Privatizing Medicare


George W. Bush endorsed the privatization of Medicare in September
2000 when he was still a candidate for president, he did not give
Medicare privatization high priority during his first two years
in office. That changed last January. On January 3, the

York Times

broke the news that the Bush administration would
soon propose adding drug coverage to Medicare, but only on the condition
that Medicare be privatized. 

January 28, Bush used his second State of the Union address to announce
that health care reform was one of his “goals,” that “health
care reform must begin with Medicare,” and that Medicare “reform”
meant giving “all seniors…the choice of a health care
plan that provides prescription drugs.” Most observers, including
a number of Republican leaders, interpreted these remarks to mean
seniors who want drug coverage would have to leave the traditional
Medicare program (which now enrolls 86 percent of all Medicare beneficiaries)
and enroll in an HMO (HMOs enroll the other 14 percent of beneficiaries). 

campaign to privatize Medicare is going to be as weird, as unproductive,
and as entertaining as his bizarre campaign to privatize Social
Security has been. The latter campaign has been strange because,
on the one hand, Bush has refused to put a detailed proposal on
the table in the two-and-a-half years since he announced his intention
to privatize Social Security, but, on the other, he won’t stop
yacking about the issue. 

refuses to offer details on his Social Security and Medicare privatization
schemes for an obvious reason: He wants to be free to make impossible
claims for privatization—that it will save money and create
no losers. Bush tells us his Social Security plan (allowing workers
to invest a portion of their payroll taxes in retirement “accounts”
which, in turn, invest the money in stocks and bonds) will save
money for the Social Security program. But he also tells us his
plan will require no cuts in benefits for the elderly and near-elderly,
no increase in payroll taxes, and no increase in the eligibility
age. He doesn’t explain how all this is possible if a portion
of payroll taxes otherwise destined for the Social Security trust
fund are siphoned off to Wall Street. He doesn’t explain what
will happen to workers whose investments shrivel in value shortly
before they retire.  

in 2001, Bush’s Social Security Commission, stacked with privatization
buffs, recommended three different privatization proposals for Bush
and Congress to consider, Bush refused to endorse any of them. In
March 2002, the public was treated to the ludicrous sight of House
Democrats introducing three bills corresponding to the commission’s
three privatization proposals and demanding hearings on them. Republicans
refused the Democrats’ call for hearings. 

the summer of 2002, Republicans were ready to put some distance
between themselves and Bush on the Social Security issue. According
to the

Washington Post

, Republican congressional leaders
undertook a campaign to deny that “privatization” accurately
described Bush’s proposal. Many Republicans running for office
last fall went even further: They decided that torturing the word
“privatize” was not going to fool the public and, for
the sake of their political careers, they had better adopt positions
critical of privatization. For example, Candice Miller, now a Republican
representative from Michigan, wrote AARP, “Social Security
is too important to risk one penny of trust fund money being siphoned
off into individual accounts.” Such statements will, at minimum,
make it very difficult for any politician who makes them to support
Bush’s plan in the future.

faces the same dilemma with his Medicare proposal. Like his Social
Security proposal, his Medicare privatization plan will antagonize
a substantial portion of the population if and when Bush gets around
to announcing the details of his plan. It will also scare the hell
out of a lot of Republican politicians even before the unsightly
details of his plan are bathed in the warm glow of publicity. Bush
now finds himself with three bad options: (1) He must either shut
his mouth about Medicare; (2) He must admit that Medicare privatization
is a stupid idea; (3) He must speak in jabberwocky, lie, refrain
from introducing bills, and otherwise conceal the gory details of
his plan. As was the case with his weird Social Security campaign,
Bush has chosen the third option. He speaks about his Medicare plan
in terms so general as to be meaningless, he often uses euphemisms,
and he lies to cover up the financial coercion that his plan will
have to rely on to push seniors into HMOs. 

began his State of the Union remarks about health care by claiming
he wanted to solve the twin problems of rising costs and rising
numbers of uninsured. After saying these problems couldn’t
be solved with “a nationalized health care system,” he
then, inexplicably, trashed HMOs, the cornerstone of his Medicare
plan. “Instead of bureaucrats and trial lawyers and HMOs, we
must put doctors and nurses and patients back in charge of American
medicine,” he announced in indignation to great applause. Then,
turning to his Medicare plan, he offered this confusing and misleading
statement: “Seniors happy with the current Medicare system
should be able to keep their coverage just the way it is. [A]ll
seniors should have the choice of a health care plan that provides
prescription drugs.” This implies that Bush does not support
adding drug coverage to traditional Medicare, but he didn’t
come right out and say that. It is misleading because it failed
to apprise seniors that their “choice” to enroll in a
private-sector plan that does cover drugs will be exercisable only
if they are willing to enroll in HMOs. 

