Activist, Contributing Author
It is convenient that I chose to write my next article on Medicare due to the fact that members of Congress, most notably Senator Chuck Schumer, are expressing their abhorrence to any cuts to Medicare, and to do so would be ‘morally wrong.’ While I am not a conservative, I agree with the conservative Republicans in Congress – but more much with the libertarian-leaning Republicans, who have the same viewpoint – that there must be, and ought to be, cuts to Medicare. One of the most evident reasons why there need to be cuts to Medicare is its debt. Over the past decade, health care cost trends have started to increase at a slower rate, but Medicare is in even worse financial shape: As of now, Medicare faces unfunded liabilities of approximately $48 trillion; if health care inflation increases back to greater than ten percent, these liabilities might reach $88 trillion. At best, the current sources of funding for Medicare will finance only about one-third of currently promised benefits to today’s young workers.
In The Atlantic article, by Derek Thompson, “No, Not Gary Johnson,” the author suggests that cutting Medicare would cause ‘economic turmoil.’ This is so far from the truth. From the aforementioned data, it is apparent that Medicare in its current structure is what is causing economic turmoil – the libertarian solution is what would change that. However, the solvency of Medicare does not even begin to tell the story as to why I, and many other libertarians, want to make cuts to Medicare.
In order to explain why I agree with the Republicans in Congress, and, more importantly, how I defended my position to those who thought it was ‘morally wrong’ for me to want to cut Medicare, I will mention the three main defenses that I received – and also have heard from many Democratic leaders – in response to my position to make cuts to Medicare. Throughout my discussions with these people, I posited that their three defenses are fallacies and that; because they are fallacies, their defense on Medicare is invalid and flawed. I started to defend my position by simply negating, with data, these three defenses. Once I proved that that the defenses for Medicare were invalid and flawed, I was able to describe some of the libertarian solutions for Medicare and how they would not cause economic turmoil, but actually fix it.
The first defense that I received is that Medicare is “more efficient” than private insurance, because it doesn’t run on profits and has a three percent administrative cost compared to that of private insurance of 10-20% – because Medicare doesn’t have all functions such as claims utilization review, underwriting, and product management. The second defense is that cutting Medicare is ‘morally wrong,’ because it cuts quality health care for seniors. Finally, the third defense is that making cuts is immoral because seniors have paid into the system for the majority of their working-lives. I will now take each of these, one-by-one, to describe how each is a misconception.
‘Is the Government More Efficient than the Private-Sector?’
This past summer, I had a Health Policy class with Former Governor Michael Dukakis, in which I constantly heard him claim that “the government is more efficient than the private sector: Medicare has an administrative cost of three percent, compared to the private insurance companies that have administrative costs of 10-20%.” I have to add the disclaimer that Governor Dukakis has been an amazing mentor to me, in terms of advice and being able to go toe-to-toe with a former presidential candidate. He recognized that he and I didn’t agree on much – or, anything at all, including this topic; however, he respected and listened to my defense.
My rebuttal to Governor Dukakis was that comparing administrative costs between Medicare and private insurance was not an apples-to-apples comparison: Medicare is essentially a system of ‘blank-checks’ in which it receives a claim, and then it pays out the claim, without a utilization review process – making it very inefficient, and obviously apt to fraud and abuse (although, fraud and abuse doesn’t make-up much of the total Medicare costs). Moreover, this three percent number is a bit misleading: Medicare, by its structure, doesn’t have administrative functions, and has a large number of claims that it pays out. The small number of administrative functions make its numerator deflated; the large number of claims make its denominator inflated; therefore, its overall administrative percentage is, by default, going to be low. But this low number doesn’t mean that it is more efficient than the private sector. Having few administrative functions does not infer that a system is more efficient. The conclusion assumes that administrative functions impede efficiency; however, that is quite the opposite.
