“The growing premium differential between Medicare and private insurance would prompt more people eligible for the Public Option or Medicare Buy-in to enroll in Medicare. That would off another round of disproportionately higher private premiums, which would exacerbate the problem. In the insurance industry, we call this phenomenon the death spiral.”
William G. (Bill) Stuart
Director of Strategy and Compliance
February 6, 2020
The Iowa caucus is now history. The New Hampshire primary (with 33 candidates, including some who have abandoned or suspended their campaigns, on the ballot) is next Tuesday. Before you know it, Super Tuesday will arrive, and the herd of Democrat candidates for president will be further culled. But most of them continue to support replacing the current system – largely defined by the Affordable Care Act of 2010 – with increased federal control over the design, delivery, and financing of medical care for either all Americans immediately or a growing segment of the population over time.
Here’s what you need to know to understand the effect that Medicare for All, Public Option, and Medicare Buy-in would have on your future coverage:
Today, Medicare reimburses care for about 60 million Americans, mostly people over age 65 or disabled and, in some cases, their dependents. The program has four distinct parts:
Part A pays for inpatient services, plus home-health and hospice care. It’s financed by a payroll tax that workers pay during their working careers and is premium-free for most enrollees. The payroll tax no longer covers annual costs, so the system relies on surpluses accumulated since 1965. The program is expected to run out of money later this decade.
Part B reimburses outpatient care (doctor visits, lab work, imaging, outpatient therapy, and other services). Enrollees pay a monthly premium ($144.60 per month in 2020 for most enrollees) that covers about a quarter of the total cost. The remaining 75% of expenses are paid out of the federal treasury.
Part D covers prescription drugs. It’s offered by private insurers who contract with and are regulated by the Medicare system. Enrollees pay a monthly premium (an average of about $33 monthly in 2020) that covers about a quarter of the total cost, with the balance paid out of the federal treasury.
Part C is a private alternative to traditional Medicare. More than one-third of enrollees choose Part C coverage. They pay their Part B premium and may pay an additional amount for coverage. This plan often has a limited network and typically looks like an HMO, with additional services, member discounts, and caps on member out-of-pocket financial responsibility.
Enrollees generally report high satisfaction with the program. The most frequent complaints are that access is limited (many doctors don’t treat Medicare patients because of its low reimbursement rates) and enrollees must purchase a Medicare supplement plan to protect them from unlimited financial responsibility under Part B.
Medicare for All
This term is a catch-all phrase for various proposals through which the federal government assumes responsibility for designing, financing, and perhaps delivering all medical care in the United States. The concept of a government monopoly over medical care goes back at least 70 years, and today a number of elected officials and special-interest groups believe that their hour is fast approaching.
Although details differ slightly from plan to plan, common elements include federal funding of all medical care (through various tax increases on businesses and individuals), a single plan design, and low or no out-of-pocket costs at the point of service. Various plans diverge somewhat on whether all medical practitioners and other providers of care (and support staff) become federal employees or remain independent and are reimbursed based on either type and quantity of care delivered (like traditional Medicare) or a fixed payment per patient, with adjustments for age and medical condition.
This proposal clearly involves trade-offs. Employers would be relieved of the direct burden of providing coverage for their employees. And businesses that do offer coverage won’t be placed at a competitive cost disadvantage relative to businesses that don’t incur this expense.
At the same time, companies wouldn’t have the option to alter plan design to fit medical coverage into their overall compensation budget. They wouldn’t have the latitude to create benefit designs that meet their needs, offer benefits that meet their employees’ specific medical needs, or try new approaches to rein in costs. Rather, they would be assessed a tax, probably a per-employee assessment, to pay for coverage and care, without any input as to the design and cost of the coverage.
A second approach is to offer traditional Medicare as an option in nongroup and employer markets. Under this proposal, Medicare would be offered alongside private coverage in federal and state ACA marketplaces. Also, employers – perhaps small groups only, maybe all employers – could offer Medicare to their employees, just as they offer Cigna, Anthem, CareFirst, or Harvard Pilgrim today. Proponents believe that Medicare’s lower level of reimbursement would allow it to offer lower premiums, thereby lowering premiums for individuals and companies that offer Medicare and forcing competitors to lower their premiums to remain competitive.
Many Americans lose their access to employer-sponsored medical coverage before they are eligible to enroll in Medicare at age 65. We don’t know how many, but nearly half of all Americans begin to collect Social Security benefits before they turn age 65 (which reduces their monthly benefit for the rest of their lives). Once those who are eligible to continue coverage on the group plan by exercising their COBRA rights, they must bridge the gap to Medicare by either foregoing coverage or purchasing a plan in the nongroup market. Nongroup plans premiums are adjusted for age (though under the ACA, young nongroup enrollees subsidize a portion of older enrollees’ premiums), so they are expensive – particularly for people who don’t qualify for premium subsidies.
Allowing Americans to buy in to Medicare at age 50 or 55 is seen as an opportunity to allow them to enroll in their final medical plan at an earlier age and perhaps pay less for their coverage.
The Issues with These Approaches to Coverage
Politicians who propose one or more of these solutions tout the benefits – universal coverage and equality of coverage among them – without addressing the shortcomings. And the shortcomings pose a real challenge to actual implementation and the long-term financial viability of any of these approaches
Access. Today, seniors often complain of lack of access to doctors, particularly specialists, because many doctors won’t work for Medicare’s low reimbursement rates. If Medicare becomes universal (Medicare for All) or more prevalent (Public Option, Medicare Buy-in), perhaps more practitioners would find themselves forced to participate in the Medicare program to continue to see their current patients and attract new ones. But we’d probably see a reduction in participating providers (by holdout, retirement, or potential doctors who don’t enter the profession). That reduction in supply would affect those already in the system and put pressure on both private insurers (who negotiate reimbursement levels with providers) and Medicare (which dictates reimbursement on a take-it-or-leave-it basis) to increase provider compensation. This pressure will increase the national spend on medical care.
