House Energy and Commerce Subcommittee on Health Hearing

My name is Katherine Baicker, and I am a Professor of Health Economics in the Department of Health Policy and Management at the Harvard School of Public Health. I would like to thank Chairman Pitts, Ranking Member Pallone, and the Distinguished Members of the Committee for giving me the opportunity to speak today about how we can address the crucial policy challenge of making Medicare work better for beneficiaries and ensuring that it provides the vital protections they need for generations to come. This testimony is derived in large part from recent academic work with my colleague Helen Levy that appeared in the New England Journal of Medicine. I summarize that work here.

Medicare is an insurance program. The reason we have health insurance at all is not because health care is expensive, but rather because there is great uncertainty about who will need very expensive and potentially life-saving care and when they will need it. Medicare should give beneficiaries not just access to medical care, but also protection from the risk of catastrophic spending. At the same time, Medicare - like any good insurance - should not cover so much care so generously that beneficiaries end up consuming too much care of questionable value and driving up costs for everyone. This means that beneficiary cost-sharing in Medicare is a balancing act: too little cost-sharing means patients have no incentive to spend Medicare dollars wisely; too much cost-sharing means Medicare fails to perform its insurance function.

How well does Medicare do at this balancing act? Not very. Medicare by itself offers only limited protection against economic ruin. The basic benefit lacks a cap on out-of-pocket spending, so that beneficiaries are exposed to the risk of open-ended cost-sharing. Moreover, the odds of facing a catastrophic expense mount over time. Almost half of beneficiaries are hospitalized at least once in a four year window. n1 Without supplemental insurance, 14.5% of beneficiaries would have faced out-of-pocket expenses of more than $2,500 in 2009, and more than half of beneficiaries would have had at least one year between 2000-2009 where they faced $2,500 or more in out-of-pocket expenses (see Exhibit). 15% would have had at least one year between 2000-2009 where they faced more than $5,000 in out-of-pocket expenses - or more than a third of the average annual Social Security income for a retired worker. And these figures are for hospital, outpatient facility, and physician care only - beneficiaries face additional cost-sharing liability for other categories of care such as prescription drugs, medical equipment, and skilled nursing facilities.

Beneficiaries without any supplemental coverage thus do not have enough insurance and face too much risk. This risk is one reason that 90 percent of beneficiaries obtain some other insurance (retiree health benefits, MediGap, Medicare Advantage, or Medicaid). n1 But beneficiaries with generous supplemental coverage probably have too much insurance. "Too much insurance" may seem like a nonsensical concept, but there is ample evidence that lower copays result in more care, much of it of questionable benefit to health. n2 Beyond the fact that many supplemental plans are quite expensive for beneficiaries, they substantially raise Medicare program spending. n1-n5 The system-wide effects are large, including changes in practice patterns and investment in infrastructure; the spread of insurance is estimated to be responsible for about half of the rise in per capita health spending between 1950 and 1990. n6 Having little or no cost-sharing leads enrollees to consume low-value care and drives up the cost of Medicare for everyone.

As a Medicare solvency crisis approaches slowly but inexorably, pressure to restructure the program in order to reduce spending will only increase. Proposed reforms are typically evaluated on how they impact the bottom line: the HI Trust Fund exhaustion date or the share of GDP devoted to Medicare. They are also evaluated on whether their burden is borne, on average, by providers or by beneficiaries. These metrics are not enough. Reforms must also be evaluated on how they affect the risk of potentially high expenditures to which beneficiaries are exposed - striking a better balance between financial protection on the one hand and preserving incentives to consume care wisely on the other.

Technological innovation raises the stakes. Many new technologies are crucial for extending life and improving well-being, but also add even greater uncertainty about health spending both for individuals and for the health care system overall. Mounting budgetary pressures highlight the fiscal unsustainability and economic costs of the current financing and benefit structure. n7-n10 These costs rise as Medicare covers an increasing array of treatments that may not be what most enrollees would choose if they were spending their own money.

