FOUR
* * *
ON MEDICARE AND OBAMACARE
ANOTHER IMPENDING FIASCO FOR America’s younger people and future generations involves the federal government’s control over health care. In the United States, trillions of dollars are spent each year on health care. The Centers for Medicare and Medicaid Services (CMS), a federal agency within the Department of Health and Human Services (HHS), estimated that national health expenditures were $2.8 trillion in 2012, or about 17.2 percent of America’s Gross Domestic Product (GDP).1 Others have noted that there are hundreds of billions in hidden costs that should be added to that number, such as costs to families who serve as home caregivers and money spent on vitamins, bringing the total to over $3 trillion annually.2
But the amount spent on health care is not, by itself, the key. North Korea’s tyrannical regime spends a lot less per person on health care than the United States and no one in his right mind would advocate switching systems. Similarly, Bangladesh, also among the world’s poorest nations, spends a far lower percentage of GDP on health care, a mere 3.6 percent.3 Most Americans would agree that there are few human and moral priorities more important than the mental and physical health of an individual or family. The key problem in America is the increasingly centralized role of government in the provision of health-care services, which does, in fact, become administratively unmanageable and financially unsustainable over time. Top-down command-and-control decision-making, combined with political and social engineering and redistributive subsidies, destroy the application of genuine insurance practices; distort and eventually contract the marketplace; hugely inflate costs; generate widespread economic inefficiencies, unpredictability, and scarcity; and, severely diminish the quality of health-care services and their availability to countless patients.
The federal government provides health insurance, funds to state health-care programs, or direct care to the elderly (Medicare), the poor (Medicaid), the children of those not poor enough for Medicaid (Children’s Health Insurance Program or CHIP), the military (TRICARE), and veterans (the Veterans Administration). The largest of the programs, Medicare, provides health-care coverage to nearly all seniors over the age of sixty-five. In 2014, about 54 million individuals were eligible for Medicare (45 million seniors and 9 million disabled individuals) for a total cost of $612 billion.4 As with Social Security, the scope of covered individuals and services has grown significantly since Medicare’s inception in 1965. And like Social Security, it has required ever greater federal taxes and subsidies to support it. Meanwhile, the number of individuals retiring and becoming eligible for Medicare is soaring. Once again, the ratio of younger workers to older beneficiaries is declining. Moreover, Medicare’s financial condition is even worse than Social Security’s, as its expenses are growing at a faster rate. Nonetheless, in 2010 the federal government’s role in health care hugely expanded in depth and scope with the adoption of the mammoth Patient Protection and Affordable Care Act, or Obamacare. One indication of the size of this new program is that the original statute was well over two thousand pages in length. By 2013, tens of thousands of pages of related regulations were issued, totaling almost 11,600,000 words.5
The time is not far off when federal health-care programs, combined with Social Security, will actually consume the vast majority of the federal budget, leaving little room for much else. In fiscal year 2013, 41 percent of the federal government’s expenditures supported just Social Security and Medicare.6 The Congressional Budget Office’s (CBO’s) long-term budget projections, using a baseline of current spending, concludes that by 2039 federal spending for Social Security and the country’s major health-care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and Obamacare) will grow to 14 percent of GDP. That is twice the average over the past forty years.7
In addition, state budgets are now swamped by health-care spending, in particular Medicaid. Medicaid consumes almost 26 percent of total state expenditures. It is administered by the states with partial financial support from the federal government.8 One of the major provisions of Obamacare was an expansion of Medicaid, in which states were enticed with initial federal subsidies to cover even more individuals. Though Medicaid was once considered a program solely for the poor, the eligibility requirements were loosened to cover those making 138 percent of the poverty line—that is, an annual income of $16,105 for an individual and $32,913 for a family of four.9 Since the expansion went into effect, 9.1 million people have been added to Medicaid.10 In return for covering more people, the federal government agreed to pay the states 100 percent of the additional costs for the first three years, which decreases to 90 percent by 2020.11 Thereafter, which level of government is responsible for funding and for how much cannot be known. However, already Medicaid enrollment and spending under Obamacare are soaring.12 But in the end, younger people and future generations will bear the brunt of the financial hardship.
Again, the CBO has declared that the size and growth of the federal debt, most of which is owing to unfunded entitlement liabilities—especially Medicare and Social Security—is a threat to the future viability of the nation. “The large amount of federal borrowing would draw money away from private investment in productive capital in the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal . . . ; [f]ederal spending on interest payments would rise, thus requiring higher taxes, lower spending for benefits and services, or both to achieve any chosen targets for budget deficits and debt; [t]he large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises.”13 “As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.”14
As many younger people have no idea how Medicare works and do not have much interest in the subject, despite its ominous drag on their future, a short tutorial may be useful.
