A prescription to fix Medicare

By Michael O. Leavitt, Published: May 19

The warnings from the global market are steely-eyed and dispassionate: Standard & Poor’s downgraded its outlook on the U.S. debt last month, signaling the rating agency’s willingness to downgrade the creditworthiness of the United States. The U.S. government admits it is now using gimmicks and sleight of hand to stay under its statutory debt limit. Treasury Secretary Timothy Geithner diplomatically characterized the recent steps as “extraordinary” measures. What happens if U.S. debt becomes less appealing to bond buyers around the world?
An honest assessment of our nation’s financial problems reveals that we must restructure how Medicare works.
A tested strategy is available. We must make Medicare Part A (hospital insurance) and Part B (health insurance) work more like Medicare Part D (prescription drug insurance). Doing so would dramatically improve the financial condition of our country and help us meet our commitment to seniors.
The prescription drug benefit, passed in 2003 and implemented in 2006, broke ground because it moved away from the traditional Medicare model. Instead of relying on regulated government payments to control costs, the drug benefit relies on cost-conscious consumers selecting drug plans that suit their needs and household budgets. The drug benefit is delivered by private plans, with no government-administered “public option.” The plans compete with each other based on the premiums they charge and the drugs in their benefit packages.
Most important, the government’s contribution toward drug coverage for Medicare participants does not vary based on the plans the beneficiaries select. All beneficiaries in a region are entitled to the same level of government support, based on a weighted average premium charged by the competing plans. Beneficiaries who choose the most expensive plan options pay the extra premiums themselves. Those selecting the less expensive options pay far less.
Critics said this would never work. They said that health care isn’t like electronics or cars, because consumers aren’t looking to save money when it comes to health services. Some said that private insurers wouldn’t participate without more guaranteed enrollment or, if they did, their costs would be sky-high because they lack the leverage to get deep discounts from drug manufacturers. Still others thought that the program would be too complex for seniors to navigate and that millions would opt out because of fear or confusion.
What happened? The drug benefit, now in its sixth year, has outperformed all expectations. Seniors like it. Ninety percent of Medicare participants are in secure drug coverage and express strong satisfaction with the program in independent surveys. Scores of insurers participate in the program. In 2011, every senior in the country has access to a minimum of 28 drug plan options. Competition is working to hold down costs. Current projections by the Medicare actuaries show the 10-year costs of the drug legislation coming in 41 percent below estimates made when the bill passed.
The plans are offering benefit designs that reward seniors for taking generics when they are available. One study has shown that the average price per prescription for the most popular prescriptions for seniors participating in the drug program declined between 2006 and 2009 by 21 percent thanks to massive shifts toward low-cost generics.
If the government had tried to mandate generic substitution, it would have backfired. Advocates for the elderly and branded manufacturers would have found countless reasons to slow the effort and water it down with amendments and exceptions. Instead, the Medicare drug benefit makes an end run around the usual political and market obstacles to reform by allowing beneficiaries to share in the savings drawn from sensible cost-cutting and efficiency. Seniors have voluntarily signed up for drug plans that heavily push generic substitution because they mean lower premiums.
We need to bring that same cost-cutting dynamic to the rest of Medicare. It is widely acknowledged that the only way to slow the pace of rising costs without harming quality is by changing how hospitals and doctors are organized and provide services to patients — “delivery system reform,” in the president’s parlance.
The basic features of a plan to use a Medicare Part D strategy in the rest of Medicare would be government oversight of an organized and competitive marketplace, annual choice of plan by the beneficiaries, and a fixed government contribution that is pegged to grow at a rate in line with expected revenue. While the Obama administration has been hostile toward adopting a Part D approach to all of Medicare, the president and his allies — ironically — praise the same features as virtues of health insurance exchanges under the Affordable Care Act.
The United States faces an economic imperative as global markets pass judgment on our creditworthiness. The political posturing must end. Our elected leaders must get serious about reforming the program that is central to the nation’s health costs and fiscal crises. When they do, there’s no need to start from scratch. The Medicare drug benefit is a successful model that can be replicated.
The writer was secretary of health and human services from 2005 to 2009.(Under the Bush Administration, That explains it)