Getting to Medicare for All

May 09, 2019

CEPR

(This post first appeared on my Patreon page.)

I had the opportunity to testify last week before the House Rules committee on Medicare for All. Incredibly, this was apparently the first time the topic had been explicitly addressed in a congressional hearing. In my testimony, I argued that a Medicare for All program would be affordable, but the key factor was reducing the cost of input prices, like prescription drugs, medical equipment, and doctors’ pay. I also briefly laid out what I considered the key features of a transition from the current system. I want to go into this issue in a bit more detail here.

I listed four main steps as being key in the transition:

Fix the current Medicare system;
Allow a Medicare buy-in;
Take measures to reduce input prices;
Lower age of Medicare eligibility to 64.

These four steps should allow for an orderly phase in of a universal Medicare system. They also should quickly provide substantial benefits to most of the population in the form of better quality/lower cost health care.

Fixing Traditional Medicare

The first point largely involves reversing the effort over the last few decades by right wingers to sabotage traditional Medicare and drive people into private Medicare Advantage plans or to require them to buy private supplemental insurance if they remain in traditional Medicare.

The most obvious fix here is to impose a cap on out-of-pocket spending. This is actually required for Medicare Advantage plans, but for some reason, no cap was ever put in place for traditional Medicare. We can start with a cap of $6,000, which is roughly the cap for Medicare Advantage. As we move towards the more comprehensive system envisioned by proponents of Medicare for All, this cap can be lowered, but the first step is simply to have a cap in place comparable to the cap for Medicare Advantage plans.

The second important fix is to roll part D drug benefits into the traditional Medicare program. Requiring a separate insurance package for prescription drugs makes little sense except as a way to force beneficiaries to give money to the insurance industry. Stand-alone prescription drug insurance plans do not exist in the private sector; it is absurd that the Bush administration insisted on going this route in 2003 as a condition of providing a prescription drug benefit.

It would also be desirable to merge Medicare Part A and Part B as part of a single system, to reduce complexity. This would require some fundamental revamping of the program (Part A is financed by the designated payroll tax, while Part B is paid partly by premiums and mostly out of general revenue), but this revamping will be necessary at some point in the movement towards Medicare for All in any case. Even if Part A and Part B are not immediately merged for current beneficiaries, they should certainly be merged for those opting to buy into the program.

The third part of a fix is to eliminate the effective subsidies that Medicare Advantage plans obtain from “upcoding” their enrollees. Medicare reimburses Medicare Advantage plans based on the health of the people they have enrolled. Recent research indicates Medicare Advantage plans systematically upcode their enrollees, implying their health is worse than is actually the case, in a way that could increase payments by as much as 16 percent.

The program should move quickly to end these excess payments. One route would be to assume that the insurers lie about the health of their enrollees and adjust payments according. For example, if the average overpayment is found to be 10 percent, then the payment to Medicare Advantage plans can simply be reduced by 10 percent.[1]

Alternatively, improper coding of enrollees could be treated like the fraud which it is. This would mean severe civil penalties for the companies that engage in the practice and possible criminal penalties for the corporate executives that design the policy. There are plenty of people in prison for stealing cars that might be worth just a few thousand dollars. There is no reason that insurance executives, who might be stealing tens of millions from Medicare, should not face punishment that is at least as harsh.

Allowing a Medicare Buy-In

After putting in the fixes discussed above (which should be quickly doable), people of all ages should be allowed to buy into the Medicare program, so that the system competes directly with private insurers. This buy in would be either through the exchanges, with households being able to apply whatever subsidies for which they are eligible under the exchanges, or alternatively through employer-based coverage, with employers able to pay an age-adjusted rate for their workers, as is the case now for private insurers under the Affordable Care Act (ACA).

This buy-in would serve four purposes. First, it should give every person in the country access to a decent insurance plan. A reformed Medicare plan will provide access to a large number of providers and avoid the harassment that often proves so profitable for private insurers. It also is likely to provide an attractive option to employers who currently provide insurance for their workers. There is no reason not to allow employers to replace a current private plan with Medicare, and undoubtedly many would choose to do so.

