Medicare's real mistake

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Lastweek,the Medicare Trustees announced for what seemslikethe thousandth time that its actuaries estimate Medicare will go bankrupt, which is like saying that a car will run out of gas if you drive it long enough without a refill. Supposedly, the program might -- with the emphasis on might -- run out of money seven years earlier than previously estimated because the chief actuary, a Mr. Richard Foster, has changed his projection of what the program will spend and take in because in 2003 it spent more and took in less than what he estimated it would in his last report to Congress. Multiplying that gap over 10 years leads to a geometric drain on the trust fund.

Of course, any number of things could change that estimate next year. For instance, a couple of months before the 2000 election, Mr. Foster found an accounting error that -- surprise! -- when corrected generated enough money to push the date Medicare would go broke beyond 2008 (when President Al Gore would have been finishing up a second term) to 2020.

But I digress.

Medicare estimates are based on a very static set of assumptions that predict that nothing about the health of seniors or the quality or innovation of health care will change. That is not a very smart assumption. It's like assuming that in 1960 we would never get cable or broadband or digital services to augment black and white TV or that America's productivity rate in 1990 would stay the same for the next 10 years instead of increasing because of computers and advances in manufacturing technology. Assuming that nothing will ever change -- that every dollar spent is the same no matter what you spend it on -- is a recipe for mediocrity and failure.

Similarly, nothing in Mr. Foster's assumptions -- or those of the Congressional Budget Office (CBO), for that matter -- takes into account that spending more on drugs or spending health-care dollars differently can reduce total Medicare spending. For instance, if you give a senior with significant risk factors for a heart attack a medicine that reduces the incidence of heart attacks by 30 percent, or if you reward health plans for treating seniors with the most serious illness or for preventing heart disease, it will actually improve productivity. Seniors will live longer and spend less on other forms of health care. Study after study shows that to be the case.

Significantly, Mr. Foster's memosuggeststhat Medicare will spend lots more on seniors than Congress estimates and spend it in just the ways described above. Poor seniors without drug coverage and health plans with seniors that use a lot of drugs will rapidly sign up for drug benefits. Private health plans, in turn, will receive higher payments to treat the sickest patients for the first time in the program's history, while seniors will receive premium rebates and extra benefits. The combination will encourage more seniors to join private health plans and leave traditional Medicare. (CBO figures Medicare will find a way to shortchange health plans with higher costs as it did in the past, which would reduce the number of plans participating.)

Both of these changes reflect a fundamental shift in the way Medicare spends money. For the first time, Medicare will spend more money on the cost-effective medical technologies like drugs, on the sickest seniors and on prevention. The same is true for their managing disease before it gets worse, as opposed to just paying a flat fee for services regardless of effectiveness.

A recent study in the New England Journal of Medicine found that taking 80 milligrams of certain cholesterol medicines will reduce death by 28 percent in people with acute heart disease. Today, millions of seniors who could benefit from intensive therapy are not receiving it. Investing in their treatment would cost tens of billions each year in drug spending but would save up to $80 billion annually in other medicines for stroke, bypass surgery, stents, angioplasties, nursing home costs and hospitalizations. Thisisprogressfor Medicare because federal dollars targeted on prescription drug coverage will be more productive and reduce total costs.

As seniors live longer and healthier lives through prescription drug coverage and expanded private plan participation, Medicare's financial day of reckoning will be postponed. Neither Mr. Foster nor CBO take these changes into account. Nor do many in Congress and in the interest-group community, including the AARP, who are hostile to the idea of using money to improve the quality of care instead of propping up the old Medicare program. Instead, they want to destroy reforms that shift more money and people toward the best health plans and best available medical technologies.

That's intellectual bankruptcy, which is a more expensive assumption than Mr. Foster can imagine.

Robert Goldberg is director of the Center for Medical Progress at the Manhattan Institute.