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What is wrong with Medicare prices for all?

Written by Diane Archer

In the latest issue of the Washington Monthly, Paul Hewitt and Phillip Longman make the case for single-price health care, proposing Medicare prices for all.  They explain how the Affordable Care Act cut the number of uninsured in the US significantly but left health care costs to soar, even for people with employer coverage. In their view, in the next stage of health reform Congress should extend Medicare prices to everyone, driving down health care costs without increasing taxes, and leave our failing commercial health insurance system, in place.

While Hewitt and Longman’s proposal is a necessary element of health care reform, it does not go far enough. Insurers will still have the motives and the means to shift costs to individuals and design health plans that do not meet the needs of people with the costliest and most complex conditions. 

Hewitt and Longman explain that in 2016, the average cost of health care for a typical family of four was nearly $27,000 or about 50 percent more than in 2010 when it was $18,000. Workers pay for this coverage through lower wages. The additional cost to workers in those six years was the equivalent of a 4.5 percent payroll tax each year, beginning in 2010. But, workers tend not to realize they are paying for their health care in lost wages.

Medicare is far more cost-effective than commercial insurance because it relies on negotiated prices, sometimes called “administered pricing.” Hewitt and Longman see administered pricing for all health insurance as the solution for bringing down costs for workers and everyone else not on Medicare or Medicaid. Effectively, they want to extend the benefits of the federal government’s Medicare price negotiations to everyone else.

They see what they call “single-price health care” as a solution because it is the price of health care more than anything else that is driving up health care spending. The rise in health care spending has little to do—10 percent—with the fact that Americans are getting older.  It also has little to do with people receiving more health care services.

The biggest driver of high health care costs are hospitals, which command virtual monopoly pricing power in most communities. If commercial insurers paid Medicare rates, they would secure 30 percent in savings, the equivalent of around $9,000 per family a year. Without administered pricing for everyone, Hewitt and Longman project that, by 2028, workers will be giving up an average of $44,000 in lost wages each year to cover their care.

Hewitt and Longman acknowledge that a 30 percent price cut for hospitals would cause them major disruption. But, they point out that the hospitals already serving the most vulnerable Americans would be hit the least hard. Their revenue already derives mostly from Medicare and Medicaid. And, Hewitt and Longman believe that hospitals in competitive markets would also not be affected dramatically.

Medicare prices for all would take the biggest toll on large nonprofit and for-profit health systems. It would mean lower executive and provider salaries. In turn, executives would need to pay more attention to what they spent money on instead of using their near monopoly power to drive up their rates each year.

Medicare prices for all would reduce administrative costs, since it would eliminate the cost for insurers and hospitals to negotiate prices, further reducing health care spending. It should also benefit small employers by making it easier for them to compete against large employers. And, it should eliminate barriers to entry for insurers wanting to offer coverage but currently squeezed out of the market, allowing more competition.  Today, the biggest insurer in a community gets the best rate and an agreement from the biggest providers to charge other insurers higher rates, leaving smaller insurers unable to compete with it.

Perhaps most importantly, Medicare prices for all should drive down health care costs for working people since the Affordable Care Act only allows insurers to charge premiums 15-20 percent above what they spend on care. Hewitt and Longman recognize that employers might not pass along health insurance savings, but they suggest that the law could require them to.

The authors argue that people with employer coverage are more likely to take to this proposal than to Medicare for all. With Medicare for all, people would likely pay higher taxes. And, they would probably feel they were paying more for their health care unless they saw large wage increases. Working people do not appreciate that employers pay two-thirds of their premiums in the form of lower wages today. Hewitt and Longman suggest that a law could require employers to pass on these lost wages to their employees.

In short, Hewitt and Longman make a compelling case for Medicare prices for all, but they sacrifice people’s interests and the public good by allowing the current unsustainable health care system, with its inadequate coverage and opaque and costly bureaucracy, to remain intact. They fail to consider that commercial health insurers have consistently found ways to drive up people’s costs, avoid enrolling people with costly conditions, deny people’s care, undermine continue of care, and otherwise increase their profits. By imposing high deductibles and copays, for-profit insurers also put their shareholders’ interests above people’s health care needs, as they are required to do. Helping them to continue in business when they lack true accountability and fail to compete on the value of the care they deliver to people with costly conditions is a recipe for further destroying our health care system and forcing people to go without needed care.

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  • Using Medicare reimbursement rates would certainly bring down the costs of healthcare but would leave in place the pernicious fee-for-service model that creates incentives for excessive but not necessarily effective treatments. To really affect the healthcare cost curve we need to move to value based reimbursement systems such as accountable care organizations.

    • I agree that the incentives are wrong in our current health care system. In managed care plans, the incentive is to deny costly care or keep people with complex conditions from getting needed care. In fee for service, the incentive is to deliver more care. But, in fee-for-service Medicare, the data is transparent. In cases of clear overtreatment or delivery of unnecessary care, doctors and hospitals can be identified. In managed care plans, the data is proprietary. We can only assume that the value being delivered is not worth promoting, or the health plans would promote it. If the commercial health plans offer high value care and they do not want to publicize their data, they undermine the public good. Moreover, the managed care plans tend to pay their doctors and hospitals on a fee-for-service basis, so they offer no reimbursement alternative to fee for service and no data to permit appropriate oversight and accountability.
      Today, we have rating systems for the best restaurants, hotels and televisions. But, we have no clue which are the best commercial health plans for people with cancer, heart disease and stroke. To have a truly value-based reimbursement system we need the answer to these questions.

  • …and for those living solely on Social Security, it needs to be pretty much free. 134$ a month out of my monthly benefit really puts a serious pinch on the budget. That premium is only about 20$ less then the commercial plan the company I used to work for (which paid low wages) offered where I was making roughly twice (gross) what I am getting now per month. It is also more than my monthly SNAP allowance (which usually does not stretch through the entire month forcing me to pay out of pocket near month’s end).

    Like Medicare part B, that plan didn’t cover a lot of expenses (particularly hospitalisation) and had a pretty steep deductible (more than a month’s pay whereas Medicare Part B the deductible also exceeds my monthly benefit cheque). Medicare itself needs fixing, not in the way the republicans want to do it, but to make it have less of a financial impact on those living on a meagre fixed income.

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