Section VI & VII

VI. ANA's Financing Proposal

A. Background

ANA believes that Medicare must remain a broad-based social insurance system that is available to all eligible individuals regardless of income. ANA recognizes, however, that a viable, quality program will cost more money, not less, as the years go by. Even the most stringent cost controls will not -- in and of themselves -- be able to "balance the books."

ANA believes that numerous approaches can be used, including the increased and effective use of case management, to limit current and future costs and the growth of those costs. ANA also believes that, given the demographics of the next 50 years, more Federal money should go to the health and welfare of people, including the elderly.

B. Cost Savings

In the near term, there are few opportunities for significant cost savings using traditional Medicare cost-control techniques. First, the Balanced Budget Act of 1997 (P.L.105-33) modified and reduced payment rates throughout Medicare, and introduced prospectively-set payment rates in those sectors of Medicare Part A that still relied on cost-based payments. Second, the Health Insurance Portability and Accountability Act (P.L.104 -191) authorized the Medicare Integrity Program, a major new effort, which ANA supports, against fraud, waste, and abuse in Medicare. These new laws arguably applied most of the traditional Medicare cost saving techniques that were available, including across-the-board update reductions, introduction of prospective rates and fee schedules, and stepped-up efforts to eliminate fraud and abuse. Together, they indicate the extent to which the Congress was willing to extract cost savings from Medicare via traditional cost control techniques.

ANA believes that additional savings from the Medicare program can come from two sources: extending the payment reductions of the Balanced Budget Act of 1997 beyond their slated expiration dates, and identifying other traditional and non-traditional methods for reducing Medicare costs.

  1. Extend Elements of the Balanced Budget Act of 1997

    The Balanced Budget Act of 1997 reduced projected net Medicare costs by $112 billion over the five year period 1998 to 2002.(45) Much of the savings came from slowing the growth, through update reductions, in Medicare spending.(46) Most of these update reductions are slated to expire in 2002, and both the Congressional Budget Office and the Bipartisan Commission have explored the potential for keeping the Balanced Budget Act update reductions in place after 2002.(47)

    Extending these update reductions is estimated to reduce Medicare spending growth by between 0.6 percent and 0.8 percent per year from 2003 onward. While this change is small, cumulated over many years it would lead to significant savings. For example, total spending in the year 2020 would be reduced between 10 and 13 percent if these update reductions were in place from 2003 to 2020.(48)

    The Balanced Budget Act of 1997 and plans to extend its cost-reducing provisions beyond 2003 mean that most of the plausible traditional methods for reducing Medicare costs have already been utilized. Current cost savings have already been taken into account in Congressional budget calculations. Future savings from continued update reductions, if sustainable, are already being considered and counted as part of cost savings for Medicare reform.

  2. Transfer DRG Payments to Account for Increased Post-acute Care

    Hospitals are paid a fixed amount to treat a given condition (DRG payments). In recent years, however, hospitals have tended to discharge patients early and in need of post acute follow-up, thus not providing the same level or length of service as they were when the DRGs were developed. These earlier discharges by hospitals have resulted in increased costs for post-acute care with no corresponding reduction in costs for acute care. 1998 analyses by the Medicare Payment Advisory Commission (MedPAC) argue that the annual update in Medicare hospital payments should be reduced by between 1 percent and 3 percent to account for this "product change."(49) In effect, Medicare is paying twice for those days of care: once in the hospital update, and again in payments to post-acute providers. Efforts are underway to prevent this "double billing;" such efforts should be evaluated, and if successful, expanded. In addition, mechanisms must be put in place to ensure that hospitals do not cut services or staffing as a result of reductions in the DRG.

  3. Integrate Physician and Facility Payments for Inpatient Care

    Two long-standing proposals for modifying traditional Medicare are the high-cost hospital medical staffs proposal(50), and the physician DRG proposal.(51) These approaches would combine or bundle (to some extent) physician and facility payments for inpatient care. Under the high-cost hospital medical staffs proposal, Medicare would profile inpatient physician billings per DRG-adjusted admission. Where the total billings from a hospital per DRG-adjusted admission exceeded a threshold, Medicare would withhold some portion of payment to physicians treating patients in that hospital. The physician DRG approach would bundle all physician and facility payments for inpatient care. For all inpatient care, Medicare would pay an all-inclusive combined physician and facility rate.

    These proposals are intended to address the lack of integration within traditional Medicare. Hospitals and physicians have very different incentives when providing inpatient care. Hospitals are paid a flat DRG rate per admission, while physicians are paid per service. Physicians have little direct incentive to provide care efficiently or to coordinate with hospital administrators to look for means for coordinating and improving the cost-effectiveness of care within the hospital. ANA believes that implementation of these proposals could both reduce costs and improve efficiency in the Medicare program.

