Since they took over Congress in 1994, the Republicans, with the help of a few Democrats, have worked to privatize Medicare. With the "Balanced Budget Act of 1997" (BBA) and "The Prescription Drug and Medicare Modernization Act of 2003" (MMA), Congress has built a foundation for just this kind of change to Medicare.
To encourage private plans to enter the market, the BBA increased payments to them above the average cost of traditional fee-for-service (FFS) beneficiaries. Still plans failed to enter many areas and withdrew from others. To encourage entry and continuity, the MMA raised average payments even more. Consequently, each beneficiary in a private plan came to cost more than those enrolled in FFS
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Part of the justification for creating Medicare private plans is to save the government money. This hope has not been fulfilled. In fact, private plans cost more than FFS.
One study estimates that the 12.6% of Medicare beneficiaries enrolled in private plans in 2005 would cost Medicare $2.72 billion above what they would cost if enrolled in the FFS system. In some counties those enrolled in private plans would cost $1200 above the average cost of a beneficiary enrolled in FFS.
The Medicare Actuary testified to Congress in 2004 that the MMA (excluding its prescription drug provisions) decreased the life of the Medicare Part A trust fund by two years. These increased costs have also been at least partly responsible for the sharp increases in Part B beneficiary premiums in the past three years. In the past few years, these premium increases have equaled a substantial portion of the yearly cost of living adjustments awarded Social Security beneficiaries.
A brief summary of the history of Medicare financing arrangements will help explain this disparity between payments to FFS Medicare and those to private plans. At its origin, Part A of Medicare covered hospital costs and was financed by a payroll tax. Part B covered physician and ancillary services and was financed by the Federal general fund and by beneficiary premiums. Services provided by prepaid group practices (known later as Health Maintenance Organizations or HMOs) were reimbursed on a cost basis like services of other physicians.
In 1982, Congress integrated HMOs formally into Medicare as a money-saving measure. An HMO that contracted with Medicare was paid for each person it enrolled 95% of the average FFS cost of beneficiaries, adjusted for demographic factors, in each county it served. Since HMOs were believed to deliver services more efficiently than FFS, they were expected to save money while delivering increased benefits.
Over time, it became clear that there were vast geographic inequities in the premiums charged by Medicare HMOs and in the packages of benefits they delivered. In some areas, beneficiaries paid no additional premiums to their HMO and received prescription drug benefits, no co-payments and even free health club memberships. In other areas, beneficiaries paid additional premiums to the HMO, paid co-payments and received no prescription drug coverage. And in many areas, such an option was simply unavailable.
These disparities were the result of significant geographic variations in FFS payments throughout the nation. In some areas, physician practice styles simply cost more than in others as a result such factors as the frequency of hospitalization, the propensity to perform high tech procedures, etc. Since HMO payments were directly related to FFS costs, some plans received much higher payments than others.
As long as all Medicare beneficiaries received the same benefits under FFS, this cost variation went unnoticed. But when some beneficiaries began to enjoy benefits unavailable to others, it was recognized as a problem. Eventually, Congress addressed this geographic inequity, only to create significant disparities between payments to private plans and the cost of FFS Medicare.
In 1994, the Republicans won control of both Houses of Congress for the first time in 40 years. Their campaign did not emphasize the reform of Medicare, but it did emphasize the presumed advantages of private over government administration of many programs, an ideological conviction that the Republicans, with some help from Democrats, had advocated for the preceding quarter century. The opportunity to try to apply this prescription to Medicare came in 1995.
In that year, the Medicare Trustees projected that the Part A Trust Fund would, at then current rates of taxation and expenditure, become insolvent by 2002. Using the condition of the Part A Trust Fund as a measure of the health of Medicare as a whole was not very meaningful. Part A was only one part of the entire system and was subject to manipulation. For example, Congress sometimes moved categories of expenditure to Part B precisely to reduce Part A spending and lengthen the life of the Trust Fund.
