer a choice of health plans, not so much because their average costs are higher but because those costs are especially concentrated and catastrophic. This creates a powerful incentive to “cream skim” the healthy and exclude those with more serious and costly health-care needs.
Churning of private plans in and out of Medicare also hits the elderly and disabled particularly hard because it tends to disrupt the continuity of care that is essential for effective treatment of chronic problems. And most of the elderly now in Medicare have little familiarity with private plans, limiting their ability to anticipate these sorts of problems.
Fixing Medicare's system for paying private plans would help considerably. Currently, Medicare essentially pays all plans that want to participate in each region the same amount -- pegged to the average cost of seniors in the traditional fee-for-service program. The incentives for plans are clear: attract healthier patients, and enter only regions where payments are high. The goal should instead be a level playing field in which plans attract patients only by delivering things that beneficiaries find of value -- convenience, coordination, integrated benefits, low cost sharing -- not by gaming the system.
A level playing field is decidedly not, however, what the 2003 Medicare legislation contained. It's already clear that the 2003 reforms will be a disaster when it comes to providing drug coverage. But as bad as the drug benefit is, the way in which the bill coddles the private sector is even more troubling. Under the legislation, private plans will get huge new subsidies to encourage their participation in the program, even though recent studies indicate that private plans continue to be overpaid when the healthier mix of patients they enroll is taken into account.
If that weren't enough, drug coverage under the bill must be provided by private insurers. Except in regions where private plans don't emerge, beneficiaries cannot get drug coverage through Medicare itself. And even in such regions, Medicare is prevented from actually serving as a purchaser -- it bears the risk, but farms out management to the private sector. This also means, of course, that Medicare has no bargaining power under the bill to hold down skyrocketing drug costs.
Fixing Medicare to correct these egregious overpayments and to allow it to provide drug coverage directly is essential. But there's another important step that could and should be taken to make private plans in Medicare work better: Expand it to the non-aged. Doing so would greatly even out the costs among subscribers by bringing in healthier younger Americans. It would reduce the prevalence of chronic illness among enrollees and introduce into Medicare a group of comparatively savvy consumers. Above all, it would make insurance more secure and affordable for all Americans, ensuring that workers and their families have access to a low-cost policy providing free choice of doctors and an effectively regulated system of private health plans.
If the goal of expanding Medicare seems radical or strange, remember that when Medicare was enacted in 1965, almost everyone saw it as the first step to universal coverage. That didn't happen, of course, and now advocates of expanded insurance hardly talk about the program -- or even see it as an obstacle. Yet, just as in 1965, Medicare remains today the most effective, most attractive, most viable avenue to reach universal health insurance in the United States.
It's also a big and costly federal program, which may be why advocates of universal coverage seem so reluctant to seize on its untapped potential. But this is exactly backward: The size and federal character of Medicare are its greatest assets as a platform for expanded coverage. State insurance programs vary greatly from state to state. Worse, they're “pro-cyclical,” meaning they increase their spending when the economy is good and cut it back precisely when the need is greatest. These are not attractive features when trying to ensure health security, and neither would be true of a national program.
The assumption that Americans wouldn't accept a huge federal program called Medicare seems convincing -- until one realizes that there already is such a program, it's called Medicare, and Americans absolutely love it. Medicare is among the most consistently popular programs in the United States, and its popularity has been enhanced by the addition of private-plan options, despite the evident problems with their implementation.
Indeed, many Americans don't even think of Medicare as a government program, as is suggested by the story of an elderly constituent who reportedly jumped up at a congressional town-hall meeting and declared, “Keep government out of my Medicare.” Which is precisely why the program is such a good institutional route for expanding health coverage. Public-opinion postmortems suggested that Americans turned against Bill Clinton's health plan because Republicans were able to portray it as unfamiliar, unpredictable, and threatening. Medicare would not be vulnerable to the same attack.
But isn't Medicare the sort of dreaded single-payer plan that would place the government in charge of the entire health system? That might have been an effective retort a decade or two ago, but it's hardly relevant to the program that exists today, with its extensive private-plan options. Since polling on health care began during the 1930s, the public has been fairly evenly divided between approaches that rely on public and private insurance. Medicare, in its contemporary form, offers a balance between the two.
Essentially, the reform policy we have in mind would give employers the option of either providing basic coverage on their own or paying a premium based on their total payroll to purchase Medicare coverage for their workers. With the premium set at 5 percent of wages, estimates show that about 40 percent of Americans would be enrolled in Medicare, with the rest in employment-based health plans. The net cost would be roughly $85 billion. This compares favorably to John Kerry's plan, which would cover substantially fewer Americans for about $70 billion.
Making Medicare available to all Americans would, in a single stroke, address many of the complaints that critics have raised. Though requiring new financing up front, this would greatly lessen Medicare's long-term cost problem because it would make program spending less sensitive to the demographic distribution of the American population. By increasing the share of health spending financed by Medicare, it would also give the government greater leverage to control costs. And by bringing in younger Americans, it would make it much easier to improve the program's reliance on private health plans.
But perhaps most crucial, expanding coverage to the uninsured through Medicare would powerfully link the health security of the aged and non-aged. No longer would young workers without insurance shell out payroll taxes to support elderly citizens with good coverage. And no longer would advocates of expanded insurance coverage feel that improving Medicare was at odds with their ultimate aims. Instead of simply making Medicare more like insurance for workers, this Medicare reform strategy would also make insurance for workers more like Medicare: secure, affordable, and simple.
To be sure, none of this would be easy. So far has Medicare drifted from the larger goal of universal coverage that advocates rarely mention the two in the same sentence. But the two should be spoken of together, for Medicare's future and the future of American health insurance are necessarily intertwined. The only question is whether Medicare and universal coverage will hang together or hang separately. We can preserve and improve Medicare for future generations and finally make health insurance secure for all Americans. Or we can leave each bobbing separately in a sea of hostility to the ideal of a shared fate that once fired enthusiasm for Medicare -- and could do so yet again.
Jacob S. Hacker is Peter Strauss Family Assistant Professor of Political Science at Yale and a fellow at the New America Foundation. He is completing a book on economic insecurity, The Great Risk Shift. Mark Schlesinger is Professor of Public Health at Yale and editor of the Journal of Health Politics, Policy and Law. In 2003, he directed a study of private plans in Medicare for the National Academy of Social Insurance. Details of the proposal for Medicare expansion described in this piece can be found at pantheon.yale.edu/~jhacker.
