Medicare Compliance & Reimbursement

Health & Human Services Secretary Michael Leavitt has issued a strong warning about Medicare: It's heading toward disaster, and time is running out to fix it.

If the government fails to act, the system will be broke in 11 years, failing in its objective to pay for healthcare for elderly and disabled people. "This is serious business involving trillions of dollars and the lives of hundreds of millions of people," Leavitt says in an April 29 statement, entitled "Drifting To Disaster," on the HHS Web site http://www.hhs.gov/news/speech/2008/sp20080429a.html.

Disaster is not inevitable, he says, but the country must act now, and it must fix Medicare's core problem: Healthcare costs are rising higher than other costs in the economy, and all the evidence shows that the trend will continue.

Another major problem is that the U.S. population is aging, which leads to higher medical expenses. "Today, 12 percent of the population is 65 or older. By 2030, nearly 20 percent of us will be seniors. There is nothing we can do to change that," he says.

Leavitt says he was motivated to make a serious statement after reviewing a report from the Medicare Trust Fund, which he is a member of. The report was based on government actuaries' information on the condition of the Social Security and Medicare Trust Funds.

Tough choices: Leavitt predicts a gloomy future unless the government repairs the program's major flaw: Younger working people must pay for seniors' healthcare, but the number of workers per senior is falling fast.

"Higher and higher costs are being borne by fewer and fewer people. Sooner or later, this formula implodes," he says.

Congress will be forced to act to keep the system solvent, and lawmakers will have only three choices:

• raising taxes;

• cutting benefits to seniors; or

• imposing reduced payment rates on providers.

Leavitt warned that these options will lead to intergenerational conflict. In the next 20 years, the number of working people per Medicare beneficiary will drop from 4 to 2.5, and younger workers will face off against seniors in the dispute over taxes and Medicare benefits.

Both sides will have valid arguments, Leavitt says -- workers can claim that their own expenses, including healthcare, are too high and that they can't afford higher taxes, and seniors can claim that they are legally entitled to benefits from a system that they supported while they were working.

Examples highlight U.S. trouble: Comparing the United States' healthcare dilemma to problems faced by other countries, Leavitt lauded the method used in Singapore, where the government requires citizens to save money and has a healthcare system that uses only 4 percent of its gross domestic product. The United States' healthcare system consumes 16 percent of GDP.

He also warned that the United States is making the same mistakes that Argentina has made -- the government overspent on social benefits, became vast and bloated, and racked up debt that it couldn't repay.

In the 1990s, "Argentina was in political turmoil, with a rapid succession of governments, a currency in free-fall, and a rapid spike in unemployment. The country teetered on the verge of civil unrest," he says. Argentina had failed to correct its expensive entitlement programs, and creditors no longer trusted the government. Leavitt says it's not difficult to imagine the same fate for the U.S.

Reform plan: Leavitt outlined a program for Medicare reform, which he says is crucial and will affect the entire U.S. healthcare system, but his advice is not administration policy, only his suggestions.

Three actions are required to fix Medicare, he says:

• separate the commitment from the pain;

• pick the right moment; and

• modernize the budget scoring conventions.

To separate commitment from pain, Congress should enact legislation with trigger points so lawmakers can't vote to take specific measures but must lay "contingent plans if things go beyond a predetermined point," which will, for example, limit spending.

Congress must "pick the right moment" by taking bipartisan action, because the normal legislative process, which involves conflict between "majority parties and minority parties," is failing.

Productivity and the power of investment are essential to changing Medicare, so budget reform must "require investments that traditional scoring conventions would count solely as expenditures," Leavitt says.

How would these actions affect Medicare? The program would encourage value of care rather than volume of care, Medicare parts A and B would operate like Part D, and each generation would pay for its own healthcare.

By encouraging value of care rather than volume of care, Medicare can reduce fraud, costs, duplications of service, and poor-quality care, Leavitt says. The current system rewards poor quality, he says, citing one example: "When patients contract preventable hospital infections, costs skyrocket, and in most settings, the hospital profits."

Leavitt laments a characteristic of the system that he calls "Chronic More": There are no controls on the volume of care, and medical providers are paid more money for more services whether those services are of high quality or low quality. He says that Congress must create a new payment structure with incentives for high-quality, efficient care, rather than for more care.

Medicare Parts A and B can adopt the methods of the Medicare Part D Prescription Drug Program by using the competitive marketplace to lower prices, improve quality and reward value, he says.

Medicare reform would require that each generation do its share by "rebalancing the generational obligation" -- for example, young, struggling workers should no longer have to subsidize the healthcare of well-off seniors.

Reform is essential to save Medicare, Leavitt says, and he expresses hope that his message can make a difference: "If we start now, the change can be made over time and with genuine fairness."