Medicare Part D

"Most Americans are aware that our health-care system is in deep trouble, a dog's breakfast ofprivate providers and insurers that has weak and inconsistent incentives for quality control and cost containment."


Dear Friends and Colleagues;
Greetings from the cold, but sunny Jerusalem.
Attached a very interesting and informative article published in yesterdays Wall Street Journal reviewing the effect and performance of the Medicare Part D program.
Part D is a massive social experiment on the ability of a privatized market to deliver social services effectively.
The author and researcher claims that in terms of health delivered per dollar of cost, our health care system is grotesquely inefficient. We spend $6,102 per person on health care each year, nearly 17% of GDP. Our neighbor Canada's single-payer system costs $3,165 per person per year, about half our expenditure, or 10% of their GDP. The Canadian costs and health outcomes are typical of developed countries, where government managed and financed systems predominate. The extra cost of our system is not buying us better health. The probability of dying between ages 15 and 60, a good indicator of failure of a health-care system to prevent and treat disease, is 8.1% for females in the U.S.; in Canada, the same probability is 5.7%.
f current trends continue, health care in the U.S. as a proportion of GDP will rise to 40% by 2050, a level that will break the current system of financing health through employers, pension funds and Medicare/Medicaid.
The authors then continue analyzing the performance of the Medicare Part B program and gives it a mixed report card:

My overall conclusion is that, so far, the Part D program has succeeded in getting affordable prescription drugs to the senior population. Its privatized structure has not been a significant impediment to delivery of these services. Competition among insurers seems to have been effective in keeping a lid on costs, and assuring reasonable quality control. We do not have an experiment in which we can determine whether a single-product system could have done as well, or better, along these dimensions, but I think it is reasonable to say that the Part D market has performed as well as its partisans hoped, and far better than its detractors expected.

Does this mean that Part D proves that privatization will be effective in other segments of the health-care market?
The authors cautions and points out that:

* the success of Part D depends substantially on thoughtful and muscular management of the market.A health insurance market like Part D probably requires this level of active management to work well; after-the-fact oversight in the style of the SEC or FTC is inadequate. If privatization is going to work elsewhere in health care, active market management will be needed.
* consumer-directed health care works only if consumers can understand the consequences of their choices. In much of medicine, providers are the agents that guide consumers through these choices. If consumer-directed health care is to be effective, these providers must give sound advice on both the health and financial consequences of alternative choices. This is possible if the incentives to providers and consumers are right, but the design of such markets should not be left to chance.

Yours

Bernd Wollschlaeger,MD,FAAFP




A Dog's Breakfast
By DANIEL L. MCFADDEN
February 16, 2007; Page A15

Last year, Medicare underwent a major expansion with the addition of Part D prescription drug coverage. A controversial feature of this new program was its organization as a market in which consumers could choose among various plans offered competitively by different insurers and HMOs, rather than the single-payer, single-product model used elsewhere in the Medicare system. Proponents of this design touted the choices it would offer consumers, and the benefits of competition for product quality and cost; opponents objected that consumers would be overwhelmed by the complexity of the market, and that it was unnecessarily generous to pharmaceutical and insurance companies.

Part D is a massive social experiment on the ability of a privatized market to deliver social services effectively. With the support of the National Institute on Aging, my research group has monitored consumer choices and outcomes from the new Part D market. I will summarize our findings, but first I want to provide some perspective on the American health-care system and the questions that study of Part D may help answer.


Most Americans are aware that our health-care system is in deep trouble, a dog's breakfast of private providers and insurers that has weak and inconsistent incentives for quality control and cost containment. Many consumers cannot obtain health insurance at reasonable cost, and financing the system is stressing employers, pension funds, and the government's Medicare and Medicaid programs.

In terms of health delivered per dollar of cost, our system is grotesquely inefficient. We spend $6,102 per person on health care each year, nearly 17% of GDP. Our neighbor Canada's single-payer system costs $3,165 per person per year, about half our expenditure, or 10% of their GDP. The Canadian costs and health outcomes are typical of developed countries, where government managed and financed systems predominate. The extra cost of our system is not buying us better health. The probability of dying between ages 15 and 60, a good indicator of failure of a health-care system to prevent and treat disease, is 8.1% for females in the U.S.; in Canada, the same probability is 5.7%.

