Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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What Part of Medicare Gets Paid?

Unthinkingly, many people believe Medicare completely pays all medical costs for 44 million eligible recipients. Not by a long shot. In the first place, many medical costs are ineligible for Medicare reimbursement; the largest is nursing home care. About 5 million recipients are "dual eligible", which means they get both Medicare and Medicaid coverage, and then state Medicaid programs do pay for nursing homes to a variable degree. The federal government excludes "custodial" care, but to some degree does pay for "skilled nursing care" , so the nursing home matter often seems ambiguous, and becomes the source of some resentment.

Beyond that, patients are responsible for annual cash deductibles, hospital daily deductibles and about 20% co-insurance, all of which are really Medicare-related. The 20% coinsurance was allegedly meant to generate cost concern by demanding patients "have some skin in the game", but the great majority of patients promptly took out a second, co-insurance, coverage, so any cost restraint has long been eliminated for them. They have to pay a second insurance administrative cost, plus its profit margin, however. A 20% co-payment isn't enough to influence behavior, while the ability to budget retirement costs is more important to elderly people on a fixed income. They soon see the foolishness of buying a 20% insurance to cover a 20% discount on the first insurance, but the reaction is not that it's stupid, but rather, that Medicare is stupid. Furthermore, if the individual has Major Medical Insurance coverage, some additional odds, ends and outliers are covered, but with with a third insurance layer of cost and profit added. Once it was discovered that insurance profitability was also enhanced by a great many people neglecting to file a Major Medical claim form, the incentive of the insurance industry to protest the situation was effectively smothered. In summary, by addressing the total costs of the elderly rather than Medicare alone, we can claim the elimination of this triple insurance cost, which somehow escaped the attention of the designers of Obamacare for their scheme. In fact, it can be suspected that many advocates of "single payer" are imagining the elimination of this duplication.

In addition, the Medicare patient pays premiums, which amount to a quarter of Medicare cost, and derived from young working person from age 25 to 65, the 2.9% payroll deduction contributes another quarter. We can't both collect it, and still assume it as a cost for the taxpayer to assume. The remaining 50% of the Medicare cost results in a deficit, paid for with debt, largely owed to the Chinese. There's a lot of rounding error and approximation in the reports, but the impression is gained that the U.S. government doesn't pay very much of Medicare costs at all, except for its administrative costs and the debt service. But in fact until those debts are finally settled, no one can say how much the government pays for Medicare.

Since our present purpose is not to pay the costs but to approximate them for discussion of alternatives, rounded-off costs, are perfectly adequate. Approximations only contribute serious errors, if applied in different ways to different payment systems. The individual and his employer are now paying somewhat more than half of Medicare costs, which are perhaps 70% of the total medical costs of the elderly, and the remaining 30-40% is a government obligation whose ultimate settlement is not yet determined. It's not easy (impossible?) to say what we might be paying if these costs were borne by a new financing arrangement. Most economists say the employer contribution is adjusted in fact by lowering wages by an equal amount, and that in turn is recouped in part by income taxes. Furthermore, the Chinese loaned us the money with the expectation of being repaid, so there are outstanding debts from the past which must be figured into the calculation.

Under these circumstances, it seems appropriate to start with a way to pay the total program costs of Medicare. We'll start with that, making a mental note that there's probably 25% (?) more, and try to cope with these other leads and lags, by trying to offset them during the transition, or just by letting the Government Accounting Office figure out the rest. Medicare program costs are a known quantity for use in a program re-design, while other unknowns are for others to conjure with.

Originally published: Sunday, August 10, 2014; most-recently modified: Friday, June 07, 2019