Medicare was signed into law in 1965 by President Lyndon Johnson. He described it as another insurance system: “[T]hrough this new law . . . every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age.”15 Today Medicare is administered by the Centers for Medicare and Medicaid Services (CMS). It originally worked through two components: Part A, Hospital Insurance (HI), which covers costs associated with stays at hospitals, hospices, and nursing facilities; and Part B, Supplementary Medical Insurance (SMI), which covers doctors, outpatient treatment, and durable equipment.
In 1997, Congress and President Bill Clinton expanded Medicare coverage to include Part C, Medicare Advantage (MA), which set up a system allowing the selection of health insurance through private companies, which, in turn, are subsidized by the federal government. (Most participants choose Parts A and B.) In 2003, Congress and President George W. Bush again expanded Medicare coverage to include Part D, prescription drug plans.
Part A automatically covers an individual based on age or disability. Like Social Security, Part A HI is in theory financed primarily through the Federal Insurance Contributions Act (FICA) payroll taxes on employees and employers. Employees pay 1.45 percent of their earnings, which is matched by the employer, and the self-employed pay the full 2.9 percent. This rate used to have the same cap on income as Social Security, but the cap was completely removed in 1990. When the program started, the tax rate was only .35 percent on the first $6,600 of income, the same tax base as Social Security. Johnson claimed that the average worker would pay about $1.50 a month for hospital insurance protection in the program’s first y
ear.16 Within six years, however, the rate jumped from .35 percent to 1 percent a year, a 185 percent increase.
By contrast, Part B is voluntary. It is said to be a form of insurance, although it actually does not function that way, but it does require the payment of premiums and copays. In 1966, the premium was set at $3.00 a month. Each year the premium changes, and the premiums are also adjusted according to certain income levels. The Congressional Research Service (CRS) reports: “The standard monthly Part B premium for 2014 is $104.90. Higher-income beneficiaries, currently defined as those with incomes over $85,000 a year, or couples with incomes over $170,000 per year, pay $146.90, $209.80, $272.70, or $335.70 per month, depending on their income levels.”17 Part D, the prescription drug program, is also voluntary and is funded mostly by premiums and general tax revenues. As with Part B, it initially provided for a uniform premium, but now the formula includes higher premiums on higher earners.
The history of Medicare is similar to that of Social Security. It was first touted as an insurance system, but it never was. And it has grown into a centralized, bureaucratic octopus with tentacles reaching in every direction.
One thing is clear: Younger people are taxed today for promises of comprehensive health-care coverage in their senior years, which is simply impossible. Over the longer run, the Medicare design was political in nature and could never work as a rational economic model. Like Social Security, today it is simultaneously expanding and imploding.
Of course, those who have already retired have benefited considerably from the system. The evidence demonstrates that an average worker who retired in 2011 would have paid $60,000 in Medicare-related taxes yet received $170,000 in benefits.18 This system cannot last forever, and it will not, given reality and mathematics. Indeed, in 2014, the trustees overseeing Medicare declared that the HI trust fund will run dry in 2030.19 The trustees also predict that Medicare will take an even larger share of the nation’s resources, nearly doubling from 3.5 percent of GDP in 2013 to 6.9 percent in 2088.20 In fact, the present value of the HI trust fund’s unfunded obligation through 2075 is $3.6 trillion.21 Consequently, not only will future generations lose the tax “contributions” they have “paid into Medicare trust funds,” for they will no longer exist even in theory, but they will have to bear the impossible burden of Medicare’s massive unfunded obligations.
In addition, Medicare has a perverse effect on the delivery of quality health-care services, which will only exacerbate over time. For example, obviously the health-care system cannot function well without the services of doctors and other providers. Doctors are largely paid on a “fee for service” basis. Initially, Medicare reimbursed doctors for “usual, customary and reasonable” fees. Such a vague standard paid by a distant third party was soon blamed for rising costs. Therefore, about twenty-five years ago, the federal government created an incredibly complex standardized payment scheme—the Resource-Based Relative Value Scale (RBRVS). This system sought to assign a numerical value to the multitude of medical services. As described by the American Medical Association (AMA): “In the RBRVS system, payments for services are determined by the resource costs needed to provide them. The cost of providing each service is divided into three components: physician work, practice expense and professional liability insurance. Payments are calculated by multiplying the combined costs of a service by a conversion factor (a monetary amount that is determined by the Centers for Medicare and Medicaid Services). Payments are also adjusted for geographical differences in resource costs.”22
The RBRVS system assigns a relative value to a given procedure. The values are updated periodically by a handful of individuals from the AMA who serve on the Relative Value Update Committee (RUC). They meet in secret each year to discuss and reach their decisions. The federal government adopts nearly all of the RUC’s recommendations. The effects of this centralized, byzantine approach and point system are not limited to Medicare because of Medicare’s size and influence over the entire health-care system—roughly 80 percent of private insurers use the point system for their own payment structures.23 Therefore, the impracticability of Medicare’s centralized management and archaic decision-making practices also significantly impairs the broader private sector.
The absurdity of the federal government’s top-down control over health care is perhaps best explained with a simple example. The retail price for a loaf of bread is different in New York than it is in Alabama. There are differences in price for a loaf of bread between towns and cities in the same state—such as Brooklyn, New York, and Utica, New York. The reason is there are untold factors relating to resources, allocation, labor, administration, and so on, which go into the cost of planting, harvesting, transporting, processing, baking, packaging, labeling, and transporting again a loaf of bread, as with any product. There are also countless regulations and taxes at every level of the process, from beginning to end, and they differ from jurisdiction to jurisdiction.
Imagine the disorder and dislocation, including cost increases, supply shortages, and instability, if the federal government were in charge of supervising the production and delivery of a loaf of bread. It has been tried by many totalitarian regimes with terrible consequences. Yet the health-care system, which the federal government increasingly monopolizes, is far more complicated and intricate than the numerous processes involved in putting bread on the family table.
Unsurprisingly, another outcome from government’s omnipresence in the health-care system is vast levels of fraud, waste, and abuse. On June 25, 2014, the General Accountability Office (GAO) reported: “We have designated Medicare as a high-risk program since 1990, in part because we found the program’s size and complexity make it vulnerable to fraud, waste, and abuse. Although there have been convictions for multimillion-dollar schemes that defrauded the Medicare program, the extent of the problem is unknown. There are no reliable estimates of the extent of fraud in the Medicare program or for the health care industry as a whole. By its very nature, fraud is difficult to detect, as those involved are engaged in intentional deception.”24
Nonetheless, the GAO pointed out that in 2013 “The Centers for Medicare & Medicaid Services . . . estimated that improper payments in the Medicare program were almost $50 billion in fiscal year 2013, about $5 billion higher than in 2012. Improper payments may be a result of fraud, waste, or abuse, but it is important to distinguish that the $50 billion in estimated improper payments reported by CMS in fiscal year 2013 is not an estimate of fraud in Medicare. Reported improper payment estimates include many types of payments that should not have been made or were made in an incorrect amount such as overpayments, underpayments, and payments that were not adequately documented.”25
Sadly, there is more. There exists another layer of complexity that is bewildering to patients and adds heavy administrative costs to health-care providers: medical codes. The AMA developed Current Procedural Technology (CPT) codes in the 1960s, which assign a number for every service a doctor or facility provides as a way to introduce uniformity in medical records. There are thousands of such codes, which are updated each year. Now these codes have spawned more codes. In 1983, CMS incorporated CPT codes into the billing process for Medicare through the development of the Healthcare Common Procedure Coding System (HCPCS).26 HCPCS codes include CPT codes for services as well as codes for supplies, devices, and equipment provided to patients. There is also an outpatient code system for diagnoses and disorders—International Classification of Diseases, 9th revision, Clinical Modification or ICD-9-CM codes. Health-care providers are required to use all these codes on claims for reimbursement from Medicare and private insurers.
As the consolidation of health-care management tightens further, the federal government is about to require a switch from ICD-9, which has 13,000 codes, to ICD-10, which has 68,000 codes.27 In the new system, there are separate codes for injuries sustained while “sewing, ironing, playing a brass instrument, crocheting, doing handicrafts, or knitting” or injuries caused by a bi
rd, duck, macaw, parrot, goose, or turkey.28 Tracking existing injuries will also require more intricate codes: “the one code for suturing an artery will become 195 codes, designating every single artery, among other variables.”29
This unfathomable coding system, which engulfs doctors’ offices in suffocating administrative minutiae unrelated to the provision of timely and quality medical services, is also prone to error and outright fraud. In May 2014, the Office of the Inspector General (IG) for the HHS conducted a review of doctors’ reimbursement claims for office visits and other evaluations (E/M services) for calendar year 2010. It discovered that “Medicare inappropriately paid $6.7 billion for claims for E/M services in 2010 that were incorrectly coded and/or lacking documentation.”30 These payments accounted for 21 percent of Medicare payments for this type of visit for the year. The IG also discovered that 42 percent of claims for such services in 2010 were incorrectly coded—billing too much or too little—and 19 percent lacked documentation.31
Despite the backdrop of spiraling costs, centralized decision-making, administrative overkill, and widespread waste, fraud, and abuse, in 2010 a Democratic Congress passed, and Obama signed, the most dramatic expansion of federal control over health care since the passage of Medicare and Medicaid nearly fifty years earlier—Obamacare.