nation did not react favorably to Bush’s remarks. The next
day, observers across the country either professed to be confused
by Bush’s comments or they interpreted them to mean he did
not intend to add drug coverage to the traditional Medicare program
and that the only seniors who would get drug coverage would be those
who were willing to leave traditional Medicare, give up their choice
of doctor, and submit to the tender mercies of the HMO industry.
“He says he wants to help seniors afford prescriptions drugs,”
said Senate Minority Leader Tom Daschle to the Associated Press,
“then he proposes a plan to coerce seniors into HMOs to get
prescription coverage.” “ABC News” ran a portion
of an interview with Robert Hayes, president of the Medicare Rights
Center, saying, “President Bush’s proposal to offer prescription
drug coverage at the price of gutting Medicare and forcing people
into HMOs is a cruel hoax.” According to the same “ABC
News” report, seniors who watched Bush make equally cryptic
remarks about Medicare during his January 29 speech in Michigan
were disappointed. “He talked, but he didn’t say anything,”
said one. Said another, “I don’t know if he really understands
the seniors’ problems.” 

significantly, Bush encountered immediate criticism from some Republicans,
criticism which, like the critical statements some Republicans have
made about Social Security privatization, should make it impossible
for the speakers ever to endorse a plan that coerces seniors into
enrolling in HMOs, either by charging seniors more to stay in traditional
Medicare, or by giving them drug coverage but only if they enroll
in HMOs. “I’m concerned. . .that the president’s
focus on ways to reform Medicare could hamper our efforts to pass
comprehensive prescription coverage,” said Sen. Olympia Snowe
(R-ME) in a January 29 statement. The same day, Sen. Charles Grassley
(R-IA) told the

New York Times

, “Prescription drug coverage
should be available to all seniors, not just those who switch into
managed care.” It is no accident that Snowe and Grassley are
from rural states. Because HMOs are scarce in rural areas, any plan
that links drug coverage to HMO enrollment would guarantee that
the vast majority of rural seniors wouldn’t get drug coverage. 

significant difference between Bush’s Social Security campaign
and his Medicare campaign is that a bill to privatize Medicare has
actually been introduced in Congress and Bush has actually said
that this bill closely resembles his proposal. The bill, unctuously
entitled “The Medicare Preservation and Improvement Act,”
was first introduced by Senators John Breaux (D-LA) and Bill Frist
(R-TN) in 1999 and then again in 2001. Because Republicans have
not held hearings on the bill and because the media has paid no
attention to it, the public knows nothing about it. The Breaux-Frist
legislation would not actually require seniors to leave the traditional
Medicare program and join an HMO. Rather, it would put financial
pressure on seniors to do that. This pressure would be exerted by
converting the entire Medicare program into a voucher program. The
traditional Medicare program and Medicare HMOs would be required
to charge premiums, and seniors would be given vouchers that would
cover all or most of the HMOs’ premiums but not enough to pay
for traditional Medicare’s premiums. Why would traditional
Medicare’s premium be higher? Because the typical senior who
stays in traditional Medicare is much sicker than the typical senior
who enrolls with a Medicare HMO.  

although the traditional Medicare program is far more efficient
than HMOs are (Medicare’s overhead is 2 percent of its revenues
versus 20 to 30 percent for HMOs), traditional Medicare’s costs
are higher because it suffers from “unfavorable selection,”
that is, it insures sicker people. The HMO industry bitterly denies
that it benefits from favorable selection, but two dozen studies
have demonstrated they do. In a 1997 report to Congress, the U.S.
General Accounting Office wrote: “Although Medicare’s…HMO
program was designed to save the program 5 percent [of the cost
of insuring an average Medicare beneficiary], a decade of research
has found that this program instead costs Medicare money. The research
shows Medicare’s rate-setting method produces excess payments
to HMOs.” According to Bruce Vladeck, Medicare’s director
from 1993 to 1997, this conclusion is “incontrovertible.”
The literature indicates that HMO seniors are so much healthier
that HMOs incur costs per senior somewhere between 10 and 45 percent
less than the traditional Medicare program incurs. 

evidence exists that HMOs encourage their generally healthier seniors
to disenroll from their HMOs and return to traditional Medicare
as soon as the seniors need expensive treatments. A study of more
than 400,000 seniors, reported in 1997 in the