Before I informed Governor Dukakis and other people in my class that administrative costs actually increased efficiency, I informed them of my experience in the health insurance industry: administrative costs rarely contribute to profit. As a Financial Underwriter at Blue Cross Blue Shield of Massachusetts (BCBSMA), I see that its administrative cost barely covers its claims. The small profit that BCBSMA does make (it operates at a loss due to claims being higher than what it charges for premium) is due to investments it makes – not from the administrative costs built-in to the premiums it charges members. Nonetheless, the administrative costs are a very important function in insurance because they, along with profits, actually signal where efficiencies need to be made. In any industry, but especially that of health care, administrative costs are beneficial to help increase efficiency, decrease the costs, and increase outcomes. For example, Obama adviser, Ezekiel Emanuel wrote,
“Some administrative costs are not only necessary but beneficial. Following heart-attack or cancer patients to see which interventions work best is an administrative cost, but it’s also invaluable if you want to improve care.”
At this point, I had some people in the class look at me like I had five heads. They didn’t understand how profits are actually a good thing, because they’ve heard so often that a profit-motive is greed, and greed is ‘immoral.’ I explained that profits signal to firms whether the specific good or service they are providing is in high demand, whether it should keep producing, and whether efficiencies need to be made; if something operates at a loss, the loss is a signal because it shows that there need to be efficiencies made. Profits, not losses, however, have a similar function as do the administrative costs, as they help fund the research – through claims utilization review, underwriting, and product management – to help provide more cost-effective products or services that can benefit consumers. Profits also help lower costs for consumers, in the long run, because they help finance the ways by which firms can discover to make efficiencies to lower operating costs. Administrative costs and profits fuel the mechanism by which progress can occur; when progress occurs, efficiencies occur, and costs decrease. Therefore, these administrative costs and profits actually increase efficiency, lower costs, and increase quality, in the long-run. (As a side note, I would like to mention that private insurance profits are only three percent of overall revenue.)
The fact that Medicare keeps its administrative costs – especially underwriting and claims utilization review – so low, it actually impeding efficiencies from occurring. It doesn’t allow for any research of new ways of doing things to occur, and, therefore, it impedes progress and innovation that could improve care.
This aforementioned statement is precisely why libertarians are against Medicare, and a single-payer system that is modeled after Medicare: Medicare impedes efficiencies and the innovation that promote change in health care. The innovation and progress that has occurred in the health care and health-science field has occurred due to competition, not due to the unilateral-focused arm of government bureaucracy. This is already evident in the Medicare system: it doesn’t create provide effective treatment or outcomes for patients, and does not manage its costs. In terms of outcomes and treatment, I will discuss this more in the next section; however, in terms of cost, I will say that the cost-system is very misunderstood in Medicare. Most notably, reimbursement-rates for Medicare are so low for Medicare that many health care providers opt out of the Medicare system: In fact, fewer than 84% of doctors accept new Medicare patients; some doctors even drop-out of the Medicare system. For the doctors who do stay in the Medicare-system, they just shift the loss onto those with private insurance – so, essentially, the private insurance recipients are subsidizing those on Medicare through higher premiums and higher taxes.
Moreover, Medicare’s low administrative costs may come at a price: it has a high amount of erroneous payments, because without these administrative functions, it does not monitor its erroneous payments. CMS estimated that it made $10.4 Billion in improper payments in 2008. Additionally, CMS estimated that approximately $9.8 Billion in erroneous payments were made in 2007 – a figure which is more than double what the CMS spent for claims processing and review. On the contrary, to compare CMS to private insurance: In 2006, CMS estimated that Medicare Part C (a private option) made erroneous payments of $6.8 Billion – which is only approximately 10.6 percent of its payments.
After I provided this defense, Governor Dukakis and the rest of the class didn’t have a rebuttal for me. However, some of my classmates came up to me after and said that they never understood the libertarian argument to cut Medicare or to even privatize it; but now they did. The one thing that still concerned them, though, was “pulling the rug out from under those who contributed into the system.” This brings me to the second misconception.
One of the frequent accusations – and most frustrating for me, personally – that I hear when people find out my stance on Medicare is that ‘I’m trying to steal money away from the elderly, who have paid into the system.’ I, as well as all other libertarians, don’t want to steal any money from those who have paid into the system. What I am guilty of, however, is making it fair.