  4. Competitive Bidding and Competitively Set Rates

    Competitive bidding also has the potential to reduce costs. In general, it is difficult for Medicare to use competitive bidding because beneficiaries have the right to access all qualified health care providers and because most do not pay Medicare's co-payments or deductibles (and thus have no reason to be concerned about the cost of services). Medicare cannot therefore use a typical preferred-provider arrangement (lower co-payments for use of in-network providers) to encourage beneficiaries to use those providers who have offered Medicare the lowest prices. That, in turn, provides little incentive for providers to offer lower prices to Medicare. However, Medicare could introduce competitive bidding in its Medicare+Choice plans. There, beneficiaries are explicitly choosing a plan or provider network based on premium charged and value offered. The widespread presence of "zero-premium" plans (plans that charge no premium for Medicare enrollment) suggests that Medicare's payment rates are, in some areas, well above what would be required to ensure plan participation with Medicare.(52)

    Another area where competitive bidding might apply is in the provision of supplies, durable medical equipment, drugs (to the extent covered), and other commodity items that do not involve significant amounts of personal services from health care providers. Many private insurers successfully use sole-source local or national contracts to provide these services (for example, instituting a mail-order drug benefit and soliciting bids from companies who provide such a service). Medicare has moved significantly in this direction over the last decade by instituting national fee schedules and other types of fee regulations for many types of supplies and equipment. Additional savings might be had, however, by putting some or all of these items under a more competitive pricing arrangement.

C. Additional Revenue

  1. Reduce Taxpayer Subsidy for Those Able to Pay More

    Because Part A (hospital fees) and Part B (physician fees) would be merged, Part B would no longer be a voluntary program. Beneficiaries would no longer need to enroll in Part B, nor could they decline to take it. Under the existing Medicare program, Medicare's Part B premium ($528) covers only one-quarter of the cost of Part B, with the remaining three-quarters paid by taxpayers. This 25 percent premium for Part B coverage, which under a merged Part A & B represents a beneficiary contribution of just 10 percent of Medicare program costs, applies to all beneficiaries who opt for Part B coverage (approximately

    96 percent of Part A beneficiaries), regardless of income. Thus, well-to-do beneficiaries are subsidized by Federal taxpayers at the same level (90 percent) as less well-off beneficiaries.(53)

    ANA believes that it is not fair to use taxes levied on relatively low-income workers to subsidize health insurance for wealthier retirees and recommends reducing taxpayer subsidies for those beneficiaries who can afford to pay more. ANA recommends that those beneficiaries with household incomes of less than $30,000 be exempt from paying any additional costs. Those beneficiaries with household incomes of $30,00 or more should be asked to pay slightly more, based on the sliding scale shown below:

    		Under $30,000 		$528	
		$30,000-$35,000      	$697
		$35,000-$40,000      	$867
		$40,000-$45,000     	$1,036
		$45,000-$50,000     	$1,206
		Over $50,000          	$1,375 (represents 1/4 of program costs)

  2. Reallocate Federal Budget

    ANA believes that, given the demographics over the next 50 years, it is time to reallocate the Federal budget to account for the growing elderly population and the increasing health needs of an aging society. ANA leaves to Congress the decision of how that can best be accomplished but maintains that this is the right time and the right program to prompt such a reallocation of Federal resources. How much can be raised through this mechanism will determine how much tax revenue must be raised (see 3, below).

  3. Raise Taxes

    The Medicare Trustees calculate that an immediate increase in the hospital insurance payroll tax from 2.9 percent to 5.0 percent would put the Part A Trust Fund on a sound basis for the 75 year projection period (through 2070) .(54) For Part B, there is no dedicated payroll tax, but the Trustees note that Part B spending would consume roughly one-quarter of all personal and corporate income tax receipts by 2070.(55)

    The Medicare program will need additional revenue to remain solvent; cost-cutting alone will not achieve the necessary fiscal improvements, nor will sufficient reallocation of the Federal budget occur to achieve these goals. ANA believes, however, that an increase in the payroll tax is a regressive way to seek needed funds, and that most American taxpayers would be willing to pay a reasonable amount more for the enhanced benefits and protections proposed here. Therefore, ANA recommends an increase in revenue for the Medicare program in an amount that would ensure the program's continued solvency.(56)

D. Financing Summary

ANA's proposed plan would today require an additional $15.5 billion. Over time, however, ANA believes that the implementation of its proposed recommendations would significantly lower this estimate and ultimately result in considerable cost savings. In the meantime, ANA recommends obtaining these additional funds through the combination of cost savings and revenues described above.

VII. Conclusion

ANA believes that the Medicare system has had a critically important impact on the welfare of the nation's elderly and disabled citizens. The proposals recommended in this report are designed to ensure the continuation of a Medicare program that provides high quality care to every beneficiary and enjoys the strong support of people of every age. Only through strengthening today's Medicare program will we be able to protect it in the future. While our program does not result in immediate cost-savings, ANA believes that prompt implementation will result in increasing savings over time and will ensure that Medicare is fiscally sound and providing excellent quality care for future generations.