New England Journal
of Medicine

, found that seniors who enrolled in Florida Medicare
HMOs during the period 1990-93 tended to stay enrolled only as long
as they were healthy. When they got sick, they disenrolled and returned
to traditional Medicare, thus saving their HMOs lots of money and
driving up the cost of traditional Medicare. This study was entitled,
appropriately enough, “The Medicare-HMO revolving door—the
healthy go in and the sick go out.”  A reasonable interpretation
of the “revolving door” study is that seniors in HMOs
went back to traditional Medicare when they got sick because their
HMO refused to give them the services they needed. A subsequent
study, which appeared in the

American Journal of Managed Care

in 2000, confirmed that hypothesis reporting that Florida HMO disenrollees
were four times as likely as Florida seniors who enrolled in traditional
Medicare to have hip and knee replacements in the three months after
they left their HMO. The authors concluded, “These data provide
indirect evidence that Medicare HMOs…are rationing [hip and
knee replacement surgery] and that beneficiaries respond by returning
to the [traditional Medicare] system to seek care.” This study
is consistent with numerous scientific studies and an ocean of anecdotal
data which indicate that HMOs deny necessary medical services.  

Breaux-Frist bill will push seniors into HMOs where they will get
worse care. It will also drive up Medicare’s total costs because
it will permit Medicare HMOs to be overpaid. This will happen because
the HMOs will be paid as if their enrollees had the health status
of an average Medicare beneficiary. The Breaux-Frist bill contains
a short provision, which purports to address this problem. It instructs
Medicare to “establish an appropriate methodology for adjusting
the amount of payment to Medicare plans…based on the differences
in actuarial risk of different enrollees being served.” “Actuarial
risk” is health policy jargon for “likelihood of getting
sick and needing health services.” 

trouble with this mandate to Medicare in the Breaux-Frist bill is
that Medicare has been under a similar and far more detailed mandate
since 1997, and, for two reasons, has been unable to carry it out.
The first and most significant problem is logistical. It is extremely
difficult to evaluate the health of each of the six million seniors
who are currently enrolled in the roughly 200 HMOs that now serve
Medicare beneficiaries and to assign to each of those HMOs a score
indicating how much healthier the “average” senior in
each HMO is than the “average” senior enrolled in the
traditional Medicare program. Accurate risk-adjustment (the phrase
used to describe the process of adjusting Medicare’s payments
to HMOs downward to reflect the better health of HMO enrollees)
requires that Medicare read the medical records of all HMO enrollees,
something that is not possible now and could only be made possible
at great expense, in terms of both dollars and lost privacy. The
second problem is political. The U.S. HMO industry opposes accurate

a result of these logistical and political problems, Medicare’s
overpayments to HMOs are as large or larger today than they were
in 1997 when Congress instructed Medicare to risk-adjust Medicare’s
payments to HMOs. (The claims by the HMO industry that HMOs are
leaving the Medicare “market” because they are underpaid
are false. There is no question that many HMOs have expenses that
exceed their Medicare reimbursements, but, as GAO personnel and
other experts have noted, the problem is excessive HMO expenses,
especially administrative expenses, not low Medicare reimbursement
rates.) Because the logistical and political problems are very difficult
to solve, the overpayment of Medicare HMOs will almost certainly
continue in some form for as long as HMOs are allowed to participate
in Medicare. The Breaux-Frist bill cannot make these logistical
and political problems go away simply by issuing a mandate to Medicare
to solve them. Conclusion: Unless Medicare HMOs ration far more
aggressively than they do now, Breaux-Frist will drive Medicare’s
total costs up, not down. 

view of the utter impossibility of Bush’s Medicare privatization
plan ever working as advertised, the question inevitably arises,
Why is Bush doing this? My hypothesis is that Bush, like so many
other politicians before him, including Bill Clinton, has uncritically
accepted two lines of propaganda from the HMO industry: (1) that
insurers that use managed care cost-control tactics are more efficient
than insurers, including traditional Medicare, that don’t;
and (2) that HMOs do not damage quality of care (in other words,
all the medical services HMOs deny are “unnecessary”)
and all the complaining about HMO quality of care can be written
off as just bratty “consumers” upset over the loss of
their “unnecessary” services.  

why anyone would buy this nonsense in 2003—seven years after
the backlash against managed care became front-page news and three
years after double-digit premium inflation returned—is beyond
me. Perhaps the best explanation is that Bush is as dumb as he looks.


Sullivan lives in Minneapolis and writes frequently about health policy.