Cost-shift. Medicare reimburses doctors at far lower rates than commercial insurers, as noted above. Under a Public Option or Medicare Buy-in program, the differential would threaten the continuation of private insurance. Here’s why: As more patients shift to Medicare reimbursement levels, providers lose income. They demand disproportionately higher reimbursements when they renegotiate with private insurers. These higher reimbursements force private insurers to increase their premiums beyond what they’d otherwise be.
The growing premium differential between Medicare and private insurance would prompt more people eligible for the Public Option or Medicare Buy-in to enroll in Medicare. That would set off another round of disproportionately higher private premiums, which would exacerbate the problem. In the insurance industry, we call this phenomenon the death spiral. We saw it in the mid-1980s to late 1990s as employers introduced HMOs and gradually only the sickest patients remained on indemnity coverage. We’ve seen it more recently as employers adjust their contribution to premium to drive employees from PPO to HMO coverage. In each case, the death spiral slowly – or sometimes quickly – kills one form of coverage. In this death spiral, the coverage that won’t survive is private insurance.
Advocates of the Public Option and Medicare Buy-in know this. Their strategy appears to be not merely offering choice within an existing competitive infrastructure, but to slowly – or quickly – move the country toward a government monopoly. If you’re familiar with the boiling the frog fable you understand this strategy.
Design. Traditional Medicare is a relic of the 1960s, when Blue Cross and Blue Shield were separate entities (they merged in the 1980s). Inpatient care, outpatient services, and prescription drugs are covered by separate plans with separate premiums and cost-sharing. And in the case of prescription drugs, a separate enrollment period as well. Nearly everyone covered on employer-sponsored or nongroup care today is enrolled in a single plan that provides comprehensive benefits with financial responsibility that accumulates toward a single deductible and out-of-pocket maximum. Moving people off this design and back into the 1960s (when we waited patiently for our black-and-white television to warm up to watch The Ed Sullivan Show) would be a major step backward.
And it’s not only the antiquated separation of benefits. Part B has no cap on out-of-pocket costs, as private plans must under federal law. The 20% coinsurance on all services after the $198 deductible isn’t capped. A patient undergoing outpatient cancer treatment that costs $200,000 in 2020 pays $40,158 out-of-pocket. In contrast, she pays no more than $8,150 on private insurance. This unlimited exposure is why most enrollees in traditional Medicare pay $250 or more monthly for a Medicare supplement plan, which caps their exposure.
Group Sale. The Public Option proposal includes offering Medicare as a coverage option for small employers (and perhaps large companies as well). But Medicare has never offered any coverage other than nongroup. It would have to build a separate infrastructure to administer the program at the group level. It’s not as easy as it sounds.
And Then There’s the Price
Projecting the cost of any of these approaches is difficult. It requires too many assumptions.
But it’s important to understand how a Public Option or Medicare Buy-in plan is priced for the enrollee. After all, the price (premium) will determine whether the plan is a viable option to existing coverage.
Part A. Medicare-eligible individuals can enroll in Part A with no premium as long as they’ve worked 40 quarters (10 years). But this benefit is built on the assumption that no one enrolls before age 65 (unless disabled). If Medicare is available to the general under-65 population, payroll taxes aren’t projected to finance any coverage. Today, workers who’ve worked fewer than 20 quarters pay $458 per month for Part A coverage. Let’s use that figure as a proxy for the actual cost of Part A coverage.
Part B. Three-quarters of the cost of Part B is subsidized by taxpayers from the federal treasury. The monthly premium for most Medicare enrollees is $144.60. So let’s multiply that figure by four (so that the treasury isn’t subsidizing any of the premium). That comes to about $575 per month.
Part D. Again, taxpayers subsidize about 75% of the premium. The average premium in 2020 is $32.74, so the full cost is about $130.
Let’s sum these figures: $458 + $575 + $130 = $1,163. That figure may be adjusted based on age for younger people enrolling in the Medicare Buy-in Option. But for those who are eligible for the Medicare Buy-in, an age adjustment would be minimal. Let’s say it’s $900 per month each for a couple. That’s an $1,800 monthly premium – probably a little better than nongroup coverage once you factor in deductibles. But this couple will have unlimited Part B financial responsibility, so they’ll each have to buy a Medicare supplement plan at $250 each (the lower end of premiums) to achieve the same level of financial security that private insurance provides. Suddenly, their Medicare Buy-in total cost is $2,300 monthly.
That may not be a bargain. And even if it is in their case and they choose this coverage, the effect of their change in coverage and the corresponding difference in reimbursement would devastate the private market. That’s not their immediate concern, but it’s an important byproduct of their decision.
Is our system of financing medical care broken? Most Americans believe it is. As do most members of Congress – the Republicans who nearly unanimously oppose the ACA, the half of Democrats in the House who acknowledge the failure of the ACA by co-sponsoring Medicare for All legislation, and most of the original 20 or so Democrat candidates for president who support an expansion of Medicare at the expense of private coverage.
Is putting politicians in charge of a government monopoly on the design, delivery, and financing of medical care the solution? That’s the question that really drives this debate. And in most cases, political views rather than an understanding of the laws of economics and human behavior drive the answers.