The second benefit is that it would provide a serious competitor for private insurers. This is especially important in markets where consolidation of insurers has limited the availability of plans to just one or two insurers, but a reformed Medicare plan, if priced at cost, should be an attractive option everywhere.

The third benefit is that a reformed Medicare program, with a buy in option, should have enormous market power. The existing plan, with 40 million enrollees, already has substantial market power. But if we assume that half of those currently enrolled in Medicare Advantage switch to a reformed Medicare plan, along with 10 percent of the pre-Medicare age population, the reformed Medicare plan would have almost 80 million people enrolled, or just under a quarter of the population. Since this group includes most of the elderly and disabled, it would account for an even larger share of health care spending.

This would be such a large share of the market that it is likely that providers in many areas would opt only to deal with Medicare in order to avoid the administrative costs associated with dealing with a variety of smaller insurers. There would be even more market power with a merged Medicare-Medicaid program, which together with a modest degree of voluntary buy-ins, would account for well over half of the country’s health care spending, and far more than half in particular markets. Insofar as providers decided to rely on Medicare only, it would allow for the administrative efficiencies sought by proponents of Medicare for All.

The last advantage of a buy-in is that it would increase people’s familiarity and comfort with getting their insurance through Medicare. It would make the step to a universal Medicare program seem far less drastic.

Getting Health Care Input Prices in Line with the Rest of the World

The United States pays roughly twice as much for our health care inputs – drugs, medical equipment, doctors – as do people in other wealthy countries. This both makes it much more difficult to pay for universal Medicare and also leads to poorer quality health care.

This is most clear in the case of prescription drugs and medical equipment. Because these items are expensive in the United States, doctors and patients often choose inferior courses of treatment. In the case of prescription drugs, they may take a less effective drug because it is cheaper. Alternatively, many people take half doses in order to economize on their drug spending. In the case of medical equipment, they may not take advantage of new technological developments because they are too expensive.

These health endangering efforts at saving money are especially painful because it is government policy that makes drugs and medical equipment expensive. Specifically, they are expensive because the government grants patent monopolies as the way it pays for the research and development costs for new drugs and medical equipment.

Without these government-granted monopolies, drugs and medical equipment would almost invariably be cheap. In the case of prescription drugs, new breakthrough drugs would sell for the same price as generic drugs long on the market. There would be no issue of debating whether the government or private insurers should have to pay for a new drug that cost tens of thousands or hundreds of thousands a year, since new drugs would rarely cost more than a few hundred dollars a year.

The same applies to medical equipment. The most modern scans would not cost much more than a simple X-Ray. There would be no economic reason for doctors not to prescribe the best method for examining a patient.

If we did not rely on government-granted patent monopolies, the government would need another mechanism for financing research. The obvious alternative is direct government funding. This would likely be an enormous money saver.

We will spend more than $430 billion this year on prescription drugs that would likely cost less than $80 billion in a free market without patent or related protections.[2] For this additional $350 billion in spending, we get roughly $70 billion in research from the pharmaceutical industry. The government currently spends more than $40 billion a year through the National Institutes of Health and other agencies. If it were to double or triple this spending, it should be able to replace the research currently being supported through patent monopolies.

This publicly funded research would have two major advantages over the current system. First, all the results would be fully public, this would be a condition of receiving the money.[3] This should allow research to advance more quickly, since researchers could quickly build on each other’s’ successes or failures.

The other great advantage is that it would eliminate the incentive to lie about the safety and effectiveness of drugs. This is a widely recognized problem with the current system where pharmaceutical companies often engage in questionable or even illegal practices to promote their drugs. In extreme cases, they push drugs in contexts where they can be harmful to patients, as is alleged to be the case with Perdue Pharma promoting OxyContin as not being addictive, even though it knew it was. No one would be lying to increase sales of OxyContin if it sold for the same price as generic aspirin.

We will not get a system of publicly funded research overnight, and even if we did, it would take many years before the research yielded fruit. However, we can ramp up funding, with the explicit intention of bringing new drugs onto the market at generic prices. In the meantime, we can use the same sort of price controls to bring prices in the U.S. in line with other wealthy countries.

