Whatever its flaws, Medicare is one of the few voices of rationality in healthcare finance. Due to the system's huge amount of leverage--it covers about 55 million Americans--it is able to negotiate prices for care that tend to be far lower than other payers. That big pharma lobbied to ensure that Medicare could not negotiate prices for drugs purchased in bulk shows the power of the program.
But Medicare is a closed system. If you're under age 65 or are not disabled, you can't enroll. If you earn more than a relative pittance, you also can't enroll in Medicaid or the Children's Health Insurance Program, which also keeps prices down for care. Those two programs cover even more Americans than Medicare--71.6 million.
Yet despite those huge numbers of Americans enrolled in government healthcare insurance programs, the majority of the country--the remaining 215 million or so--are either enrolled in commercial health plans or are uninsured.
This is where troubling trends often begin. Many of those insurance plans began as non-profits, but starting in the pro-business 1980s, many converted to for-profit and publicly-traded entities. That means their primary fiduciary obligations lies with their shareholders and not their enrollees. So premiums are pushed up in order to make numbers, not down in order to satisfy constituents. Meanwhile, hospital operators are looking for ways to make up the far slimmer margins they enjoy with Medicare patients, and the losses they often take from Medicaid and uninsured patients.
This trend may be best exemplified by a recent study undertaken by RAND Corp. and the Agency for Health Research and Quality and published in the journal Health Affairs. Its conclusion is both surprising and unsettling: The standardized payment rates for private payers were about 10 percent higher on average than Medicare between 1996 and 2001. But little more than a decade later, in 2012, the gap was 75 percent.
That dramatic difference can be evident in the earnings reported by major insurers. WellPoint, Inc., the for-profit successor of Blue Cross of California and now part of Anthem, reported net income of $549.1 million for 2002. For 2014, it was $2.6 billion-- a nearly five-fold increase. However, membership only tripled during that time period, from about 11 million to 37 million. UnitedHealth Group has had a more consistent growth to its earnings curve: It reported net income in 2003 of $1.35 billion with about 7.5 million enrollees. In 2014, its net income was $5.6 billion with 45 million enrollees, although as I mentioned recently, it expects a big ramp up in earnings for 2016.
Health plans such as Anthem and United have always given the same reasons for increasing premiums: Medical expenses keep on rising. Yet they almost always manage to earn more money as well. That money has to come out of somewhere--usually from patient's pockets these days.
While many of these insurers operate in multiple states, their business model is positively fragmented compared to Medicare. So, they bargain with providers on a regional rather than a nationwide basis, diluting their leverage.
Meanwhile, insurers permit themselves to be selectively competitive. United, for example, entered the state insurance exchanges tentatively and have all but said they plan to get out because they lose money on these patients. Again, the medical cost issue was mentioned, but I'm sure having to offer competitive premiums in the exchanges played a role as well.
Patients get stuck in the middle of all this. And as I have said ad nauseum, they do not have access to nearly enough price and other relevant information to make informed decisions about their healthcare. Given that hospitals primarily have to mind their leverage with payers and exert it completely against individual patients, this makes a grim sort of sense.
What does this all mean? Absent much tougher reforms, a widening gap. But the Health Affairs study made mention of a proposal floated last year by two Dartmouth healthcare economists, Jonathan Skinner and Elliott Fisher, and James N. Weinstein, the chief executive officer of the Dartmouth-Hitchcock health system. It was elegant but blunt: Cap commercial insurance hospital charges at 125 percent of Medicare.
"If every patient and every insurance company always had the option of paying 125 percent of the Medicare price for any service, we would effectively cap the worst of the price spikes. No longer would the tourist checked out at the ER for heat stroke be clobbered with a sky-high bill. Nor would the uninsured single mother be charged 10 times the best price for her child's asthma care," they wrote on the Health Affairs blog last year. "This is not just another government regulation, but instead a protection plan that shields consumers from excessive market power."
Of course, with Congress badly polarized and a barely functioning legislative body, such a cap will not be implemented anytime soon. Even if there were bipartisanship, if lobbying can ensure Medicare is barred from bargaining for drug prices, it is highly unlikely such a cap would be permitted by the hospital or even the insurance lobbies.
Eventually though, hospitals and payers will likely paint themselves into a corner on charges, pricing and premiums. Medicare may then be expanded dramatically in order to use its bargaining clout to rein in cost trends that are no longer tenable. In other words, Medicare for all--the irrational fear of many people in this country, but merely the single-payer system that exists in the rest of the civilized world. – Ron (@FierceHealth)