Privatizing Medicare

A lthough George W. Bush endorsed the privatization of Medicare in September 2000 when he was still a candidate for president, he did not give Medicare privatization high priority during his first two years in office. That changed last January. On January 3, the New York Times broke the news that the Bush administration would soon propose adding drug coverage to Medicare, but only on the condition that Medicare be privatized. 

On January 28, Bush used his second State of the Union address to announce that health care reform was one of his “goals,” that “health care reform must begin with Medicare,” and that Medicare “reform” meant giving “all seniors…the choice of a health care plan that provides prescription drugs.” Most observers, including a number of Republican leaders, interpreted these remarks to mean seniors who want drug coverage would have to leave the traditional Medicare program (which now enrolls 86 percent of all Medicare beneficiaries) and enroll in an HMO (HMOs enroll the other 14 percent of beneficiaries). 

Bush’s campaign to privatize Medicare is going to be as weird, as unproductive, and as entertaining as his bizarre campaign to privatize Social Security has been. The latter campaign has been strange because, on the one hand, Bush has refused to put a detailed proposal on the table in the two-and-a-half years since he announced his intention to privatize Social Security, but, on the other, he won’t stop yacking about the issue. 

Bush refuses to offer details on his Social Security and Medicare privatization schemes for an obvious reason: He wants to be free to make impossible claims for privatization—that it will save money and create no losers. Bush tells us his Social Security plan (allowing workers to invest a portion of their payroll taxes in retirement “accounts” which, in turn, invest the money in stocks and bonds) will save money for the Social Security program. But he also tells us his plan will require no cuts in benefits for the elderly and near-elderly, no increase in payroll taxes, and no increase in the eligibility age. He doesn’t explain how all this is possible if a portion of payroll taxes otherwise destined for the Social Security trust fund are siphoned off to Wall Street. He doesn’t explain what will happen to workers whose investments shrivel in value shortly before they retire.  

When, in 2001, Bush’s Social Security Commission, stacked with privatization buffs, recommended three different privatization proposals for Bush and Congress to consider, Bush refused to endorse any of them. In March 2002, the public was treated to the ludicrous sight of House Democrats introducing three bills corresponding to the commission’s three privatization proposals and demanding hearings on them. Republicans refused the Democrats’ call for hearings. 

By the summer of 2002, Republicans were ready to put some distance between themselves and Bush on the Social Security issue. According to the Washington Post , Republican congressional leaders undertook a campaign to deny that “privatization” accurately described Bush’s proposal. Many Republicans running for office last fall went even further: They decided that torturing the word “privatize” was not going to fool the public and, for the sake of their political careers, they had better adopt positions critical of privatization. For example, Candice Miller, now a Republican representative from Michigan, wrote AARP, “Social Security is too important to risk one penny of trust fund money being siphoned off into individual accounts.” Such statements will, at minimum, make it very difficult for any politician who makes them to support Bush’s plan in the future. Bush faces the same dilemma with his Medicare proposal. Like his Social Security proposal, his Medicare privatization plan will antagonize a substantial portion of the population if and when Bush gets around to announcing the details of his plan. It will also scare the hell out of a lot of Republican politicians even before the unsightly details of his plan are bathed in the warm glow of publicity. Bush now finds himself with three bad options: (1) He must either shut his mouth about Medicare; (2) He must admit that Medicare privatization is a stupid idea; (3) He must speak in jabberwocky, lie, refrain from introducing bills, and otherwise conceal the gory details of his plan. As was the case with his weird Social Security campaign, Bush has chosen the third option. He speaks about his Medicare plan in terms so general as to be meaningless, he often uses euphemisms, and he lies to cover up the financial coercion that his plan will have to rely on to push seniors into HMOs. 

Bush began his State of the Union remarks about health care by claiming he wanted to solve the twin problems of rising costs and rising numbers of uninsured. After saying these problems couldn’t be solved with “a nationalized health care system,” he then, inexplicably, trashed HMOs, the cornerstone of his Medicare plan. “Instead of bureaucrats and trial lawyers and HMOs, we must put doctors and nurses and patients back in charge of American medicine,” he announced in indignation to great applause. Then, turning to his Medicare plan, he offered this confusing and misleading statement: “Seniors happy with the current Medicare system should be able to keep their coverage just the way it is. [A]ll seniors should have the choice of a health care plan that provides prescription drugs.” This implies that Bush does not support adding drug coverage to traditional Medicare, but he didn’t come right out and say that. It is misleading because it failed to apprise seniors that their “choice” to enroll in a private-sector plan that does cover drugs will be exercisable only if they are willing to enroll in HMOs. 