In the future, things are going to get much worse. If current trends continue, health care in the U.S. as a proportion of GDP will rise to 40% by 2050, a level that will break the current system of financing health through employers, pension funds and Medicare/Medicaid.

There are a number of reasons for this gathering storm. First, the U.S. population is getting older, and the old require more medical maintenance. Second, we are getting wealthier, and staying alive is the ultimate luxury good. Third, we demand expensive medical innovations, such as dialysis, MRIs, transplants, stents and biotech. About a third of all medical costs are incurred in the last year of life, and are at best marginally effective. The incentives in the system do not force hard choices.

To deal with this future, three substantial reforms are needed. First, we need to wring out some of the inefficiencies. Something like 30% of our health costs come from administrative overhead, legal costs and defensive medicine. These could be largely eliminated in a comprehensive reform; we just need to emulate best practice in other developed countries.

Second, we need universal health insurance coverage, with active emphasis on preventive medicine that is effective in reducing later medical events and costs. Perhaps this can be accomplished by cobbling together existing sources of finance, as in Gov. Arnold Schwarzenegger's current proposal for California. However, eventually we will have to go to a system that is not channeled through employers, something like a tax-financed medical voucher system.

Third, we need incentives that match choice of expensive treatments with consumers' willingness to pay for them, a benefit-cost analysis that places treatment choices and financial responsibility on the individual.

This brings us to Medicare Part D. This experiment in privatizing the prescription drug insurance market and the interface between insurers and consumers gives the individual the right, and responsibility, to make insurance plan choices that are in his or her self-interest. If consumers are up to this task, then their choices will ensure that the plans, and insurers, that succeed in the market are ones that meet their needs. However, if many are confused or confounded, the market will not get the signals it needs to work satisfactorily. The success or failure of the Part D market is a bellwether for proposals to spread consumer-directed health care across the system, putting health and financial choices in the hands of consumers, and utilizing the forces of market competition to rationalize the system.

So, how well has the Part D market worked? We now have one year of experience, including a second open enrollment period in which consumers could switch plans, or enroll if they had not done so earlier. We can ask whether consumers were satisfied with this market, whether their choices were consistent with their interests, and whether Part D insurance has had a positive effect on health outcomes. To do this, my group is tracking about 2,200 consumers age 65 and up from opening of the initial enrollment period in mid-November 2005. We interviewed them just before enrollment began, and again just after the initial enrollment period ended on May 15, 2006. Here are some of the things we have found:

Consumers were quite confused about the Part D program before enrollment began, with 40% knowing little or nothing about what the program offered, and 17% indicating that they were unlikely to enroll. Start-up problems, widely publicized, further clouded the program's future. However, when the initial enrollment period closed, only 7.4% of the age 65-plus eligible population of 35.8 million were not enrolled in Part D or comparable prescription drug coverage. It helped that monthly premiums, predicted to be about $37, were substantially lower, averaging around $24, with some plans available for premiums as low as $6 to $10. It helped that about 68% of the population was automatically enrolled, either through employer or union based plans or through Medicaid, VA or federal employee coverage. It also helped that Part D incorporates an annual subsidy of about $1,200 per enrollee, so that most potential enrollees benefit immediately.

Failure to enroll turned out to be a minor problem, but making Part D voluntary rather than mandatory did have some consequences. About 1.2 million seniors who use enough prescription drugs so that they would immediately benefit from enrolling failed to do so. Mostly, these were not the very poor, who were picked up by Medicaid and by outreach programs, but poorly educated people above the poverty line.

General opinions elicited after the close of the initial enrollment period give Part D a mixed report card. Seventy-seven percent liked having a choice of plans, but 58% thought the program was not well designed; 77% say they would have preferred to have prescription drugs provided automatically as part of Medicare Part A; 58% are less satisfied with Medicare as a result of Part D; and large majorities dislike formulary restrictions and the gap, a range of out-of-pocket costs where the Part D standard plan offers no benefits.

