To fully appreciate the costs and benefits of Medicare Prime (MP), we need to explore its possible budgetary and distributional effects. There are several factors to be considered. One is how much the deductible would vary with income and other household characteristics.
There are an endless number of possible formulas to determine a household’s MP deductible. How do we narrow them down to a few reasonable options? The objective of the MP deductible is to close the coverage gap for the poor and the chronically unhealthy at a minimum cost to taxpayers. Therefore, one common feature is that the deductible must be zero for households too poor to purchase private insurance and it must increase with household income.
Healthcare expenditures are highly correlated with age. In fact, age is often used by insurers as an easily observed indicator of likely healthcare costs, a.k.a. preexisting conditions. That is the reason Medicare was created in the 1960’s. Without it, elderly Americans would find it nearly impossible to obtain affordable health insurance. Additionally, the Affordable Care Act (ACA) restricts the amount an insurer can increase premiums with age. So, another possible feature of the deductible formula could be that the deductible would decrease with age.
The MP deductible could even be directly determined by the existence of diagnoses of chronic medical conditions, like breast cancer or heart disease. The more preexisting conditions a person has, the smaller his deductible. By risk-adjusting the MP deductible, enrollees would have an incentive to divulge their preexisting health problems, thus eliminating the informational asymmetry that is the root cause of adverse selection.
To investigate MP’s feasibility relative to Medicare For All (MFA) and The Public Option (TPO), let’s start with only considering household income. Our goal is to identify three income levels: low — for household’s that need free [There’s that word again!] health insurance; middle — for households that need some government assistance in obtaining private health insurance; and high — for households that do not need any government assistance. Using Occam’s Razor as a guide, I start with the simplest formula I can think of:
Parameter a is the rate at which the deductible grows as household income increases — a parameter that should lie somewhere between 0 and 1.
Parameter b is the fraction or multiple of the Federal Poverty Level (FPL) that determines the upper limit of income where the deductible is zero, in other words, low-income households. In today’s all-or-nothing public insurance system, this is analogous to qualifying for Medicaid.
Parameter c is the multiple of the FPL that determines the upper limit of middle-income households. Above this income level, households would not benefit from MP.
The ACA sought to establish 138% of the FPL as the income upper limit for Medicaid qualification, therefore, let’s set b to 1.38. The ACA also established the income upper limit for premium subsidies at 400% of the FPL. That would translate to a value of c = 4.
What would be a reasonable value for parameter a? The lower its value the greater the benefit to middle-income households and the higher the cost to taxpayers. Figure 18.1 illustrates the relationship between the MP deductible and income for a one-person household in 2017 for three different values of parameter a. The horizontal intercept, the income level that separated low-income individuals from middle-income individuals, was $16,643. At an income of $30,000, the deductible would have been $3,339 when parameter a = 0.25. The deductible would have been $6,679 when a = 0.5 and $13,357 when a = 1.0. Regardless of the value of parameter a, the value of the deductible would be irrelevant for incomes greater than $48,240. Those individuals would not benefit from MP.
Figure 18.1 Medicare Prime Deductible Lines
What is the Benefit for Middle-Income Households?
The benefit of MP for low-income households is easy to see. If they use only in-network providers, all their healthcare expenses are paid for by MP. Even if they do use the occasional out-of-network provider, their burden is decreased due to the policy of partial payments to such providers.
The harder question to answer succinctly concerns the benefit for middle-income households. These households must satisfy their deductible before MP pays anything. As the examples demonstrated above, the deductible can be several thousand dollars even for an individual who earns only $30,000 a year. And the MP deductible is not even the maximum out-of-pocket expenditures the beneficiary must pay. It is the maximum expenditures Medicare would pay (if it covered all expenditures) before it pays anything. The middle-income beneficiary and her insurer, if she has one, will likely pay more than that.
An Illustrative Example
To understand what I’m getting at, let’s consider an appendectomy. This procedure is typically performed at a hospital by a surgeon. Medicare has two different systems that pay for this — one for the hospital and another for the surgeon.
Medicare uses the Inpatient Prospective Payment System (IPPS) to pay hospitals. The Diagnosis-Related Group (DRG) code for “appendectomy w/o complications” is 343. Since the hospital’s payment depends on the DRG code as well as the location and type of hospital, I’ll specify the Southeast Alabama Medical Center because it is the first hospital in the U.S. … by Medicare Provider Number (i.e. 010001). In 2017 Medicare paid this hospital exactly $5,716.01 for each hospital stay with this DRG. (Source: 2017 Medicare Pricer)
Surgeons are paid separately from hospitals. Medicare uses the Resource-Based Relative Value System (RBRVS) for surgeon payments. The Current Procedural Terminology (CPT) code for an appendectomy is 44950. For this procedure, Medicare pays the surgeon exactly $667.17. This does not include any office visits related to the procedure. (Source: CMS Physician Fee Schedule Search)
The total Medicare payment would be $6,383.18. While the Medicare payment systems are publicly known, a provider’s undiscounted charges for performing an appendectomy and any discounts negotiated with private insurers are not. But based on national averages, we can estimate the undiscounted charges would have been $26,268.23 and the price paid by a typical private insurer would have been $12,004.58.
If an individual in the middle-income group had needed an appendectomy, what direct benefit would MP have provided for them? If her deductible was over $6,383.18 and she had no other healthcare expenses that year, the answer would be zero. If she had no private insurance, she would have owed the undiscounted charges, $26,268.23. If she had private insurance, she and her insurer would have shared the $12,004.58 in obligations.
Direct benefits would only accrue to individuals with deductibles less than $6,383.18. Figure 18.2 illustrates the beneficiary liabilities at three different deductible levels: $1,000; $5,000; and $10,000. Even a household with a MP deductible as small as $1,000 would still be liable for over $1,000 in expenses if it had private insurance and several thousands of dollars if it didn’t.
Figure 18.2 Patient Expenses by Deductible Level
So, the direct benefit of MP to middle-income households would be very limited. The tangible benefit of MP to middle-income households would be mostly indirect in the form of lower private insurance premiums. In today’s market, the private insurer is primary. For any single customer, its liability is virtually unlimited. The MP deductible would truncate the private insurer’s liability, allowing it to charge a lower premium.
For example, healthcare expenditures by the 4,346 middle-income households that responded to the 2017 Medical Expenditure Panel Survey would have ranged from zero to $352,983 had they paid Medicare rates. 23% (i.e. 1,008) of these households would have paid more than $5,000. 13% (i.e. 563) would have paid more than $10,000. The losses suffered by private insurers of these households would have been greatly curtailed if MP had been in operation.
Next time I’ll explore the possible budgetary impact of MP.