Medicare Medicare was established in 1965 to guarantee elderly Americans access to quality health care regardless of their financial circumstances. Medicare spends more than $200 billion a year and it will increase, partly because greater numbers of Americans will become eligible for coverage when the baby boomers begin to turn sixty-five after 2010. According to the article The Political Economy of Medicare by Bruce C. Vladeck, to understand the political economy of Medicare it is necessary to view it from three perspectives.
The first one is Medicare as redistributive politics, second is Medicare as special-interest politics, and third is Medicare as distributive politics. In the next few paragraphs I will focus on economic analysis of Medicare system described in this article. Much of the discussion about the Medicare as redistributive politics relies on the fact that Medicare is a “mildly progressive income-transfer program. ” Medicare funding comes from four major sources: payroll taxes, income taxes, trust fund interests and enrollee premiums.
As Vladeck stated in his article, Medicare helps in reducing poverty for the elderly and disabled by just transferring income from working-age persons to retired or disabled former workers. There are two parts in financing of Medicare. Part A (hospital insurance) comes from payroll taxes paid on and by all workers in the U. S. labor force. Individuals who have paid into the social security system for ten years are automatically enrolled in Part A upon reaching their sixty-fifth birthday.
If the individual uses hospital treatment, he or she will pay a deductible equal to the cost of the first day in the hospital; Medicare will pay for days 2-60 with no coinsurance requirements; days 61-90 would be covered but the patient must pay coinsurance equal to 25 percent of the deductible; and days 91-150 would be covered if the lifetime reserve days are available with the patient paying coinsurance equal to 50 percent of the deductible amount. Medicare does not pay any hospital cost after 150 days. The other part, Part B is supplemental medical insurance.
An individual pays a monthly premium which is usually deducted from the monthly Social Security check. Participation in Part B is voluntary, however it pays for physician’s services and outpatient hospital services (emergency room services, diagnostic testing, laboratory services, outpatient physical therapy, speech-pathology services, and durable medical equipment; Health Economics & Policy, James W. Henderson, pg. 347). As Vladeck stated in his article, Medicare accounts for as much as 40 percent of the income of the average U. S. ospital. The reason for this is that Medicare makes payments to providers of services, not directly to beneficiaries. Physicians who provide care to Medicare patients have to decide whether or not to accept the Medicare allowable fee as payment in full for the services provided. To get the bills paid for the services provided, physicians often use balance billing. Using balance billing, physicians bill a patient for the difference between the physician’s usual charge for a service and the maximum charge allowed by the patient’s health plan.
However, physicians complain that the Medicare allowable fee is below their average cost of providing medical services, so a common practice is cost shifting to private patients. A part of the income for the hospitals, especially teaching hospitals, is the prospective payment system (PPS). This kind of payment is determined prior to the provision of services. It is a feature of many managed care organizations that base payment on capitation. Discussing Medicare as interest-group politics, Vladeck mentioned the impact that Medicare contractors have on the Medicare itself.
By Medicare contractors Vladeck refers to private insurance companies that perform the basic administrative tasks of the Medicare fee-for-service program. A system financed primarily through retrospective fee-for-service insurance reimbursement is open-ended. Providers are able to pass through all their costs, no matter how inefficient the production of services. There is no incentive for providers to search for more efficient methods of production, and patients have no incentive to for providers who offer lower prices.
Vladeck claims that Medicare contractors, together with hospitals, doctors, and HMOs have a major stake in Medicare policy, and ultimately behave as expected in political system. In the discussion about the Medicare as distributive politics, Vladeck emphasizes the fact that the “geographic distribution of Medicare dollars has become a matter of increasing attention. ” The biggest example of Medicare’s allocation of its dollars comes in treatment of payment rates for capitated plans in the Balance Budget Act, of 1997 (BBA).
Capitation itself is a payment method providing a fixed, per capita payment to providers for a specified medical benefits package. Providers are required to treat a well-defined population for a fixed sum of money paid in advance without regard to the number or nature of service provided to each person. Vladeck claims that there is no right way for allocating capitated payments across communities, because the dynamics of individual markets vary specifically on price. The future of Medicare is very unpredictable.
Changes that might be in the effect by 2010 solely depend on whether Americans will fully accept higher fiscal responsibility of the health cost. The government, I believe will inforce the system of Medical Savings Accounts to expand the health care coverage. A Medical Savings Account, or MSA, is a saving account that can be used to pay medical expenses not covered by the insurance. Contributions to the plan are deductible from an accountholders’ federal income tax and, where permitted, from state income tax.
Self-employed individuals can accumulate funds in the account from year to year, and those with individual MSAs can make contributions themselves. Employers with small group MSAs may make contributions on behalf of employees, or employees may make the entire contribution. The MSA must be coupled with a high-deductible medical insurance plan, sometimes known as a “catastrophic” plan. Under such plans, individuals pay medical bills out of their own pocket up to the deductible but have medical coverage in case of serious illness or accident.
There are heated debates over the MSAs program. If people who enroll in MSA’s get sick, they are likely to face high out-of-pocket costs because of unfunded MSA’s and high deductibles. Another debate is over the fact who benefits the most from MSAs. Opponents of the MSAs claim that higher income people benefit more from MSA’s than do lower income people for several reasons. Higher income people are more likely to be able to afford high deductibles than are low income people.
Also, higher income people are more likely to benefit from employer-paid premiums and MSA contributions than are lower income people. Another issue with MSAs is that higher income people would receive larger tax benefits than lower income people. Nevertheless I believe that the reform in Social Security and ultimately in Medicare should be focused on the market approach, to where individuals would be solely responsible for spending their own money.