Medicare: The View from Inside the Administration

This roundtable offers perspectives from two former Medicare administrators, Bruce Vladeck, who is currently a senior advisor for the healthcare consulting firm Nexera, Inc., in New York City, and Gail Wilensky, who is an economist and senior fellow at Project HOPE, an international health foundation in Washington, D.C. What are their frustrations with Medicare and what are their prescriptions for improvement? Generations Guest Editors Tricia Neuman and John Rother moderated this discussion.


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Generations: You have both served as administrators of the Medicare program and clearly are experts in Medicare policy. Please tell us what you consider your major accomplishments during your time as head of the Health Care Finance Administration (HCFA).

Gail Wilensky (GW): Medicare has favorably impacted the lives of so many people over age 65, as well as the disabled under age 65 who qualify. One of the activities I most liked to do when I was running Medicare was to visit with beneficiaries of the program, going to hospitals, senior centers, and nursing facilities. It was important because when you [run an agency like HCFA] in Washington, D.C., you spend an enormous amount of time in day-to-day skirmishes protecting your programs, responding to the various constituents, and talking to members of Congress. You can forget why you are doing this.

One of the issues plaguing the agency when I arrived was the interminable amount of time it took to get regulations out. I decided that making the agency function better was one way to help seniors. One of my first tests was to move the [regulations implementing] the Clinical Laboratory Improvement Act. At one of my first hearings, I remember a senator pointing at me and asking, ‘When are you going to start obeying the law, Dr. Wilensky, and get this legislation implemented?’ I went back and said, ‘We have got to get this regulation out now.’ It had been circulating around the department for at least a year by then.

I quickly learned that sometimes regulations circulate around the department or agency for a long time because there are a lot of very controversial elements. It was my first exercise in trying to keep the external responses under control and fix what needed to be fixed.

Bruce Vladeck (BV): When I left [HCFA], I received a note from one of the senior career people at the Agency—one of the stalwarts of the Medicare program—who worked very closely with both Gail and me. In the note, she said something to the effect of: You really got us to refocus on beneficiaries.

I think the pressures on the Agency are always in terms of budgets, the provider groups, and the local constituencies. I had some sense that people were not really sure who the primary customers were, or what their primary purpose was. I spent a lot of time and effort on the message that our purpose was to make sure beneficiaries get the best possible care. I would not have presumed to claim success had I not gotten that note.

The other thing about the particular time in which I was administrator is best encapsulated, I think, in a conversation I had with Robert Pear [Washington correspondent for The New York Times] in the summer of 1996. He [asked], ‘What is your major accomplishment of the first term?’ I said, ‘Well, we still have Medicare and Medicaid.’

We spent so much time playing defense in those years. I think Medicaid and Medicare both came out of that process stronger than they went in, both financially and in terms of a number of specific characteristics of the programs.

GW: When I look back, there are at least two accomplishments I feel very good about. [One] was implementing the Relative Value System (RVS) physician payment reform that had been passed by Congress, somewhat surprisingly, in November 1989. The legislation was not even completely developed when it was passed into law. I never thought it would be passed as a wholesale replacement of the previous fee schedule, but would be used to justify fiddling with the extreme values in the existing schedule. As a market-oriented economist, I watched the development of the RVS with even more appreciation of what the market does on its own as opposed to trying to come up with ten or eight or 9,000 different price points for physicians. Implementing the change was an all-hands-on-deck effort for about a year and a half. The proposed rule for the RVS ended up generating even more flack than the regulations for clinical labs.

In January 1992, the implementation of the RVS worked quite well, even though at the time and since then, I have expressed frustration and concern about the way the relative value scale [used to set payments for physicians] is constructed, but my job was to make sure it happened so that beneficiaries could continue to go to their physicians and physicians would be paid in a timely way.