The benefits a Medicare recipient receives are much higher than those that he or she paid into the system. A think-tank which I try my hardest not to read, the Urban Institute, found that a married couple with two average earners turning 65 in 2020 will have paid roughly $154,000 in Medicare payroll taxes over their lifetimes, however will receive $479,000 in benefits. That’s not ‘efficient’ or ‘fair’ if you ask me.
Still, even after debunking two of these fallacies, people still had one more: that Medicare provides good quality insurance for seniors, at a low-cost. Despite the fact that it doesn’t really provide it at a low-cost – as already mentioned, it actually just shifts the costs onto everyone else – contrary to this belief, it does not provide good quality insurance.
Besides making the system fairer, I also care very much about the elderly who need care; that is precisely why I want to change the system: Medicare does not provide the elderly with the best care or outcomes.
A study that was published in the Journal of the American Medical Association (JAMA) found that for 16 of 40 standard indicators, patients on Medicare parts A and/or B received recommended care less than two-thirds of the time. Additionally, other studies published in JAMA show that Medicare patients receive a lower quality of care than do patients with private Medicare (part C) or, just private insurance.
Despite Medicare receiving poor scores on the outcomes for elderly patients, its system, in general, is not based on outcomes. As the Medicare Payment Advisory Commission asserts, “Medicare payment systems have created little or no incentive for providers to spend additional resources on improving quality.”
While working at BCBSMA, I have seen the quality measures that private insurance has put in place for not only its commercial population, but also its Medicare population. This is much different than Medicare’s Fee-For-Service model, which just pays out claims based on each service performed. Private insurance uses its profits and administrative costs to invest in solutions which provide quality to its members. At BCBSMA, there is something called the ‘Alternative Quality Contract,’ or ACQ, which reimburses and incentivizes providers on quality-of-care standards – not for each service provided like Medicare’s Fee-For-Service model does. Moreover, even if the solutions in which private insurers invest do not work, competition in the marketplace among private insurers will provide the best solution: if each private insurer has its own solution, the consumers will pick the best, and, therefore, that one will prevail among all of the solutions. Having a single-payor, Medicare, does not allow for this type of competition to occur.
Additionally, the coverage for Medicare is not as comprehensive as most people think. Medicare Part A (hospital insurance) payments are taken out of our income; Medicare Part B (outpatient insurance) and Medicare Part D (prescription drugs) require a separate premium paid by the subscriber. However, Medicare Part A, B, and D do not cover all services. There is no cap on the out-of-pocket maximum for seniors to pay; some seniors might have to pay tens of thousands out-of-pocket; due to this, seniors purchase Medicare Part C, to cover what is not covered in Medicare Parts A, B, and D, and it costs approximately $1,200 in annual premium. My grandfather is brilliant; however, this system is too complex for even as brilliant as Albert Einstein to comprehend correctly. Imagine a senior with dementia trying to work through this system.
After debunking this third misconception, some people still said to me that “Well, we still need to contribute to Medicare because it’s morally right and humanitarian to help seniors pay for insurance, even if the quality isn’t great.” The problem is that the quality isn’t great because Medicare, itself, stifles progress and innovation, by not having administrative costs – most notably claims review and underwriting – its structure causes doctors to drop out of the system, and lacks the competitive structure that promotes innovation. If more competition was brought into its structure, the quality and costs of the program would be much higher, and lower, respectively. My last statement silenced most people, and they then turned the conversation to me, to provide my solution. I wouldn’t say it’s ‘my’ solution, as it’s a solution that many libertarian economists and policy analysts have researched and developed.
Libertarian solutions to healthcare, in general, revolve around using the free-market to promote competition, so that costs can be lowered and quality can be increased. One of the free-market solutions to health insurance – in this case Medicare – is to use Medical Savings Accounts (MSAs).
MSAs have been offered for over a decade, with more than 3,000 companies offering them as part of their benefits package. MSAs are typically bundled with higher deductible plans ($1,500+ for individuals, $3,000+ for families), which cover catastrophic costs.
The reasoning behind MSAs is to impact consumer behavior by having the insurance not kick-in until the deductible is reached; up until that point, consumers are forced to shop around for the best cost-effective health care they can find, rather than just going to the doctor that is covered by their insurance and getting unnecessary procedures and/or treatments. Having to shop around for doctors creates competition among the providers, which, in turn, helps lower costs, because doctors know that consumers are looking for costs at the best value. In the United State health care system’s current state, consumers very rarely shop around for health care insurance; they just go to the doctor that their insurance covers. The lack of competition in health care is the reason for the dearth of decreased costs, and increased quality, in health care.
