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Medicare must become managed care

Published Oct. 1, 2005

The Clinton administration's proposed reductions in payments to hospitals and doctors to solve Medicare's financial problems are equivalent to using a Band-Aid to fix a broken leg. By the time the 78-million baby boomers start becoming eligible for Medicare benefits in 2010, federal outlays for the program are expected to almost double as a percentage of the nation's gross domestic product, to 4.2 percent from 2.3 percent in 1995. This will make Medicare the federal government's single largest expense.

If Congress does nothing to fundamentally change Medicare now, by 2010 the program will cost so much that delayed eligibility, substantial reductions in benefits or higher taxes will be the only options. Payment reductions to hospitals and doctors will serve only to shrink the population of providers willing to serve the Medicare population and to increase billings by providers who do.

No matter what Congress does, by 2030 there will be just over two workers to support the costs of each beneficiary, down from the current four. Congress and the president need to be honest with the American people about the consequences of increasing Medicare costs. People need to understand that the longer Congress waits, the worse the problem will get and the tougher the solutions. Americans also need to understand that money spent on Medicare cannot be spent on education and other worthy programs.

The main problem with Medicare that is correctable is the unmanaged fee-for-service reimbursement, which pays doctors and hospitals for service regardless of whether the treatment is necessary or the most efficient. Thirty years of legislation to correct the inherently cost-increasing incentives of the reimbursement have failed.

Medicare is not designed to deliver high quality care either. There is no quality management and no accountability on the part of doctors, hospitals or other service providers. There is a better alternative. Health maintenance organizations competing in a mainly fee-for-service reimbursement system can cut health expenditures per person by 25 percent to 35 percent. Once price-competitive HMOs come to dominate a market, other cost-reducing forces come into play. As provider surpluses are exposed, HMOs can drive down provider incomes as well as costs. They can and do change community standards of care such as admission rates and lengths of stay.

HMOs compete with one another if, and only if, purchasers structure the market to reward HMOs with more subscribers for cutting costs. Thus far, most HMOs have not had to compete on price because individuals choosing health plans do not typically pay the full difference for a more expensive plan. It seems reasonable to suppose that competitive HMOs could drive expenditures per person down 35 percent to 40 percent below the projections for a fee-for-service-dominated Medicare system.

In California, overall 1997 HMO premiums for employer health insurance buying coalitions will be 15 percent to 20 percent below what they were in 1994, adjusted for inflation. Medicare HMOs offer more benefits than the Medicare program does today at less cost.

Focusing on comprehensive care opens the widest range of possibilities for health care improvement and cost reduction. Teams of professionals share incentives to improve processes, correct mistakes and keep patients healthy. Though far from universally realized, managed care has the potential to improve quality and cost.

Experience in California is showing that managed care plans can produce high levels of patient satisfaction. Twenty managed care plans serve Medicare beneficiaries in the California Public Employees Retirement System. Seven of them earned ratings of "satisfied" or "very satisfied" from at least 90 percent of their enrollees.

Building on the successful experiences of employers and other purchasers of health insurance, Congress should adopt a market-based reform for the Medicare program and do everything it can to make it function efficiently.

We propose a grand trade in which beneficiaries are asked to accept the limitations of managed care in exchange for a wide choice of health plans, small premiums for the health plan of their choice, an entitlement to an adequate package of benefits and the preservation of the Medicare program without making the drastic cutbacks necessary under any other scenario. America should ask its elders, for the sake of their children and grandchildren, to give up their a la carte doctors and benefits or else to pay the extra cost themselves.

The consequences of not implementing a comprehensive restructuring of the Medicare program soon would be so dire that politicians and the public cannot afford business as usual. The year 2010 will be too late.

Alain C. Enthoven is professor of public and private management at Stanford University's Graduate School of Business. Sara J. Singer is his associate.

Special to the Los Angeles Times