A second accomplishment was to put a stop to the voluntary donation–provider tax mischief that states were engaging in to take what had been always a federal and state matching program for Medicaid and to make it a 100 percent federally funded program. Anyone who says states cannot be creative in their financing was not observing what was going on in the early 1990s. For me, it was irresponsible to allow what was supposed to be a federal and state matching program to become a fully federally financed program with no other safeguards in place. So, while I had some sympathy for what states were trying to do—especially if they actually used the money to increase Medicaid spending—I was adamant that this was not the way. It took an enormous effort to succeed, one that many in the White House and Health and Human Services never thought would happen, but it was stopped—at least temporarily.

Generations: It has been more than twenty years; the program has changed. How would you compare Medicare when you were running it to Medicare today?

GW: I am impressed with the continuing growth that we have seen in Medicare Advantage. In some ways, this is not so surprising, as baby boomers, most of whom have spent all or most of their working lives in network plans, are more comfortable with this strategy than previous generations of seniors.

BV: When we were putting the Balanced Budget Act together, I kept hearing all this rhetoric about what was going on in the private sector. One of the things that clearly was going on in the private sector was that Health Maintenance Organizations were actually losing market share in the mid-1990s to Preferred Provider Organizations and other kinds of hybrid plan arrangements. Those options became part of the Administration’s proposal to increase the types of plans that would be available.

You had all these folks who had been enrolled in Kaiser all their lives who became Medicare beneficiaries. They wanted to keep their care system. Provisions were made for doing that back to the beginning of the program. We wanted people to be able to keep what they had [if] they liked it. But, if you are going to have this continued growth in enrollment in Medicare private plans, there are two things you must get straight. You have to get the payment right, and you must have appropriate risk adjustment to compensate plans for treating sicker-than-average patients, without overpaying plans if they then enroll healthier-than-average patients. And, you have to have a payment methodology so it is neutral for the program, whether an individual beneficiary enrolls in a private plan or stays in traditional Medicare. You also need oversight and monitoring capabilities. We took some of the earliest enforcement action on quality grounds.

Generations: We’d like to get your thoughts on Medicare today, and in the future. As this is Medicare’s 50th anniversary, we’re eager to hear your thoughts about some of the challenges facing Medicare, looking forward.

GW: Reforming how we pay physicians is critical. I was hopeful last spring with the legislation being considered in the House and Senate. It was not perfect, but it was vastly better than what we have had. There was the not-so-small problem of coming up with a $140 billion to pay for the legislation, [but] there are a variety of ways this could have been done. “Dynamic scoring” would help, assuming the new Congressional Budget Office director would be willing to consider the effects of behavior changes with different incentives.

To the surprise of many in Washington, myself included, Speaker Boehner and Minority Leader Pelosi reached an agreement to pass legislation this March very similar to what was considered last year but without full financing of the $210 billion total cost. Both the Senate and House passed the legislation with overwhelming majorities and the President has now signed it into law. Even though most physicians are caring professionals who have ignored Medicare’s financial incentives—which have been to do more and more complex procedures rather than try to do what is best for the patient—we will now have financial incentives supporting physicians who improve quality and do so efficiently rather than penalizing them for doing so. Unfortunately, the country will also be adding $140 billion to the deficit, but it is hard to imagine reforming healthcare as long as the “team captains” are facing perverse incentives.

I am hopeful we can expand the availability of coordinated care to recognize the different needs that exist for different populations in different parts of the country: not forcing people into coordinated care, but making it available because, if done well, it is generally much better suited to treating the needs of people with chronic diseases. If we can also begin to better integrate at least some of the post-acute needs into that care, this will help financially as well as clinically. Bouncing people between nursing homes and hospitals is terrible, especially for seniors. Changing settings disorients many people, especially the frail elderly or cognitively impaired.

Ultimately, we have to take on Medicare’s financing. As we all know, healthcare spending has been growing slowly. I have been publicly skeptical that since we do not know yet why the slowdown is happening, we do not know whether it is sustainable. However, the slowdown means we have a little more time to decide how we want to make Medicare financially viable, going forward. It will be a challenge, whichever political party is around when a change needs to occur.

Generations: Gail, do you have a preference as to how Congress should deal with the financial challenges?

GW: Well, I like the notion of having choices among a full set of programs, including traditional Medicare supported by a subsidy that varies with income but not with the plan choice a person makes. I agree with Bruce’s earlier comment [about] the need to have good risk adjustment, and paying properly to care for the sick. Given the doubling of the population expected in Medicare, I would not be surprised if additional financing won’t be needed. However, everything I know about the political system says that the financing should be the very last piece put in place. Although I know it has been controversial and don’t think it does much to reduce future funding need, I would support a policy that increases Medicare’s eligibility age for seniors who are fully able to continue working. It is a sensible strategy, but not a huge financial fix. Getting the subsidy right is most important. Fortunately, we have learned a lot about both risk adjustment and the potential for competitive bidding across plans.

The Affordable Care Act will provide information on issues regarding bidding and risk adjustment, and the importance of providing risk corridors, as we do with Part D. Whether risk corridors are allowed to become revenue providers, as they are in Part D, is another matter. I also believe having (budget-neutral) risk adjusters is important and appropriate for new programs or programs experiencing substantial change. Although many think of Medicare as a type of social insurance, the program currently requires higher income people to pay higher premiums under Parts B and D. With the kind of program I have suggested, we could make income-related subsidies an even more explicit part of a future Medicare program.

Generations: Do you mean reducing costs for lower income people as well raising costs for wealthier people?

GW: I mean lower income people getting more and higher income people getting less. I think we need to do both. We have been supplementing Medicare coverage at the lower end for years, which means we’ve had an income-related Medicare program for years, but we haven’t always recognized it as such. [There are] the dual eligibles (people on Medicare and Medicaid), the special low-income subsidies under Part D, and the outpatient prescription drug benefit. These subsidies also help people not quite poor enough for Medicaid, but who receive low-income support with regard to their Part D premiums, deductibles, and cost-sharing to varying degrees. So in our uniquely American patchwork-quilt way, the country has been moving quite far from a formal social insurance structure. I think we might be able to do it in a more rationalized way as we go forward, but it is not like we haven’t already been moving in this direction.

Generations: Bruce, what would you say are the major challenges facing Medicare? Do you have a similar perspective on how to address the challenges that lie ahead?

BV: I am more optimistic, perhaps, about the ability to solve [the problems] over the long term. Let me start off by saying that there are a lot of ways that the Medicare fee-for-service program could be less expensive. Competitive bidding for durable medical equipment is one obvious example that already is working and only took us twenty years or so to get through Congress. Next up ought to be competitive bidding for clinical laboratory services, which ought to be easier because they’re even more homogenous than medical equipment. I think there is still room to save a lot of money.

We also have to fix the Medicare benefit structure. We have made progress on mental health benefits, although whether or not that has any practical effect on the services available to beneficiaries is not yet clear, and we’re making progress in closing the “donut hole” in Part D.

We have to do something about dental care, which increasingly is a barrier to people getting medical care if they need transplants, or they need cancer chemotherapy, and they have untreated dental problems, but cannot afford care. With the states cutting back on adult dentistry for Medicaid, it is even more of a problem for many low-income Medicare beneficiaries who are also covered under Medicaid.

We also need to figure out how to provide catastrophic protection more effectively. There must be better ways to rationalize the copayments and deductibles and to put some kind of catastrophic cap on liabilities in the system.

I happen to be more sanguine about the long-term financing issues; not that costs won’t continue to grow, but I think we are at the cusp, delayed somewhat by the effects of the recession, of a very significant change in retirement patterns in the American population and in other industrialized nations as well, driven by supply and demand. The supply effect is going to be that, except for public employees, we basically eliminated defined-benefit pensions in the United States, and then the defined-contribution assets of many families evaporated during the recession. The actual assets of a large proportion of younger baby boomers are terrifyingly small. I think they are going to be poorer than the previous generations in several ways, and they are going to need to stay in the workforce. The demand side is also going to be there. More 70-year-olds mean we will have fewer 30-year-olds. The only alternative to keeping people in the workforce longer, in terms of having an adequate supply of workers for the economy, is to rationalize immigration policy. I think we are more likely to rationalize Medicare than rationalize immigration policy.