This also provides consumers with more choice among health care providers than those that are offered under an insurance plan.
The real impact of these plans – even though most of us do not see it, since I work in insurance, I do – is that many people avoid the doctor’s office altogether, and just go to the emergency room; if these people were forced to budget the money in their MSAs, they would be more likely to go to the doctor than to increase the costs of health care for everyone by going to the emergency room.
So far, due to the competition that MSAs promote, actuaries have discovered that MSAs have cut health care costs by greater than 30%. If MSAs were implemented in Medicare, actuaries predict that the same, if not better, results could occur, which would fix Medicare’s current financial state of insolvency.
At this point, the people with whom I was speaking asked me how this would work under Medicare, and whether senior citizens would approve of it. To answer the second question, first: 60 Plus Association, a grassroots senior organization almost 500,000 members nationwide, is advocating for a MSA option under Medicare. Additionally, the president of 60 Plus, Jim Martin, predicts that because of the many advantages of MSAs, almost all retires would choose them over Medicare.
In terms of the first question, the country’s top actuarial firm and National Center for Analysis developed the following plan:
- The deductible would be set at $3,000 for a senior; at $3,000 all costs would be covered by an insurance company (this need not be Medicare; it can be a private insurer, too).
- Since seniors have already contributed to Medicare, Medicare can contribute $1,500 to each senior’s MSA
- These funds are tax-free, and can be rolled-over for the following years, or, can be withdrawn at the end of the year to be used for any other expenses.
- Seniors need not purchase Medicare Part B, C, or D; but rather, they can use the $1,200 premium which they contributed to Medicare Part C towards their MSA.
- This $1,200 can help fund the remaining deductible.
To close, I provided why this plan provides benefits that fix the problems in Medicare, some of which are a summary of the points I’ve already mentioned:
- Having competition for health costs under $3,000 helps lower health care spending for all people by promoting consumerism, and helps increase quality by incentivizing doctors to provide the best care and the lowest cost.
- The total out-of-pocket maximum for Medicare subscribers would be capped at $1,500 (the remaining $1,500 of the deductible that Medicare does not fund); in the current Medicare system, there is no out-of-pocket maximum.
- There is more freedom of choice for the subscribers for all costs under $3,000.
- Subscribers may even choose to keep Medicare, rather than going to a private insurer; however, from most seniors with whom I’ve spoken about Medicare Part C compared to parts A and B, they prefer the private Medicare Part C component.
- The system is much less complex and confusing than is the current system with all its parts.
- As a free-market-lover, I think the best advantage is having the option to obtain coverage from private insurance, as private insurance has better quality-outcomes than does Medicare and has the necessary components of competition, administrative costs, and profits to do so.
As always, I could not convince everyone that the libertarian solution could work. However, the majority of people – most of whom consider themselves as ‘anti-capitalists’ – actually liked the solution. More importantly, everyone with whom I spoke agreed the Medicare’s system has issues, and the fallacies I brought up were things they did not know, but now discovered.
The most important thing to me was not to change anyone’s mind, but rather to educate people about the libertarian position. It was a plus that I was able to get people to understand that the common perception of Medicare is actually false, and it does not provide good quality nor control costs.
While educating people about the libertarian position, I was able to defend the libertarian position that was incorrectly misconstrued by Derek Thompson in “No, Not Gary Johnson.” While I am strong believer in the First Amendment – most notably for the freedom of speech and press – I will not, and cannot, stand behind statements which are false; false statements are akin to fraud, and fraud is not guaranteed by the First Amendment, because fraud provides people with false information, which causes them to make incorrect decisions. With that said, my next article will discuss Derek Thompson’s most fraudulent statement that he made in his article: that of the national sales tax being a ‘regressive tax.’ In my next article, I will discuss why the national sales tax is not only NOT regressive, but also why libertarians propose it.
In liberty; and may freedom, always, ring: