Capital / Cash Management

Why Are Medicare Costs Rising So Fast? It’s Actually Not Complicated

Medicare is complicated.  It’s also expensive to government and individuals. It’s not simple but can be understood. My last post was Why Are Medicare Costs Rising So Fast? It’s Actually Not Complicatedthe beginning of a primer on Medicare. Recapitulating, Medicare covers about 50 million older Americans for general health care and covers about 75% of covered services or 50% of total health care costs of these seniors.

Medicare, as the largest single insurer, sets the standard for reimbursement rates across all insurers. It tends to pay slightly less than costs, leading hospitals and doctors to cost shift or charge others a higher rate. This increases your company’s health insurance costs. Medicare costs are increasing at about 4% per year and will reach $1 trillion by 2022, an unsustainable cost to the government (tax payer).

There are multiple “parts” to Medicare:

  1. Part A is principally for hospital care
  2. Part B is for largely for physician costs
  3. Part C or Medicare Advantage is a private insurer managed care alternative to Part A which incorporates Part B and often Part D into one plan and offers certain otherwise non-covered services such as dental, hearing and vision exams.
  4. Part D is the prescription drug benefit.

Each of us and our employer (your company) pays 1.45% (total of 2.9% combined or for a self-employed worker) of earned income into the Medicare Trust Fund each year for Part A.

Beginning in 2013, the tax is 3.8% on earned and unearned (i.e., salary or wages plus interest, dividends and capital gains excluding interest on municipal bonds) income above $200,000 for a single person and $250,000 for a married couple. The money paid in is not invested and set aside for use when the individual reaches 65. Mostly, it goes to pay for the hospitalization costs of today’s beneficiaries – it is a generation transfer tax.

As the population continues to age and continues to live longer, there will a relatively smaller working population to pay the annual bills. It is estimated that the current 50 million enrollees will expand to 80 million by 2030 and the ratio of workers to enrollees will drop from 3.7/1 to 2.4 /1. So the combination of rising healthcare costs, more beneficiaries living for longer times and a relative shrinking of the taxable base means that the Trust Fund will ultimately become insolvent.

Medicare enrollees tend to have chronic illnesses; 85% have at least one and 50% have three or more. Aging brings on chronic impairments (“old parts wear out”) such as impaired vision, hearing, mobility, dentition, bone strength and cognition. Additionally, enrollees also suffer from the chronic illnesses largely but not entirely the result of life styles. These include obesity, hypertension, heart disease, diabetes, chronic lung disease, cancer and many others.  Chronic diseases are inherently difficult to manage, will last a lifetime (some cancers excepted) and are expensive to treat. Chronic illness results in over 70-85% of claims paid.

But these chronic illnesses consume more than they need to for a few very clear reasons.

1.  A lack of quality preventive care and attention to wellness is one reason.

This is an issue that many of you are addressing with in-house wellness programs. These have an immediate benefit to your company and your employees but it will also have a long term impact on the health of older Americans i.e., whether they will have as many (expensive) chronic diseases when they retire as projected.

2.  There has been the lack of careful care coordination.

These patients need a full multi-disciplinary team of providers to assure complete care (e.g., the diabetic patient will need an endocrinologist, nutritionist, exercise physiologist, podiatrist, ophthalmologist and others over time).

But any good team needs a quarterback and the logical choice, the primary care physician, has been marginalized by Medicare for years. The result is that PCPs only allot about 15 to 20 minutes per patient visit (which translates into about 10-12 minutes of actual face time) – not nearly enough time to deal with multiple chronic issues, multiple prescriptions let alone take the time to call a specialist to explain the rationale for a referral and seek a prompt appointment for the patient.

These are the basics of Medicare and the major reasons for continuing cost escalations. The increasing costs mean that it makes little sense to promise “Medicare as we know it” to persist in its current state into the future. Change is mandatory.

The question is not whether there will be change but how to make changes in a manner that protects the medical and the financial health of the beneficiaries both today and into the future while keeping the benefits affordable. This is a critical issue for your company if only because it will be paying into the Trust Fund in an amount set by Congress in the years to come.

So you and your leadership colleagues across the nation need to be involved. The Democrats and the Republicans both agree that change is mandatory but they offer widely divergent approaches to cost containment. They need to hear your voice.

Category: Capital / Cash Management Performance Management / HR

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About the Author: Stephen Schimpff

Stephen C Schimpff, MD is an internist, professor of medicine and public policy, former CEO of the University of Maryland Medical Center, chair of the Sanovas, Inc. advisory board, senior advisor at Sage Growth Partners and is the author of …

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  1. Mark A Carbone

    September 28, 2013 at 10:08 am

    I would say you missed the #1 reason – Government waste. Government has never been the solution. They work for us and have no incentive to do better.

    Preventive care is huge but that’s not solving the problem. We must stand up to our elected officials who work for us and tell them we’ve had enough.

    This year was the IRS’s best year on the books for collecting money from us. They have not proved they can ethically manage our money and yet we poor more in.

    If we don’t contain and hold them accountable to the same standards we CEO’s are held to and we hold our employees to, the government will never improve.

    Doing nothing is making a choice. We live in a special time in American history. We are at a tipping point. Time to plug the dam guys and gals.

    • jasonroth

      May 27, 2014 at 12:20 pm

      Thanks for the comment. We agree, sharing ideas and coming together is what Executive Street is all about!

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