Can this really save money?
Matthew Martin
4/20/2015 10:05:00 AM
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But it was something that Christie said about Medicare that caught my attention:
"For Medicare, the rules for cost sharing– deductibles, caps on coverage, and co-pays, are all over the map. There are different types of deductibles and cost-sharing depending on the type of service provided and where it is provided. We should do exactly what the bipartisan Simpson-Bowles report – a report which President Obama ignored -proposed. Simplify all this by having a uniform single annual deductible of $550, a uniform coinsurance rate of 20%, 5% cost-sharing above out of pocket expenses of $5,500 in a year, and a hard cap of $7,500 a year in cost-sharing. This makes sense to me. It is simpler. It will save money. We should do it."I won't claim to have done the math to see how close to optimal those numbers are--when you apply optimal control to health insurance, you generally don't get a coinsurance rate that's anywhere close to linear, especially when incentives for things like preventive care are considered. But what I like about this is that it ultimately caps senior's liabilities at $7,500 per year. Debates about health insurance tend to focus almost exclusively at what goes on in the truncated left-tail of the distribution--deductibles, co-payments, coverage for preventive care, co-insurance rates on small medical bills--but in my view limiting enrollees' right-tail liabilities is far more important than anything that goes on in the left tail.
The current Medicare program doesn't limit right-tail liabilities. Medicare part B, covering out-patient services which are growing portion of total expenses, has a flat 20 percent co-insurance rate on all spending above the deductible. This scheme was designed when outpatient care wasn't very common and generally only involved small inexpensive procedures. But we now do things like surgery on an out-patient basis, and the bills can easily be in the tens of thousands or more--meaning 20 percent packs quite a punch these days. Medicare part A is much more generous than part B on the left-tail of the distribution, with low coinsurance rates on hospitalizations...as long as you don't spend too many days in the hospital. In fact, part A cost-sharing rises steeply as your inpatient expenses rise, and benefits drop off completely at the 90-day mark (well, you get an additional 60 "lifetime reserve days" that don't renew). These benefit schedules might seem optimal in the neighborhood of average medical costs, but they fail to protect seniors from the biggest risks and are probably deeply sub-optimal as a result.
Christie's plan fixes that by capping out-of-pocket costs at $7,500 per year.
But here's the thing: can this possibly save money? I'm skeptical. A cap on out-of-pocket expenses is substantially more generous than the current system's treatment of right-tail risks, and the 20 percent coinsurance rate is no higher than the current 20 percent coinsurance for part B. The deductible is actually less than half the current medicare part A deductible. Where are the savings?
While I don't really know the answer, here's a few guesses. Most of the savings comes from higher out-of-pocket costs for inpatient hospital stays. Current inpatient stays have low co-pays, and Christie's plan would replace that with a high coinsurance up to the $7,500 limit. Even short inpatient stays are quite expensive--a lot of seniors would end up paying $7,500 almost every year (for reference, average annual Social Security payment is about $14,000). Smaller savings would come from the fact that Christie's deductible is higher than the current part B deductible, as well as the repeal of part B's extra benefits for things like preventive care, which currently come at little to no cost out-of-pocket.
Even so, I'm a little skeptical this would actually save money on net. $7,500 is high compared to seniors' incomes, but awfully low compared to typical medical bills.