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Wednesday, December 3, 2008

Sometimes the sky isn't falling

I have been bemoaning the status of the Individual insurance market as the red headed step child of the insurance industry that has a nasty habit of drawing unwanted attention to for its shortcomings. When the Individual market farts during temple, it tends to further embarrass itself by gambling and losing with the expulsion.

On the other hand, Medicare is the golden child. It provides coverage for 40 million elderly Americans who have the highest number of health conditions because they have been using their bodies for so long. For generally $150 per month in premium, they have some of the better insurance available that keeps them healthier and living longer. Medicare beneficiaries also make up 25-30% of health care providers patient volume and probably fund a similar percentage of medical devices and drugs. Would anyone else, other than the government, take on the job of insuring the highest utilizers of care and the crankiest because after a certain age, you really don't give a damn.

Medicare does a lot for the health care industry and solves a lot of problems that others don't want to think about it. Therefore, should it be a surprise to anyone that costs increase every year? This cost increase is usually expressed in the form of insolvency of the Medicare trust fund as described in this recent article about how the Medicare trust fund could be insolvent before the project 2019. To be clear, the trust fund insolvency only refers to the hospital and nursing facility payments but these are the most expensive areas to cover.

The Boston globe article talked about how the recession could change the actuarial projections from insolvency by 2019 to 2016 or 2018. In other words, they don't know when, but it will be earlier. While this may sound alarming and cause fear that Medicare won't be around for much longer, I will address those concerns and explain why there is no reason to panic.

It's always been projected to go broke: These are actuarial projections so it's not like a burn rate but a fairly educated guess. Through out Medicare's 30+ year history, it has generally been projected to be insolvent within 11-14 years. Three times (in 1969-1972, 1982-1984, and 1995-1997), it has been projected to be insolvent within 7 years. Therefore, this is not a new scenario because some degree of insolvency is always projected. Costs are expected to continue to rise and exceed funds at some point in the future.

It's political: There is also not a direct correlation between the years to insolvency and calls for crisis. As you can imagine, political expediency plays a role (which should surprise no one) In 1993, insolvency was projected to be 6 years but the alarm was not sounded until 1995. There wasn't a political need. Never estimate the the political role in calls about Medicare insolvency. However, after this election period, telling someone not to underestimate the role of politics in a decision is like telling someone not to underestimate rush hour traffic during the first big winter rain.

We have solved it before: During the previous crisis of 69-72, the solution was professional review organizations to reduce utilization. The 82-84 crisis resulted in Diagnostic Related Group or DRG's where Medicare paid a set case rate for a procedure as opposed to just paying based on how long someone stayed in the hospital. In 95-97, managed care was introduced to lower costs. In all cases the interventions did work and the years to insolvency increased. Therefore, there has been experience and success with reducing the costs of Medicare.

All of these interventions were changes to administration, payment system, and all were done within the context of an insurance framework. Medicare continues to be funded by a 1.45% pay roll tax that was set in 1965 when Medicare was created. There has been yet to need to pull major levers like use government general fund money or increase the payroll tax to fund Medicare.

I don't mean to down play the need to reduce costs for Medicare to continue to be sustainable. However, I do want people to switch to an immediate crisis mentality when they think that Medicare is going broke or is going to swallow the entire federal budget. Medicare has been self-sustaining with the same financing mechanisms that were set up in 1965. Medicare will always have a project insolvency time frame and it will usually be within 10-15 years in the best of times. That's because medical costs are always projected to increase. However, medical utilization controls have proven to be successful three times in the past.

Medicare has been and still should continue to be a successful entitlement program as long as we continue to maintain it. I fully expect to use Medicare in 30 years when I am cranky senior who doesn't give a damn.

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