The nation did not react favorably to Bush’s remarks. The next day, observers across the country either professed to be confused by Bush’s comments or they interpreted them to mean he did not intend to add drug coverage to the traditional Medicare program and that the only seniors who would get drug coverage would be those who were willing to leave traditional Medicare, give up their choice of doctor, and submit to the tender mercies of the HMO industry. “He says he wants to help seniors afford prescriptions drugs,” said Senate Minority Leader Tom Daschle to the Associated Press, “then he proposes a plan to coerce seniors into HMOs to get prescription coverage.” “ABC News” ran a portion of an interview with Robert Hayes, president of the Medicare Rights Center, saying, “President Bush’s proposal to offer prescription drug coverage at the price of gutting Medicare and forcing people into HMOs is a cruel hoax.” According to the same “ABC News” report, seniors who watched Bush make equally cryptic remarks about Medicare during his January 29 speech in Michigan were disappointed. “He talked, but he didn’t say anything,” said one. Said another, “I don’t know if he really understands the seniors’ problems.” 

Most significantly, Bush encountered immediate criticism from some Republicans, criticism which, like the critical statements some Republicans have made about Social Security privatization, should make it impossible for the speakers ever to endorse a plan that coerces seniors into enrolling in HMOs, either by charging seniors more to stay in traditional Medicare, or by giving them drug coverage but only if they enroll in HMOs. “I’m concerned. . .that the president’s focus on ways to reform Medicare could hamper our efforts to pass comprehensive prescription coverage,” said Sen. Olympia Snowe (R-ME) in a January 29 statement. The same day, Sen. Charles Grassley (R-IA) told the New York Times , “Prescription drug coverage should be available to all seniors, not just those who switch into managed care.” It is no accident that Snowe and Grassley are from rural states. Because HMOs are scarce in rural areas, any plan that links drug coverage to HMO enrollment would guarantee that the vast majority of rural seniors wouldn’t get drug coverage. 

A significant difference between Bush’s Social Security campaign and his Medicare campaign is that a bill to privatize Medicare has actually been introduced in Congress and Bush has actually said that this bill closely resembles his proposal. The bill, unctuously entitled “The Medicare Preservation and Improvement Act,” was first introduced by Senators John Breaux (D-LA) and Bill Frist (R-TN) in 1999 and then again in 2001. Because Republicans have not held hearings on the bill and because the media has paid no attention to it, the public knows nothing about it. The Breaux-Frist legislation would not actually require seniors to leave the traditional Medicare program and join an HMO. Rather, it would put financial pressure on seniors to do that. This pressure would be exerted by converting the entire Medicare program into a voucher program. The traditional Medicare program and Medicare HMOs would be required to charge premiums, and seniors would be given vouchers that would cover all or most of the HMOs’ premiums but not enough to pay for traditional Medicare’s premiums. Why would traditional Medicare’s premium be higher? Because the typical senior who stays in traditional Medicare is much sicker than the typical senior who enrolls with a Medicare HMO.  

Thus, although the traditional Medicare program is far more efficient than HMOs are (Medicare’s overhead is 2 percent of its revenues versus 20 to 30 percent for HMOs), traditional Medicare’s costs are higher because it suffers from “unfavorable selection,” that is, it insures sicker people. The HMO industry bitterly denies that it benefits from favorable selection, but two dozen studies have demonstrated they do. In a 1997 report to Congress, the U.S. General Accounting Office wrote: “Although Medicare’s…HMO program was designed to save the program 5 percent [of the cost of insuring an average Medicare beneficiary], a decade of research has found that this program instead costs Medicare money. The research shows Medicare’s rate-setting method produces excess payments to HMOs.” According to Bruce Vladeck, Medicare’s director from 1993 to 1997, this conclusion is “incontrovertible.” The literature indicates that HMO seniors are so much healthier that HMOs incur costs per senior somewhere between 10 and 45 percent less than the traditional Medicare program incurs. 