Nevertheless, the newly ascendant Republicans decided to use the "crisis" as a reason to cut and "reform" Medicare. They proposed "The Medicare Preservation Act of 1995". The primary goal of this proposal was a reduction of $270 billion in projected Medicare spending over seven years. The primary means of reaching this goal was privatization. Private plans were to provide Medicare services; a fixed dollar credit (voucher) was to be allotted to each senior for payment of the plan premium (leaving beneficiaries liable for any greater premium or other costs), and Medicare was to purchase a high deductible insurance policy and contribute to a Medical Savings Account to pay for deductible costs for those seniors who chose that option. This proposal became an issue in the 1996 election and went nowhere.
Once reelected, however, one of the Clinton Administration's priorities was achieving a balanced budget. In exchange for their cooperation, one of the concessions the Republicans in Congress demanded was changes to bring Medicare closer to their 1995 proposal. Thus was born "The Balanced Budget Act of 1997" (BBA). Among its provisions were such changes. These included substantial revisions in Medicare's payments to private plans.
Essentially, these provisions raised private plan payments in counties with the lowest capitation rates and lowered payments in counties with the highest capitation rates. These changes reduced the financial disparities among plans, but did not even come close to eliminating them. The BBA also guaranteed all plans a yearly increase in payments. It guaranteed that no plan would be paid less than 102% of their county's average FFS payment. And it authorized the development of several kinds of private plan in addition to the existing HMOs. Although the Republicans still claimed that private plans would save Medicare money, it was clear that the encouragement of private plans trumped saving money.
In 1997, The Congressional Budget Office (CBO) predicted that as many as one third of Medicare beneficiaries would be enrolled in private plans by 2005. Instead, enrollment peaked in 1999 at 16 percent, and declined to 12 percent in 2003. Plans in the highest paid counties were paid less and began to withdraw from participation, leaving their participants to find another plan with fewer benefits or return to FFS Medicare. There were still few plans in the lowest paid counties because payments were insufficient to attract them.
One would think that this kind of performance would be considered the failure of the program. But most Republicans and some Democrats in Congress and the Bush administration were swayed by their ideological convictions: If the plans chose not to participate, they simply needed more money as an enticement.
The 2003 effort to create a Medicare prescription drug benefit administered by private drug plans at a time when the GOP controlled both Congress and the Executive gave then the chance to write even more generous private Medicare plan reimbursements into the MMA.
Specifically, the Act brought per beneficiary private plan payments to an average of 107% of a county's average fee-for-service Medicare costs, leading to the above noted $2.72 billion "excess" payments to private plans estimated for 2005. It also provided $10 billion in additional expenditures to encourage a kind of plan expected to serve rural locations. It established a precedent for means testing Medicare. Starting at an income of $80,000, beneficiaries will begin to pay higher Medicare premiums in 2007. Extra payments will be based on a sliding scale topping out at $400,000 per year.
Perhaps most importantly, the Act created a potential Medicare "crisis" and obligated Congress seriously to consider changing the system if expenditures trigger that "crisis. If general revenue funding of the program is projected to exceed 45%, the President must submit and Congress must consider legislation addressing Medicare spending. This "crisis" is possible as early as 2007, leading to required Congressional action in 2008. This choice of this indicator limits the options Congress can consider. Only payroll tax increases (not considered general fund resources) or a cap on federal Medicare spending are likely substantially to reduce general fund spending.
The MMA thus only worsened the distortions in Medicare private plans created by the BBA. It is true that all Medicare beneficiaries had access to at least one private plan in 2006, while only 72 percent had access in 1999. It is also true that private plan enrollment increased from 4.6 million in 2003, the lowest since 1996, to 6.9 million in 2006, the highest ever. There is, however, no evidence that private plans produce better health outcomes. There is substantial evidence that private plans are a much more costly means of delivering services than FFS Medicare.
But these considerations are irrelevant to the privatizers. If there is still a Republican dominated Congress in 2008 and if that majority is not fearful about the results of that year's elections, we can expect to see further privatization of Medicare. Those who have always hated the concept of a universal health program controlled by the Federal government may get their wish: a program designed and administered by diverse private corporations, subsidized by fixed federal contributions, and providing different benefits to those who pay different premiums and even to those paying the same premiums--a system that looks remarkably similar to the private insurance system.