Nonpartisan and bipartisan groups have advanced proposals that would address the imbalance in risk facing beneficiaries in the current Medicare program. Although these groups do not propose exactly the same fixes, some of the basic ideas are the same: first, put a cap on the out-of-pocket spending beneficiaries are responsible for - just like most private plans already do - so that beneficiaries without any other coverage are protected from catastrophic costs. Second, restrict "first-dollar coverage" (coverage with no beneficiary cost-sharing) in Medicare supplemental insurance, either by banning it or by imposing a surcharge on plans that provide it. This surcharge would reflect the additional cost to the Medicare program imposed by the extra use of (low-value) care by beneficiaries who face no cost-sharing because of the supplemental plan - since the private premiums charged for those plans do not reflect that additional public cost.

There are of course many challenges in implementing such proposals. Crude cost-sharing that ignores the differences in health benefits produced by different types of care could reduce use of highly effective care as much as it reduces use of low-value care, especially for low-income populations. n11 A more sophisticated value-based approach would be to keep cost sharing lowest for services that are most effective at improving health. n12, n13 The value of care delivered would also be improved by promoting coordination across silos - both in insurance and in care delivery. Evidence suggests that insurance features that drive use of one type of care (such as physician visits or medications) may have spillover effects on other kinds of care (such as hospitalizations or emergency department visits) that insurers as well as providers should have incentives to take into account. n14-n16

Striking a better balance between spreading risk and promoting efficiency would make Medicare a better insurance program. Improving the efficiency with which care is delivered to Medicare beneficiaries also has the potential to improve system-level delivery. The Medicare Advantage program was introduced in that hope that private competition and managed care would result in more efficient care at a lower cost than conventional fee-for-service health insurance. n17 Accountable Care Organizations also aim to improve the value of care delivered through improved coordination. Because the same health care providers generally serve patients with different insurance coverage, changes in care induced by these programs may "spill over" to care delivered to other Medicare enrollees and, indeed, to all patients. Research suggests that these spillovers may be substantial. n18-n22

Medicare was always intended not just to increase access to care but to protect the elderly from financial ruin. As President Johnson said when signing Medicare into law in 1965, "No longer will illness crush and destroy the savings that [older Americans] have so carefully put away over a lifetime so that they might enjoy dignity in their later years." n23 Indeed, the introduction of Medicare reduced out-of-pocket spending among the top quartile of spenders by 40%. n24 Will Medicare continue to fulfill this promise in decades to come? President Reagan highlighted the need for the reform of Medicare's benefit: "All of us have family, friends, or neighbors who have suffered devastating illnesses that threatened their financial security. For too long older Americans, in particular, have faced the possibility of sicknesses that might not only wipe out their own savings but those of their families." n25 Medicare reforms that strike a balance between financial protection and financial incentives will help ensure that the program will be solvent for future generations without undermining the fundamental insurance value of this public insurance program.

EXHIBIT

Medicare Beneficiaries' Annual Cost-Sharing Liability for Hospital, Outpatient, and Physician Use

Year Any Year Any Year Any Year

2009 in 2007-9 in 2005-9 in 2000-9

Share with Cost-Sharing

Liability (Percent):

Over $1,000 35.6 60.0 72.6 87.2

Over $2,500 14.5 27.9 37.4 53.2

Over $5,000 4.0 7.5 10.1 15.1

Over $10,000 0.9 1.6 2.0 2.4

Average Expenditures ($)

Medicare 8587 8288 8226 7857

Beneficiary Cost-Sharing 1279 1254 1252 1232

Source: Baicker and Levy, New England Journal of Medicine. n26 Notes: Data from Medicare Claims files for inpatient, outpatient, and carrier (physician) use, expressed in 2009 dollars. The entries show the share of beneficiaries facing cost-sharing liability above the threshold for each row in any single year within the window for each column. For example, while 4.0% of beneficiaries had cost-sharing liability above $5,000 in 2009, 10.1% had annual cost sharing liability above $5,000 in at least one year between 2005 and 2009. These figures exclude other categories of care (such as durable medical equipment) covered by Medicare for which beneficiaries may also incur cost-sharing liability. MedPAC estimates for 2009 that include the cost-sharing liability from all categories covered by Parts A and B (but not prescription drugs) suggest that 6.0% of beneficiaries would face cost-sharing liability of above $5,000, for example. n1 This cost-sharing liability may be paid out-of-pocket or by a third party (such as a Medigap plan).

