Why we need traditional Medicare and private plans

Many people defend traditional Medicare (a.k.a. FFS Medicare, the public option arm of the program) by arguing it controls spending better than private plans. Some believe otherwise. In this post I will make a different argument in defense of traditional Medicare, one implied by many but articulated by few. In fact, I’ve never seen it put quite the way I will. (Have you?) Alert readers will notice that my defense of traditional Medicare also applies to private plans. I will return to this point at the end.

Traditional Medicare and private health plans both innovate but in different ways. For example, traditional Medicare has brought us prospective payment for hospitals, physicians, and post-acute care providers. It has introduced bundling via diagnosis related groups. In the coming years it will run ACO pilot programs and other types of bundled payment initiatives, among other payment reforms. Few, if any, private plans have implemented any similar reforms before Medicare has or will, but many have followed or may follow Medicare’s lead.

On the other hand, private plans have innovated in ways that traditional Medicare has not. Manged care, consumer-directed health plans, prescription drug benefits, and catastrophic coverage all exist or existed in the commercial market before adoption by Medicare (if ever). In some cases, the Medicare program, though not traditional Medicare itself, followed private plans’ lead, adding managed care plans and a prescription drug benefit, for example.

I know some people think some of these reforms and innovations — whether initiated by Medicare or private plans — are flawed or, worse, harmful to consumers or the federal budget. It’s not my ambition here to persuade you otherwise. My point is only that you cannot deny that traditional Medicare and private plans have each innovated in different and complementary ways. Each has done things that the other could not, or not as readily or as early anyway.

Besides, if we’re being honest with ourselves and about the history of health care cost control, we must admit that we cannot know in advance what plan and payment innovations will work, either short- or long-term. Therefore, it is natural, even necessary, that we experiment in many ways. Consequently, many innovations will fail, at least in the eyes of some. Yes, the SGR is a failure, which is why we need a “doc fix.” Yes, managed care was very unpopular and no longer exists in quite the form it did in the 1990s. But we had to try these things. It’s good that we did. This is as true going forward as it has been in the past. Thus, we need traditional Medicare because it will attempt payment innovations no other plan likely can or will on its own.

Indeed, some of the things Medicare will do are properly viewed as public goods. All but a handful of large, dominant health plans cannot convince large hospital systems to accept a new form of payment system. But Medicare can. What health plans will do its own comparative effectiveness analysis? Medicare will or could. The results of both of these types of innovations, and others, will be public information and can benefit all plans and all consumers. Because we don’t know what will work, we need traditional Medicare for its ability to experiment on a large scale.

We also need it because it can experiment in the context of care for our sickest and costliest patients. Commercial market plans, serving the non-elderly, can’t do that as readily because those plans, though they serve some very sick patients, serve far fewer of them than traditional Medicare. The same holds for Medicare Advantage plans, due to the favorable selection they experience.

Since I’ve argued traditional Medicare and private plan innovations are complements, it follows that we need private plans too. Republicans already believe that. The point has been conceded to an extent by Democrats as well, given their passage of the Affordable Care Act, which expands private plan markets for the non-elderly. Still, some strongly resist the idea that private plans have anything valuable to offer. The chief concern is that their singular focus is to innovate in ways that serve the corporation, not the consumer.

However, there is at least one — and perhaps more than one — clear example where private plans have far surpassed what traditional Medicare can do. That’s in the area of benefits expansion. For example, dental benefits are offered by private plans, but not by traditional Medicare. Another example: drug benefits were offered in the commercial market before Medicare implemented them. Even Medicare’s implementation of a drug benefit is entirely private plan-based. You might cry, “Foul” on that one since the idea of a traditional Medicare drug benefit certainly occurred to many. It isn’t impossible to think Medicare could have had or could in the future have a drug benefit in the traditional arm of the program. That the benefit is private plan-based is due to mere politics, you might say.

But politics is a very real constraint under which traditional Medicare operates. It’s the very reason that it cannot innovate in the same ways as private plans. It’s why Medicare’s innovations tend to be in the dimension of cost control and not benefits expansion. In short, it’s another reason why private plans and Medicare complement. It’s yet another reason why we need both.

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