November 02, 2012


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Interviewed by Andy Hirsch

LEWISBURG, Pa. — With the election just days away, Amy Wolaver, associate professor of economics, analyzes the debate over Medicare, health care costs and the $716 billion figure that keeps popping up. 

Question: Does President Obama want to "cut" $716 billion from Medicare?

Answer: During the debates we heard a lot about that "$716 billion" figure. The Romney campaign claims President Obama wants to cut $716 billion from Medicare, which doesn't correspond to a cut in benefits. You have to put that number in context.

What we have now with Medicare is known as a defined benefit plan. Everybody is covered for a certain level of defined health care expenses. The current system includes extra payments to hospitals that provide more of what we call "uncompensated care." In other words, if you show up at the hospital and are treated, but you're uninsured, then the hospital has used resources that it's never going to collect revenues for. To make up for these revenue shortfalls, the government compensates hospitals that have high uncompensated care loads through a Medicare funding stream. But if health care reform holds and everyone is insured, those extra payments for uncompensated care won't be necessary because hospitals will be collecting reimbursements directly from the insurers. We won't need to spend that portion of the $716 billion anymore.  

In addition, some Medicare eligible citizens opt out of the traditional Medicare structure into private plans, called Medicare Advantage; the private plans receive a premium payment from the government for this coverage. Many analyses have shown that the people who opt into Medicare Advantage plans are healthier, and therefore less costly, to the insurers than the average Medicare patient, but the premiums we've paid out do not account for that difference. These private insurers were essentially getting a substantial transfer payment from the federal government; those extra payments are being lowered under the Affordable Care Act, which is also part of that $716 billion figure.

Q: How does Governor Romney's plan differ?

A: An alternative version of Medicare, which has been proposed by Representative Ryan, would change the structure to a fixed amount of money, a certain level of support, and then individuals will go out into the market and purchase health insurance on their own. It's called defined contributions — the government is going to have a defined amount to contribute to everyone's care. Just as Republicans attack Obama's model by referring to it as a "cut" in Medicare, Democrats call the Romney/Ryan model a "voucher" system, which is a scare word for a lot of people. The basic idea is that individuals could buy a policy that costs less than that defined amount, and may receive a rebate check, but if you want more generous policies, you pick up the extra costs. The theoretical idea is that competition in the insurance industry will be encouraged and this mechanism will keep health care cost inflation under control.

The question to ask is, will the private market compete in terms of providing good, quality insurance while somehow lowering the cost of providing the care? Or will the competition come in the form of insurers trying to select the healthier, lower cost consumers. If that happens, folks who have illnesses, pre-existing conditions, chronic health conditions — they're going to be disadvantaged in that market. They're going to get a defined contribution, but their costs and therefore premiums will be more expensive than the fixed contribution, which could be problematic for access.

The Ryan plan tries to deal with this problem through risk adjustment. Basically, if one insurer has mainly healthy beneficiaries with low costs, and another insurer has mainly beneficiaries with higher costs, the Ryan plan takes money away from the first insurer and gives it to the second. You need this type of risk adjustment to get the market to focus on providing lower cost coverage rather than just competing on getting better consumers, healthier patients in their pool. But, that kind of risk adjustment is very complicated. If you're really going to do it well, you'll need to add to government bureaucracy to manage it.

Q: What else needs to be done to address the financial problems with Medicare?

A: We've been discussing the insurance side of the issue, the financing side. But to get these expenditures under control you have to focus on the health care market itself. The underlying issue is providers know more about medical care than the patients do. So we have a market where the supplier of the product is telling us, the consumers, what to demand. The debate between the two sides is, basically, do we have this defined contribution approach to try to encourage consumers to have more say in the market, and try to cut down on actual spending and health care use? Or do we have additional mechanisms that we build in through the power of the government as a major purchaser of health care, and use that power to try to change physician and provider behaviors to encourage quality care with the least cost possible?

Like most policy debates, we're making our best educated guesses on what will work. But both sides realize that costs for Medicare, and the health care market overall, are issues that need to be addressed. We spend more per capita in the U.S. than any other country with little perceived or measurable added health benefits, and that's the real problem.   

Contact: Division of Communications