Medical Tuesday Blog

Reforming Medicare With Personal Accounts, Incentives And Better Plan Design

Sep 22

Written by: Del Meyer
09/22/2015 2:38 AM 

NCPA | Policy Reports | Health | No. 372 
Tuesday, September 22, 2015
by Devon M. Herrick

Executive Summary

The long-term solvency of Medicare is the most serious domestic policy problem this country faces in the 21st century. Despite the rosy forecasts from politicians, the Medicare Trustees confirm that health care spending will consume an increasing proportion of the economy. As this occurs, Medicare spending will crowd out other government services.

Perverse incentives for patients and providers to squander resources are enormous. Medicare is an entitlement that places few limits on the services seniors consume. Beneficiaries bear little of the cost if they are wasteful and benefit little when they consume care prudently. In addition, Medicare providers have few financial incentives to control costs and keep beneficiaries out of the hospital.

Historically, a fundamental problem with efforts to contain Medicare expenditures is that Medicare follows a top-down model. Policymakers have tried to hold down spending with price controls and caps on the fees doctors and hospital earn, rather than empowering seniors to police their own consumption. One of the top-down cost-control methods involves paying hospitals a fixed fee per patient diagnosis. Another one (now modified) required automatically scaling back physician fees by a similar percentage if spending on physicians exceeded a specified growth rate. These efforts were largely unsuccessful. In 2010, the Affordable Care Act created a 15-member Independent Payment Advisory Board (IPAB) that has the power to cut reimbursements when the rate of spending growth exceeds a pre-determined threshold. The five-year-old program has no members and Congress is debating repealing it.

Spending per beneficiary has risen over time as medical technology — and perverse incentives — have raised Medicare’s costs. Per capita spending on Medicare beneficiaries has skyrocketed since its inception:

·         In 1970, annual per capita Medicare spending was only $385.

·         Today it is $12,430.

·         It is projected to approach $19,000 a decade from now. . .

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In the top down top-down model, policymakers have tried to hold down spending by payments based on the diagnosis, with price controls and caps on the fees doctors and hospital earn, rather than empowering seniors to police their own consumption. However, allowing seniors to police their own consumption can simply be implemented with a copayment on every order that a physician writes. Seniors will police their consumption within hours of the time their physician writes the order. The spending reduction will be immediate without any other government intervention. It may reduce excessive health care cost to near zero. Then the real costs of health care will emerge. Don’t be surprised if it’s cut in half. However, as Peggy Noonan noted in her column this week in the WSJ, the liberals will be unable to believe this. The only way to convince them is to vote them out of office. And even then, many will not understand. Your last chance to do this is on November 8, 2016 in two months. If we don’t do this in 2016, we may never have another chance.

Government is not the solution to our problems, government is the problem.

— Ronald Reagan

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