n1. Medicare Payment Advisory Commission. Report to the Congress: Medicare and the Health Care Delivery System, 2012 June.

n2. Newhouse JP, The Insurance Experiment Group. Free for all? Lessons from the RAND Health Insurance Experiment. A RAND Study. Cambridge and London: Harvard University Press; 1993.

n3. Golberstein E, Walsh K, He Y, and Chernew ME. Supplemental Coverage Associated with More Rapid Spending Growth for Medicare Beneficiaries. Health Affairs 2012; 32(5):873-81.

n4. Atherly A. Supplemental Insurance: Medicare's Accidental Stepchild. Medical Care Research and Review 2001; 58(2): 131-61.

n5. Congressional Budget Office. Reducing the Deficit: Spending and Revenue Options. March 2011; GPO.

n6. Finkelstein A. The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare. Quarterly Journal of Economics 2007; 122:1-37.

n7. Baicker K, Shepard M, Skinner JS. Public Financing of the Medicare Program Will Make its Uniform Structure Increasingly Costly to Sustain. Health Affairs 2013; 32:882-90.

n8. Gruber J. Public Finance and Public Policy. 2nd ed. New York: Worth Publishers; 2007.

n9. Mankiw NG. Principles of Economics. 6th ed: South-western Cengage Learning; 2011.

n10. Fullerton D. Reconciling Recent Estimates of the Marginal Welfare Costs of Taxation. Journal of Political Economy 1991; 81:302-8.

n11. Baicker K, Goldman DP. Patient Cost-Sharing and Healthcare Spending Growth. Journal of Economic Perspectives 2011; 25:47-68.

n12. Chernew ME, Rosen AB, and Fendrick AM. Value-based Insurance Design. Health Affairs 2007; 26(2): w195-203.

n13. Chernew ME, Juster IA, Shah M, Wegh A, Rosenberg S, Rosen AB, Sokol MC, Yu-Isenberg K and Fendrick AM. Evidence That Value-Based Insurance Can Be Effective. Health Affairs 2010; 29(3); w1-7.

n14. Chandra A, Gruber J, and McKnight R. Patient Cost-Sharing and Hospitalization Offsets in the Elderly. American Economic Review 2010; 100(1): 193-213.

n15. Hsu JT, Price M, et al. Unintended Consequences of Caps on Medicare Drug Benefits. New England Journal of Medicine 2006; 354(22): 2349-2359.

n16. Baicker K, Mullainathan S, Schwartzstein J, Behavioral Hazard in Health Insurance, NBER Working Paper 2012; 18468.

n17. McGuire T, Sinaiko A, Newhouse J. An Economic History of Medicare Part C. Milbank Quarterly 2011; 89:289-332.

n18. Baicker K, Chernew ME, Robbins J. The Spillover Effects of Medicare Managed Care: Medicare Advantage and Hospital Utilization. National Bureau of Economic Research Working Paper 2013; 19070.

n19. Baker LC The Effect of HMOs on Fee-for-Service Health Care Expenditures: Evidence from Medicare. J Health Econ 1997; 16:453-82.

n20. Baker LC, Corts K. HMO Penetration and the Cost of Health Care: Market Discipline or Market Segmentation? American Economic Review 1996; 86:389-94.

n21. Baker LC. Association of Managed Care Market Share and Health Expenditures for Fee-for-Service Medicare Patients. Journal of the American Medical Association 1999;281:432-7.

n22. Chernew M, DeCicca P, Town R. Managed Care and Medical Expenditures of Medicare Beneficiaries. Journal of Health Economics 2008; 27:1451-61.

n23. Johnson LB. Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965. 1966; Volume II, entry 394, pp. 811-815. Washington, D. C.: Government Printing Office.

n24. Finkelstein A, McKnight R. What Did Medicare Do? The Initial Impact of Medicare on Mortality and Out of Pocket Medical Spending. Journal of Public Economics 2008; 92:1644-69.

n25. Reagan, R. Radio Address to the Nation on Proposed Catastrophic Health Insurance Legislation February 14, 1987. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=33745.

n26. Baicker K, Levy H. The Insurance Value of Medicare. The New England Journal of Medicine 2012; 367:1773-5.

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