However, when one looks at plan choices made, one finds that consumers were relatively consistent in recognizing their self-interest. Most consumers selected among the lowest-cost plans available in their area. Consumers with significant drug needs enrolled early, while those with no immediate needs mostly enrolled later to preserve their option value of obtaining insurance at non-penalized rates. There is some evidence that consumers did not fully appreciate the consequences of the gap, and enhanced policies that covered the gap were not heavily demanded, even though the additional coverage they offered was close to actuarially fair.

The picture that emerges is that elderly consumers were mostly able to navigate the Part D market and reach reasonable choices, despite its novelty and complexity. Two concerns with insurance markets that also arise for the Part D market are adverse selection, in which only the sickest seek insurance, and insurers respond by cherry-picking, refusing coverage for individuals and conditions likely to increase claims; and moral hazard, in which insurance coverage encourages additional treatments by reducing the incremental costs of these treatments.

Adverse selection has so far been avoided in the Part D market because the voluntary enrollment rate is high, including a high proportion of healthy seniors who currently are net contributors to the system. Further, adverse selection is not a problem for plan switchers because participating insurers must take all comers, and are reimbursed by Medicare based on each individual's experience rating. There is moral hazard in the sense that prescription drug use is increasing for seniors newly insured under part D, to 4.4 from 3.3 prescriptions on average per month, according to our survey.

This increase must be assessed in terms of its health consequences. Dana Goldman at RAND Corporation has found that making at least some drugs available to seniors at lower cost more than pays for itself in decreased incidence and cost of health problems. For example, reducing the copay on statins to $10 from $45 for a 30-day supply increased plan prescription drug payments, but the increased adherence of patients to the therapy at the lower copayment reduced cardiovascular incidents and attendant hospitalization costs, so that total annual health costs per patient in his study fell to $5,180 from $5,470.

A recent study of the VA population indicates that statins increase adult life expectancy by nearly two years, apparently because they act as anti-inflamatories as well as reducing cholesterol. Anecdotal evidence indicates that Part D coverage will reduce medical problems and hospitalization costs enough to offset a significant portion of its cost. However, reduced adherence to therapies by consumers who hit the gap will probably have a significant adverse effect on health outcomes that we will begin to see in 2007. A humorous proposal is that employers could lower their total health-care bills by putting statins and anti-hypertensives in the water cooler. What is clear is that an integrated approach is needed to evaluating health-care costs, and programs like Part D that can deliver effective preventative drugs may pay for themselves.

My overall conclusion is that, so far, the Part D program has succeeded in getting affordable prescription drugs to the senior population. Its privatized structure has not been a significant impediment to delivery of these services. Competition among insurers seems to have been effective in keeping a lid on costs, and assuring reasonable quality control. We do not have an experiment in which we can determine whether a single-product system could have done as well, or better, along these dimensions, but I think it is reasonable to say that the Part D market has performed as well as its partisans hoped, and far better than its detractors expected.

Does this mean that Part D proves that privatization will be effective in other segments of the health-care market? Here, I think caution is advised. First, the success of Part D depends substantially on thoughtful and muscular management of the market. The former head of Medicare, Mark McClellan, and a dynamic, no-nonsense 75-year-old government bureaucrat, Abby Block, bullied insurers to make sure there were, in her words, "no bad choices." It is unclear whether their successors will be as successful in standing toe-to-toe with the industry and making sure consumers' interests are protected.

A health insurance market like Part D probably requires this level of active management to work well; after-the-fact oversight in the style of the SEC or FTC is inadequate. If privatization is going to work elsewhere in health care, active market management will be needed.

Finally, consumer-directed health care works only if consumers can understand the consequences of their choices. In much of medicine, providers are the agents that guide consumers through these choices. If consumer-directed health care is to be effective, these providers must give sound advice on both the health and financial consequences of alternative choices. This is possible if the incentives to providers and consumers are right, but the design of such markets should not be left to chance.

Mr. McFadden, the E. Morris Cox professor of economics and director of the Econometrics Laboratory at Berkeley, is a 2000 Nobel laureate in economics.

URL for this article:
http://online.wsj.com/article/SB117159975453110920.html