The State of Medicare: My Long-Read Q&A with Joseph Antos

Medicare is a trillion-dollar federal health insurance program designed to meet the medical needs of senior citizens and Americans with disabilities. Yet, despite its staggering amount of funding, Medicare is far from a perfect system. Here on Political Economy, I sit down with Joe Antos to discuss the current state of Medicare and its systemic challenges.

Antos is a senior fellow here at AEI where he studies the economics of health policy. He is currently Vice Chair and serving a third term as commissioner at the Maryland Health Services Cost Review Commission. He is also a professor of emergency medicine at George Washington University.

What follows is a lightly edited transcript of our conversation. You can download the episode here, and don't forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Joe, welcome to the podcast.

Antos: Thanks, Jim. Good to be here.

I wonder if you could give me a feel for the current financial condition of Medicare, our national old age medical program.

Well, Medicare has been in financial trouble for a long, long time. It may surprise people to know that it's a trillion-dollar program. It serves something like 60 million senior citizens and people with disabilities, so it's a very important program. It's the main form of health insurance for an awful lot of people. The problem is that it is not properly funded, it is extremely inefficient, it doesn't serve the beneficiaries well, it doesn't serve the taxpayer well, and, in fact, it doesn't even serve the hospitals and the doctors well. It has a lot of huge problems.

So, people tend to focus on the trust fund solvency date, or insolvency date. There are several trust funds, but the one that is always publicized is the hospital insurance trust fund, and the last year's trustees report, which came out almost a year ago, said that they expect—HHS expects—that the hospital insurance trust fund, which covers hospital care and a bunch of other things, is going to run out of money in 2031. That's pretty soon.

What people don't generally focus on is that the rest of the Medicare program is also under-funded in the same exact sense. With the HI fund, that is funded primarily through payroll taxes. With the parts that cover physician services, that's part B; and drugs part D, that is three quarters financed out of the deficit. So, in fact, the Medicare program has been underwater since 1966.

You sort of got at something I think people don't talk about as much, so there's a financing issue… does it deliver good healthcare for people?

The responsibility is not fully Medicare's, but Medicare could do a better job. One of the things that a lot of us are very concerned about is the inefficiencies that the Medicare program really imposes on the rest of the healthcare system. For example, you would like to have a program that, if you sign up for the insurance, covers all of your needs. Certainly you'd like a program that, if you have very, very high costs, that those extremely high costs that you can't afford are covered. That is actually the definition of insurance. The problem with the Medicare program is that there is no out-of-pocket cap on what people potentially could spend for their healthcare in Medicare.

Now, there's been a recent change with the drug benefit: For the first time ever, starting next year, there will be an out-of-pocket cap on copayments for prescription drugs. The cap is set at $2,000 next year. But we don't have an overall out-of-pocket cap in Medicare, and that is unlike every other health insurance in this country. Every other health insurance plan in this country is required to have a maximum out-of-pocket requirement for their members.

It seems that, maybe especially on the right, when some people talk about Medicare reform, it's sometimes in the context of, "Let's create a new system." But, while you may have reform ideas, the current system is probably going to be there in some fashion, so we need to reform it to make it as cost efficient as possible?

You'd like it to be as efficient as possible, you're absolutely right, some form of what we have now is going to continue. The question is, can we make improvements to promote a consumer awareness of what they're buying, to promote provider awareness of what they're providing? We need general awareness of whether the services are worth the money for that specific patient, and that is a responsibility not just for the patient, that's a responsibility for the provider, as well. We don't have that now and we need to promote that

Until now, what are the kinds of reform efforts that people have been making, and do we need substantively different kinds of reforms in the future?

I would argue that we haven't had much in the way of real reforms except for the creation of managed care plans in Medicare. Now, this issue goes way back to the '80s, but, much more recently, the rules have been changed. The program is called Medicare Advantage. Anybody who watches cable TV sees a Medicare Advantage ad about every five minutes for six months of the year. But these are, in fact, plans that are a lot like the plans that people have when they're employees. These are health plans that make sense to people. There's no subdivision between physician care and hospital care and generally drugs. All of those kinds of services are covered. There's generally one deductible for the year. There's generally an easily understood—maybe not affordable, but easily understood—additional payment that you make when you get an additional service, and, in my case, if I go to the doctor, I pay a $20 copay, for example. A lot of people have that sort of thing. This is exactly what Medicare Advantage plans offer.

Plus, they are somewhat competitive. I say "somewhat competitive" in the sense that they are competing against traditional fee-for-service Medicare that doesn't have any of those characteristics. Fee-for-service Medicare covers all those services, but with a very complicated scheme. As long as you work a sufficient number of years and you've paid your payroll taxes, you're automatically enrolled in the hospital insurance coverage part of it. You're not automatically enrolled in the coverage for drugs or physicians. You can choose to enroll—generally, most people do—but you have to actually take an action when you turn 65 to enroll those programs, and if you don't enroll within the first six months or so of turning age 65 and you decide later you made a mistake, you will pay a lifelong penalty for making that mistake. Clearly that's a structure that doesn't make sense. On top of that, the cost-sharing requirements are extremely complicated. There isn't just one deductible in the Medicare program. There are separate deductibles for hospital admissions, there's a separate deductible for physician services, there's a separate deductible for drugs, and the cautionary requirements are unbelievably complicated. There are limits on post-acute care—that means if you've been in the hospital and you need advanced nursing services, not just custodial care, there's a limit on the number of days of those services that Medicare will cover. This is really a lousy plan.

Is there a difference between the kinds of people who sign up for Medicare Advantage versus regular Medicare, Medicare fee-for-service?

Well, increasingly, the Medicare Advantage enrollees are the average Medicare beneficiaries. Right now we're a little bit over 50 percent of the population—of the Medicare population—is in MA plans, and it's precisely because you can understand a Medicare advantage plan. It's exactly like the plan you were used to when you were 64. There are lots of options that give you additional benefits that Medicare doesn't cover, and it's just a simpler… it's basically one decision rather than a series of decisions on what plan to buy. Now, every year you get to choose, as well. You're not locked in. That's very useful.

Some people believe—I don't think there's good evidence of this—some people believe that the people who are most likely to enroll in traditional Medicare have more serious health conditions. And the reason why they believe that is that with traditional Medicare, essentially you can go to any doctor or any hospital in the country, whereas with Medicare Advantage plans, they are very much like the plan you have from your employer. There is a network of providers, generally it's a pretty broad network, but there may be a case where you have a serious condition and you realize that you want to go to this one specific hospital, the only one in the country that you believe really does a good job for your condition, and your MA plan may not cover it, whereas traditional Medicare probably does.

Now, that's the argument, but with over 50 percent of Medicare beneficiaries in MA, I think that's less and less true—that people have realized that, since you can find out about your health situation before you make a decision about what plan to choose, and you get to choose a plan every year, you get to move around, that a wise person looks every year in the fall at what their health condition is. They consult their doctor if, in fact, they have a new diagnosis, to get a clinical recommendation, and then they can get fairly good advice from the CMS site about alternative options that you may have, including, you can key in your prescription medications to determine whether they're covered and what you would be charged for. There's lots of information if you're willing to put the effort in. If you are someone who has a serious illness, you're going to put in the effort, or your relatives are going to put in the effort for you.

For the average person, the average person's basically healthy. The average person over 65—and I'm not just talking about people 65 to 75, I'm talking about people in their '80s—are generally pretty healthy. It's kind of a miracle of modern medicine. They're well equipped to make these kinds of decisions. They're used to making these decisions from their employer plans, and they're increasingly better informed about what the considerations they should make about what coverage they should take. So I think we're on the road to an informed public, but the problem is that the Medicare program doesn't provide you the kind of information that would really make this program work, which is to provide information about what things actually cost, and to promote real competition among Medicare Advantage plans and between Medicare Advantage plans and traditional Medicare, we simply don't have real competition.

So, the thrust of our efforts should be to make changes with the fee-for-service plan, to make changes so there's more competition between the Medicare Advantage plans, or all of the above?

All of the above. With traditional Medicare, the first step—the most obvious step, people have been calling for this for years—is to make the insurance look like health insurance. In other words, put together all the benefits in the single package, have a single deductible, have an understandable set of copayments or co-insurance that people have to pay. In other words, make it look like insurance that people are used to. That's the first step. The second step, which also applies to the Medicare Advantage plans, is to have real, competitive bidding across those plans, based on their likely cost structure, based on the beneficiaries that are likely to enroll in the following year.

We don't have that now. Medicare Advantage, they do submit bids, but they are paid not on the basis of those bids, they're paid on the basis of some benchmarks that are somewhat related to the bids, but are largely tied to fee-for-service costs in the geographic areas where the MA plans operate. And so we're really stuck with a false bidding system that makes people think that there's real competition, but does not promote the kind of competition that we see in other non-health markets where the supplier is looking to attract customers; and to attract customers, they're looking to improve their product, improve their efficiency, and lower their costs. We don't see that in the health sector and we certainly don't see that in Medicare.

What is the interest level on Capitol Hill with making any changes that look anything like the ones you've just described?

Well, I think it was the last State of the Union Address, Joe Biden announced that he wasn't going to support any changes to Medicare or Social Security, and he basically got the entire room to agree, loudly. The Democrats spoke up more quickly and more loudly, the Republicans were a little quieter, but they all said, "Yeah, we're not going to touch Medicare or Social Security." So, I would say, the interest in those kinds of reforms that would really promote an effective Medicare program is, at least for this year, zero.

But, by and large, it's very difficult for people who are trying to get elected to Capitol Hill or to the presidency, and the reason is that any reform that is proposed is going to be characterized by the opponents—be they Republicans or Democrats—it's always characterized as, "This is going to endanger your benefits" or, "It's going to reduce your choices." Those are the two buzzwords, and so that's basically the kiss of death for any kind of a Medicare reform.

Now, part of the problem here is that we can't just sit there, because, even though the trust from view of things is a little bit misleading, it is also absolutely true that every year there is a reduction in payments to doctors, hospitals, and other providers in the Medicare program, two or three percent every year. And, by the way, that's not inflation adjusted. So, in a year when healthcare inflation is probably running about 10 percent, having another two or three percent reduction really is a threat.

And why is there a reduction?

There is a reduction because there are automatic formulas that were put in largely in the Affordable Care Act. They were put in to, in quotes, "pay for the expansion of health insurance through the healthcare exchanges." I'm not arguing that that was a terrible idea, I'm just saying that the way they decided they were going to get CBO to score this as not costing as much money was to put in these automatic payment adjusters. And Congress generally is loathed to go back and revisit this because, of course, this causes problems: Which provider are you going to favor? Which provider are you going to cut more out of? That's the issue. And the answer for most politicians is, "I don't want to touch hospitals. I don't want to touch doctors. I don't want to touch anybody." And so we have this problem that we have these automatic reductions that are not sustainable. The CMS actuaries have been warning for several years now that we're going to have an access problem and we're getting closer to that access problem the longer this goes on. So there needs to be a more permanent solution.

Because providers just won't accept these patients.

Well, we've already seen a lot of doctors sell their private practices to hospitals. Now, why is this stuff so important? The answer is, which generation is responsible for the largest number of physicians right now, or in the last few years? The answer is the Baby Boom generation. It's the largest generation. To be a physician, you have to have gone through medical school and so on. So the most experienced group of physicians and the largest number of physicians for the longest time were the Baby Boom physicians. Well, the Baby Boomers, of course, are in their '60s, many of them are over 65. Time to sell your practice to the local hospital, basically pull in all the money that you put into the practice, and have a great retirement.

The problem is the younger generations, there are fewer of them. It's a little hard to know whether they've lost their interest in medicine, I don't think so, but just sheer counts of numbers. If it's the same rate of people in the Baby Boom generation going to medical school, if it's the same for the younger generations, we're going to have a shortage of doctors. We already have a shortage in some ways, primary care in particular, but we're going to have a surplus of older people who need more care because of course the Baby Boom generation is going to get there first. So we have a real problem.

In your heart of hearts, what do you think this system looks like in 2040? If we think things are unsustainable and we've talked about accessing cost and that's 15 years, you think something might happen in 15 years? What does it look like?

It'll be gradual. But the fact that we've moved to just over a 50 percent Medicare Advantage says that that is going to continue to grow, not shrink. The other thing that happened—this happened with the Affordable Care Act—they invented something called "accountable care organizations." This is kind of a mini-competition within fee-for-service Medicare. Now, this is a program that unfortunately works like traditional Medicare. Beneficiaries don't know that they're in an Affordable Care organization, which is a bad thing. They should be able to choose them. So why not have real competition? Sure, keep fee-for -service going, make fee-for-service more competitive, improve consumer choice, improve transparency with regard to what things actually cost people—that's very hard to find out now—but have a more competitive system where people get to make their choices every year. And I think we're going to get there.

Fee-for-service is never going to go away, but the question is, can we make it work for the people who need it? And I would argue that rural areas, for example, where there aren't a lot of choices of providers, oftentimes there is no hospital nearby, there may be a few doctors, but there are no specialists in very rural areas. So we're going to need a backup plan. Fee-for-service isn't a terrible backup plan if you set it up right, and if you set up the relationships between the rural areas and the urban health centers to ensure that healthcare needs are actually met through telemedicine—a big factor there—but also other innovations that are not just electronic.

We're going to have a system that is going to kind of look like what we have now, but I think it's going to be a more efficient system, it'll be more understandable to people, it will operate on a more competitive basis, which means that we're going to squeeze up the incredible inefficiency that we have now. We're going to move more towards the kinds of services that advanced-practice nurses can provide. We're going to see less state interference with the practice of medicine. If we don't have that, then we're going to be stuck with inefficiencies.

Ideally, the computer age will finally reach the medical sector and we will reduce the ungodly paperwork and problems that not just patients have with their insurers, but providers have with their health systems and with their payers. We need to have all of that inefficiency: paperwork inefficiency and care inefficiency. We need to squeeze a lot of that out, and there's plenty of opportunity to do that if the right incentives are applied to everyone: the insurers, the government, the providers, and the beneficiaries.

Great stuff, Joe, thanks so much for coming on and chatting.

It's a pleasure. Thank you.

Learn more: Milton Friedman: The Last Conservative: My Long-Read Q&A with Jennifer Burns | The Importance of the Two-Parent Home: My Long-Read Q&A with Melissa Kearney | Is the Consumer Welfare Standard a Failed Experiment? My Long-Read Q&A with Timothy J. Muris | How the Middle Class Is Faring: My Long-Read Q&A with Jeremy Horpedahl

The post The State of Medicare: My Long-Read Q&A with Joseph Antos appeared first on American Enterprise Institute - AEI.