The Challenge of Our Times; Solving the Medicare Funding Issue is Key to Our Future Economic Viability

Op-Ed by Secretary Leavitt as appeared in the Modern Healthcareon May 19, 2008

Generations of Americans have grown up believing that the economy can only grow and that Social Security and Medicare will always be there when they retire. But healthcare costs are rising so much faster than the rest of the economy, so one must ask a frightening question: Can we keep the promises made to seniors and still remain a prosperous nation? On its present course, Medicare is drifting toward disaster.

When I was born, healthcare consumed 4% of the economy. When my son was born, it had doubled to 8%, and when my first grandson was born two years ago, it had doubled again to 16%. It hardly seems possible that this trend could continue, but that's the direction we're headed.

We have a medical inflation rate that has more than doubled the overall inflation rate for the past 40 years. We have an epidemic of obesity and associated chronic diseases, like diabetes and heart disease. We also have an aging population, with fewer working adults per Medicare beneficiary to pay for our promises. There are nearly four workers for every beneficiary today; in another generation, there will be just two and a half.

In 20 years, even as the ratio of workers to beneficiaries is shrinking by nearly half, Medicare's share of the federal budget will almost double from 13% to more than 23%. At the same time, the typical household will see its healthcare spending nearly double from 23% to 41% of total compensation received. Higher and higher costs will be borne by fewer and fewer people. Sooner or later, this formula implodes.

Unfortunately, Medicare itself suffers from some chronic ailments that, left unchanged, would defeat the system.

The first is the Silo Syndrome: Each medical action is paid for separately. That provides little opportunity or incentive for coordination among providers, and it often results in bad referral decisions, sloppy hand-offs, duplications, fraud, and poor quality of care. The result is inappropriate care and unnecessary cost.

The second is indifference to quality: Doctors, hospitals and other medical providers are paid at the sam e rates for good care and bad care. In fact, poor quality is often rewarded. When patients contract preventable hospital infections, costs skyrocket and, in most settings, the hospital profits from it.

The third is what I call ``chronic more'': There are no mechanisms or incentives for controlling the volume and intensity of care. Instead, the system rewards high volume. Doctor and hospital incomes rise as more units of service are ordered. Patients have no way to know how much care costs and therefore have no reason to refuse unnecessary procedures.

The good news is that there are remedies for these ailments. We need to arm consumers with strong doses of transparency about cost and quality of care. We also need to build incentives for high-quality, efficient care directly into our payment structure. A variety of policies would force these changes, and luckily the infrastructure of quality metrics and strategies for rewarding value are available. It just takes congressional action.

We need to make the rest of Medicare more like Part D. The Medicare Part D prescription drug program provides a good example of how better transparency and competition can drive change. It has not only ensured that seniors get the drugs they need, it has also demonstrated that seniors can use an organized marketplace to drive quality up and costs down.

Today, 90% of those who are eligible have drug coverage; satisfaction rates are high; and the cost is almost 40% below the original estimates. This is chiefly due to the power of a competitive marketplace. Prices are determined through competition. The cost of the benefit is transparent to consumers and they can choose the benefits that meet their needs.

If the competitive forces that exist in the Medicare Part D structure were applied to Medicare Parts A and B, it would revolutionize the entire system. A physician practice would be far more likely to invest resources in monitoring and tracking patients with chronic conditions if beneficiaries were provided with information on the quality of care and dollar savings available through more effective providers. This would drive quality up and costs down.

Medicare can be made more efficient by rewarding value and shifting to a Part D-like competitive model of delivery. However, what remains as the most difficult obstacle is rebalancing the generational obligation.

This is a classic public-policy decision that has to be faced. It is simply unreasonable to think Medicare can be sustained unless this is changed. If we start now, the change can be made over time and with genuine fairness. We can avoid an intergenerational economic struggle from which both sides suffer. Promises to present and future beneficiaries to provide coverage of healthcare must be kept, but not at the expense of future generations.

Every generation of Americans has overcome challenges to secure our nation's role as the world's economic leader. I believe that solving the healthcare puzzle is this generation's challenge. It will require change.

In a global market, there are three ways to approach change. You can fight it and fail; you can accept it and survive; or you can lead it and prosper. We are the United States of America; let us lead.

Mike Leavitt is secretary of the Department of Health and Human Services in Washington.