A bill proposed by Senator Sanders and Representative Khanna provides a great example of how this can be done. It would require companies to charge no more than the median price available in the next seven largest wealthy countries or lose their patent monopoly. A separate bill introduced by Senator Warren and Representative Schakowsky would limit abuses of monopoly power in the generic market by creating a government manufacturing capability that would allow it to quickly enter markets where excessive concentration has allowed generic producers to jack up prices, as happened with Martin Shkreli and Daraprim, an important treatment for AIDS patients.

These are measures that could in the near term allow for hundreds of billions of dollars of savings annually on prescription drugs. We can also enact comparable measures for medical equipment, getting our costs in line with other wealthy countries.

In the case of doctors and dentists, who earn on average twice of what their counterparts make in other wealthy countries, we can look to measures to increase the supply through rules that allow qualified foreign doctors to practice in the United States. We can also change licensing rules to allow lesser paid medical professionals, such as nurse practitioners and physicians’ assistants, to do tasks for which they are fully competent, like prescribing drugs, which are now typically performed by doctors. A reformed Medicare can also lower compensation rates.

If we look to get doctors’ pay in line with other wealthy countries we should also cover most of the cost of their education, as is the case in other wealthy countries. In addition, we should look to loan forgiveness for those who acquired large debts from their education. Even with paying more for medical education, there should still be large savings. If we paid $100,000 a year towards the education of 60,000 medical and dental students, it would come to $6.0 billion a year, less than 2.0 percent of what we pay doctors and dentists each year.

Taking these and other steps to reduce the cost of health care inputs would both immediately lower the cost of health care to everyone and also make an eventual transition to a universal Medicare system far more affordable. If the cost of health care inputs in the U.S. were in line with other wealthy countries, the government would already be paying almost enough to cover the cost of Medicare for All.

Lowering the Age of Medicare Eligibility to 64

The most obvious way to extend Medicare coverage is to expand the age group that is automatically eligible. There have been a variety of proposals to lower the age to 60, 55, or 50 as a major step towards including the whole population. While these age reductions are reasonable policies, they would undoubtedly be big steps. Just lowering the age to 60 would add close to 20 million people to program.

By contrast, lowering the age of eligibility to 64 is not a big step. It is just one year, roughly doubling the number of new enrollees that Medicare would see in a normal year. Also, the cost would be limited since many of 64-year olds would already be getting Medicare through the Social Security disability program, or alternatively would be receiving Medicaid.

It is likely that at least 40 percent of this age group already is having their health care paid by the government, and this would include the highest cost patients, since these are often the people receiving disability. Given this skewing, the additional cost of adding 64-year olds to Medicare would probably be in the neighborhood of $12 to $14 billion a year, the sort of money Congress adds to the military budget without a second thought.

While this would be a small step, it would nonetheless be an important one. First, it would directly extend Medicare coverage to millions of people, providing them with a much greater level of health care and financial security. It would also move the year of eligibility one year closer for many people with health issues who are approaching 65.

This modest extension of coverage would also give insights into the problems that would be encountered in a larger expansion. There will inevitably be mistakes in any largescale expansion of the program, but the experience of taking a smaller step, like lowering the age to 64 should, make the system better prepared to deal with a larger expansion.

This simple step will also make the idea of an expanded Medicare program very concrete. The system was set up to cover people over age 65, and the disabled more than fifty years ago, with no change in the age of eligibility. (There have been some efforts to raise it.) If we can successfully lower the age to 64, this will be a new fact on the ground. Everyone will know that lowering the age of eligibility is possible and that we can move to universal Medicare system.

[1] Medicare Advantage plans can be given an option to show that they had actually been honest in their coding, but this would require full public disclosure of data on services provided per enrollee.

[2] The basis for this calculation is described in more detail here.

[3] A system of direct funding could still have private pharmaceutical companies doing the research, they would just be paid upfront instead of looking to profit from patent monopolies.