Moreover, evidence exists that HMOs encourage their generally healthier seniors to disenroll from their HMOs and return to traditional Medicare as soon as the seniors need expensive treatments. A study of more than 400,000 seniors, reported in 1997 in the New England Journal of Medicine , found that seniors who enrolled in Florida Medicare HMOs during the period 1990-93 tended to stay enrolled only as long as they were healthy. When they got sick, they disenrolled and returned to traditional Medicare, thus saving their HMOs lots of money and driving up the cost of traditional Medicare. This study was entitled, appropriately enough, “The Medicare-HMO revolving door—the healthy go in and the sick go out.”  A reasonable interpretation of the “revolving door” study is that seniors in HMOs went back to traditional Medicare when they got sick because their HMO refused to give them the services they needed. A subsequent study, which appeared in the American Journal of Managed Care in 2000, confirmed that hypothesis reporting that Florida HMO disenrollees were four times as likely as Florida seniors who enrolled in traditional Medicare to have hip and knee replacements in the three months after they left their HMO. The authors concluded, “These data provide indirect evidence that Medicare HMOs…are rationing [hip and knee replacement surgery] and that beneficiaries respond by returning to the [traditional Medicare] system to seek care.” This study is consistent with numerous scientific studies and an ocean of anecdotal data which indicate that HMOs deny necessary medical services.  

The Breaux-Frist bill will push seniors into HMOs where they will get worse care. It will also drive up Medicare’s total costs because it will permit Medicare HMOs to be overpaid. This will happen because the HMOs will be paid as if their enrollees had the health status of an average Medicare beneficiary. The Breaux-Frist bill contains a short provision, which purports to address this problem. It instructs Medicare to “establish an appropriate methodology for adjusting the amount of payment to Medicare plans…based on the differences in actuarial risk of different enrollees being served.” “Actuarial risk” is health policy jargon for “likelihood of getting sick and needing health services.” 

The trouble with this mandate to Medicare in the Breaux-Frist bill is that Medicare has been under a similar and far more detailed mandate since 1997, and, for two reasons, has been unable to carry it out. The first and most significant problem is logistical. It is extremely difficult to evaluate the health of each of the six million seniors who are currently enrolled in the roughly 200 HMOs that now serve Medicare beneficiaries and to assign to each of those HMOs a score indicating how much healthier the “average” senior in each HMO is than the “average” senior enrolled in the traditional Medicare program. Accurate risk-adjustment (the phrase used to describe the process of adjusting Medicare’s payments to HMOs downward to reflect the better health of HMO enrollees) requires that Medicare read the medical records of all HMO enrollees, something that is not possible now and could only be made possible at great expense, in terms of both dollars and lost privacy. The second problem is political. The U.S. HMO industry opposes accurate risk-adjustment. 

As a result of these logistical and political problems, Medicare’s overpayments to HMOs are as large or larger today than they were in 1997 when Congress instructed Medicare to risk-adjust Medicare’s payments to HMOs. (The claims by the HMO industry that HMOs are leaving the Medicare “market” because they are underpaid are false. There is no question that many HMOs have expenses that exceed their Medicare reimbursements, but, as GAO personnel and other experts have noted, the problem is excessive HMO expenses, especially administrative expenses, not low Medicare reimbursement rates.) Because the logistical and political problems are very difficult to solve, the overpayment of Medicare HMOs will almost certainly continue in some form for as long as HMOs are allowed to participate in Medicare. The Breaux-Frist bill cannot make these logistical and political problems go away simply by issuing a mandate to Medicare to solve them. Conclusion: Unless Medicare HMOs ration far more aggressively than they do now, Breaux-Frist will drive Medicare’s total costs up, not down. 

In view of the utter impossibility of Bush’s Medicare privatization plan ever working as advertised, the question inevitably arises, Why is Bush doing this? My hypothesis is that Bush, like so many other politicians before him, including Bill Clinton, has uncritically accepted two lines of propaganda from the HMO industry: (1) that insurers that use managed care cost-control tactics are more efficient than insurers, including traditional Medicare, that don’t; and (2) that HMOs do not damage quality of care (in other words, all the medical services HMOs deny are “unnecessary”) and all the complaining about HMO quality of care can be written off as just bratty “consumers” upset over the loss of their “unnecessary” services.  

But why anyone would buy this nonsense in 2003—seven years after the backlash against managed care became front-page news and three years after double-digit premium inflation returned—is beyond me. Perhaps the best explanation is that Bush is as dumb as he looks.