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Subject: qotd: Baicker: The insurance value of Medicare
Date: Thu, 1 Nov 2012 14:11:51 -0700
From: Don McCanne <email@example.com>
To: Quote-of-the-Day <firstname.lastname@example.org>
The New England Journal of Medicine
October 31, 2012
The Insurance Value of Medicare
By Katherine Baicker, Ph.D., and Helen Levy, Ph.D.
Medicare is an insurance program. The reason we have health insurance at
all is not that health care is expensive, but rather that there is great
uncertainty about who will need very expensive and potentially
lifesaving care and when they will need it. Medicare should give
beneficiaries not just access to medical care, but also protection from
the risk of catastrophic spending. At the same time, Medicare — like any
good insurance — should not cover so much care so generously that
beneficiaries end up consuming too much care of questionable value and
driving up costs for everyone. Thus, setting cost sharing for Medicare
beneficiaries is a balancing act: too little cost sharing means patients
have no incentive to spend Medicare dollars wisely; too much means
Medicare fails to perform its insurance function.
How well does Medicare do at this balancing act? Not very. Medicare by
itself offers only limited protection against economic ruin. The basic
benefit lacks a cap on out-of-pocket spending, so beneficiaries are
exposed to the risk of open-ended cost sharing that can generate
substantial financial strain (or deplete assets for surviving spouses).
Moreover, the odds of facing a catastrophic expense mount over time.
Beneficiaries without any supplemental coverage thus do not have enough
insurance and face too much risk. This risk is one reason that 90% of
beneficiaries obtain some other type of insurance (e.g., retiree health
benefits, Medigap, Medicare Advantage, or Medicaid). But beneficiaries
with generous supplemental coverage probably have too much insurance.
"Too much insurance" may seem like a nonsensical concept, but there is
ample evidence that when copayments are lower, patients consume more
care, much of which is of questionable benefit to health. The systemwide
effects are considerable: the increasing prevalence of health insurance
in the United States is estimated to be responsible for about half the
increase in per capita health care spending between 1950 and 1990.
Having little or no cost sharing may lead enrollees to consume low-value
care and drive up the cost of Medicare for everyone.
Nonpartisan and bipartisan groups such as the Congressional Budget
Office, the National Commission on Fiscal Responsibility and Reform
(also known as the Bowles–Simpson Commission), and the Medicare Payment
Advisory Commission have advanced proposals that would address the
imbalance in risk facing beneficiaries in the current Medicare program.
Although these groups do not propose exactly the same fixes, some of the
basic ideas are the same: First, put a cap on the out-of-pocket spending
that beneficiaries are responsible for — as most private plans already
do — so that those with no other coverage are protected from
catastrophic costs. Second, restrict "first-dollar coverage" (coverage
with no cost sharing by beneficiaries) in Medicare supplemental
insurance, either by banning it or by imposing a surcharge on plans that
These proposals are controversial. Placing a cap on beneficiary cost
sharing would increase program spending at a time when there is intense
pressure to cut spending. Restricting first-dollar supplemental coverage
would cut program spending but is politically unpopular because it
requires lawmakers to tell most beneficiaries that they cannot have the
insurance (often private insurance) they are used to having.
Furthermore, crude cost sharing that ignores the differences in health
benefits produced by different types of care could reduce consumption of
highly effective care as much as it reduces consumption of low-value
care, especially for low-income populations. Nonetheless, striking a
better balance between spreading risk and promoting efficiency would
make Medicare a better insurance program.
Medicare was always intended not just to increase access to care but to
protect the elderly from financial ruin. As President Lyndon Johnson
said when signing Medicare into law in 1965, "No longer will illness
crush and destroy the savings that [older Americans] have so carefully
put away over a lifetime so that they might enjoy dignity in their later
Comment: Although cost sharing is a topic that we have covered before,
Katherine Baicker, coauthor of this NEJM article, is very influential in
the policy arena, and the issue is sure to be addressed further as
politicians look for cost savings in health care, especially as they
seek bipartisan solutions to reduce government spending on the Medicare
"entitlement." Both Barack Obama and Mitt Romney have indicated that
Medicare entitlement reform will be on the agenda regardless of who is
elected as president.
So what is the purpose of a public insurance program such as Medicare?
That's easy. It is or should be designed to ensure that beneficiaries
receive the health care that they need when they need it, without having
to face a financial hardship. The most effective design to accomplish
this would be to cover all necessary medical costs with no cost sharing
whatsoever. Financial barriers to health care would be eliminated.
But some say that the purpose of insurance is to protect against
catastrophic losses only, and that it is not intended to protect against
routine expenses. The problem with this definition is that far too many
individuals do not have enough disposable income to pay those routine
expenses, so high-deductible coverage often defeats the goals of
ensuring access and preventing financial hardship in the face of medical
What about a lower deductible and other forms of cost sharing such as
copayments and coinsurance? Same thing. There are still too many who do
not have enough disposable income to pay their share plus their other
Let's go back to what the purpose of a public health insurance program
should be. It should remove financial barriers to care. Does cost
sharing enhance this function? No, just the opposite. Cost sharing
deliberately introduces financial barriers to care. Why? As Baicker and
Levy state in this article, "Medicare — like any good insurance — should
not cover so much care so generously that beneficiaries end up consuming
too much care of questionable value and driving up costs for everyone."
This disregards the fact that it is almost impossible for patients and
even doctors to segregate out which care is "questionable."
Thus the intent of cost sharing is to control spending, not to improve
access nor to protect personal finances, both of which it can worsen.
The question then arises, is there any better way of controlling
spending, especially by methods that would be even more effective? Of
course. Simplify administration, establish global budgets, use regional
planning to budget capital improvements, reinforce the primary care
infrastructure, and switch to administered pricing to ensure fairness.
In other words, change to a single payer financing system. Other nations
have proven that you do not need cost sharing to control spending.
Though Medicare pays only about half of health care costs on average for
seniors, many soften the blow through the use supplemental plans such as
Medigap, retiree health benefit programs, or Medicare Advantage. These
authors and many others contend that patients must be exposed to first
dollar coverage (remember: to control spending, not to improve access
nor financial security), and this should be done by either banning
supplemental coverage or by penalizing it with surcharges, presumably to
be paid by the beneficiaries.
This concept is now so prevalent that we can fully anticipate that it
will be part of the entitlement reform that our politicians are
clamoring for. Medicare coverage is already inadequate, and they want
patients to have even greater exposure to health care costs. Instead, we
need to eliminate deductibles and coinsurance from Medicare to ensure
both access and financial security. Switching to a single payer improved
Medicare that covers everyone is the Medicare entitlement reform that we
really need, not just for our seniors but for the rest of us as well.