The Gang of Ten’s “Solution”: This is What Happens When You Give Five People Too Much Power– Part 1

Last night, the news broke that the “Gang of Ten” (the Senators who have been trying to break the deadlock between moderates and liberals) had come up with a two-part alternative to the public option.  Under their proposal, Americans 55 to 65 could buy in to Medicare if they choose—and if they could afford it. Meanwhile, for Americans under 55, the public option would be replaced with non-profit private insurance plans overseen by The Office of Personnel Management, the group that now administers the Federal Employees’ Plan.

Begin with expanding Medicare to people 55 to 65. This is an idea that I wrote about in Money-Driven Medicine. Bruce Vladeck, who ran Medicare during the Clinton administration, was convinced that Medicare could compete successfully with private insurers, in large part because its administrative expenses are so much lower. I agree that in the late 1990s, it would have been a good idea.

But since then the cost of health care has more than doubled, thanks to a combination of soaring prices and the fact that each year, health care providers are prescribing more products and more services. In just seven years, the volume of MRIs done in this country doubled. From 1986 to 1996 the number of visits to free-standing surgical centers rose by 300 percent. Over the past ten years, private insurers have paid out 8 percent more, each and every year, in reimbursements to doctors, hospitals and patients. While Medicare has been trying to keep some fees flat, its outlays for care have been rising by roughly 6 percent a year.

Just how much would it cost someone to buy into Medicare today? Over at The Health Care Blog, Matthew Holt estimates the premiums would run about $10,000 annually. That’s for an individual, not for a couple.

If that seems high, consider this: Today, employer-sponsored coverage for an individual costs roughly $6,000. Sure, you can find something for less, but it will have a very high deductible, and/or will be filled with holes that you don’t discover until you’re sick. Maybe it covers surgery, but not rehab after surgery. If you want comprehensive coverage, assume you and your employer will pay a total of $6,000—or more.

And that’s the price for people in an enormous pool of 18-65 year olds. At most large companies, the number of employees under 50 outnumbers those over 55. That’s why insurers are able to cover everyone at an average cost of $6,000. 

The original public option would have been open to uninsured and self-employed Americans of all ages, plus many who work for a small business. The gang of 10’s “solution” narrows the pool to 55-65 year-olds. These are folks who need—and use—medical care. If you suffer from a chronic disease like diabetes, depression, or heart disease, it will probably begin to catch up with you in your 50s and 60s. About 77 percent of all cancers are diagnosed in people age 55 and older.

When you isolate this group, insurance premiums become very expensive. Granted, Medicare’s lower administrative costs should reduce premiums by about $1,000 per person (or by $2,000 for a family plan according to Commonwealth Fund estimates), but even after  factoring in those savings, Matthew’s estimate that it would cost Medicare $10,000 per person to cover Americans 55 to 64 seems reasonable.

By contrast, Washington Post columnist Ezra Klein speculates that perhaps a Medicare program for 55-64 year olds would have enough clout to negotiate premiums that are “20 percent to 30 percent” lower than the premiums that private insurers charge. This ignores the true cost of care for middle-aged Americans. Keep in mind; private insurers enjoy profit margins of just 3%, while the amount they pay out for care is rising 8 percent a year. Premiums are high because our over-priced and inefficient health care system costs so much.

As hospitals and doctors order more tests, do more procedures and prescribe more drugs, expenses mount, and until we rein in the waste—and refuse to pay exorbitant prices for many products and procedures—Medicare won’t be able to negotiate anything like the low premiums that Klein envisions.

Over the next three years, I have argued, Medicare reforms outlined in health care legislation could begin to reduce spending. But not by 20% to 30%. And if a Medicare buy-in becomes available in 2011 (as the Gang of 10 proposes), that gives Medicare just one year to slash spending. It won’t happen. (Already hospitals and specialists are insisting that Medicare for the Middle-aged should pay more than Medicare shells out today.)

Meanwhile, Medicare cannot afford to subsidize 55-64 year-olds who opt into the system. While the compromise proposal would let them buy in to Medicare in 2011, it does not provide any subsidies until 2014. (Perhaps this will change; Howard Dean has said that if the Medicare buy-in for people 55-64  does not include subsidies, this could be a deal-breaker in conference negotiations.)

But if the buy-in did include subsidies, a couple with income over $58,200 would not be eligible for government help. At the same time, it’s hard to imagine where that couple would find $20,000 annually to buy insurance. Of course, legislators could raise subsidy levels—but that probably would mean hiking someone’s taxes. I doubt Joe Lieberman would approve…

The alternative is to turn “Medicare for the Middle-Aged” into a cheap plan with skimpy benefits. I’m not enthusiastic about selling plans that hardly deserve the name “insurance” to “Young Invincibles,” and I  certainly don’t see the point of peddling such plans to middle-class 55 to 64 year-olds. They need chronic disease management and preventive care as well as catastrophic insurance. And if deductibles and co-pays are too high, they won’t use the insurance. 

Keep in mind that median joint income for households in this age group is $54,500. Roughly one-third of these households earn less than $35,000.

The critical flaw in this proposal is that the Medicare buy-in covers such a shallow pool of older people. Without help from Americans under the age of 55, the insurance will be prohibitively expensive. It’s worth noting that in the past, proposals to open up Medicare suggested allowing a cohort of very young Americans to join the plan, along with 55 to 64 year-olds.

Who then will be helped by the Medicare expansion? The most affluent middle-aged Americans. One-fifth of households in this age group show joint income of more than $100,000. Some of them could no doubt afford $20,000 to purchase insurance for two—though many in that cohort already have good employer-based insurance.

The neediest middle-aged middle-class Americans—those who don’t have employer-based insurance, and can’t afford the high price of individual insurance in the private sector—will be left out in the cold. Of course, this will be their “choice”.  No one will tell them that they can’t buy insurance. They just won’t be able to afford it. Once again, we’re rationing by ability to pay.

This is not what I thought we meant by universal coverage.

In part 2 of this post, I’ll discuss what’s wrong with the idea of a plan that offers only private sector insurance and is overseen by The Office of Personnel Management, the group that administers the supposedly “popular” Federal Employees Plan. Talk to some postmen. Ask them how they like the plan. Take a look at the pricing, and the deductibles.

And someone remind me: Why exactly are we letting Joe Lieberman and a handful of moderates dictate the terms for national health reform?  Why are Democrats negotiating with themselves?