Again, the economics, particularly with the Affordable Care Act, of a 66- or 67-year-old who is still working and whose employer is required to continue to provide health benefits, and who is still paying payroll tax and a higher level of income tax to the Trust Fund, is very different from the economics of somebody who retires at 65. I don’t think you have to move up the age of eligibility for Medicare; we have to protect the people who are physically unable to work or unemployable when they get to be 65. But I think increased workforce participation of healthy people in the 65- to 74-year age range is happening already to a greater extent than we realize. It would be happening faster if we were not coming out of such a bad economic time. I think it will happen faster and faster in the years ahead because the big shift in age distribution is still ahead.

On the other hand, by all the traditional measures, Medicare is in the best financial shape it has been in in years. So, we have an opportunity for a few years to learn more about what is going on, about what is happening with healthcare costs, and about what is going to happen with retirement behavior, and then we will be able to think about what we ought to do in terms of long-term financing. Again, I happen to think that a chunk of the problem is going to solve itself just by changes in when people retire and who retires when.

The final point also is essential and yet the hardest to address: we must fix Medicare’s post-acute benefits, at least make them work on their own terms, let alone integrate better with other long-term-care services. I think the IMPACT Act passed earlier this year [October 2014] lays the groundwork. The fact that [post-acute benefits] are separate benefits at all makes no sense. The Medicare home health benefit—I probably spent more time on that than any other Medicare issue when I was at HCFA—is incomprehensible in any rational terms; the basic statutory framework makes no sense.

I don’t see, over time, Medicare paying a larger share of the long-term-care burden. My notion always was that people in long-term care are really sick and need a lot of health care. Medicare ought to cover their medical needs, but not their other very real needs for personal care and related services. We need some rational, clinically coherent, operationally doable way of doing that.

Generations: There is a striking amount of agreement between the two of you, in terms of how you view what the challenges have been. Talking to you, there seems to be a lot of middle ground. Is progress on Medicare in today’s political environment realistically possible?

GW: Probably not—or at least not much progress. The good news is I am not sure we need to make a lot of progress right now. We have just seen physician payment reform passed, an area that received bipartisan, bicameral support. Of course, the biggest challenge—paying for the reform—was mostly ignored, but it does indicate that agreement can occur when all parties are sufficiently motivated to do so.

Ultimately, making Medicare financially viable will be a philosophical, as well as an operational, challenge. Fortunately, the most challenging [changes] do not need to occur now. We need to learn how to get better integrated care for those who stay in fee-for-service, which is likely to be a sizeable number of seniors for the foreseeable future. With managed care, we have imposed demands for quality metrics that we have been hesitant to impose on the fee-for-service side. Seniors in fee-for-service Medicare deserve the same quality assurances as people who choose a managed care environment.

There are still more than enough challenges in our future, but there are also some upsides. The biggest one is the slow growth in healthcare spending in general, and in Medicare in particular. It means that we do not have as much pressure as we might have had and, ultimately, will have.

BV: When I first went to Washington, Medicare was the exception to the growing partisanship in healthcare. That, obviously, changed by the mid-1990s. I think [partisanship] is probably at a high point now and it may stay that way for a while.

It really is too bad that there is such an enormous emotional and political valence around these issues. If you get the people who have really been involved in running the program, whether in the private sector or the public sector, around the table without a microphone or YouTube, there will be fights. There will be disagreements, but there will also be a lot of agreement because a lot of stuff is just common sense, as in how we pay for clinical laboratory services. There is a lot more potential for commonsense policy than people would acknowledge. But I’m not optimistic that the political system is prepared to allow the government to behave commonsensically in the near future.

Editor’s Notes:

The entire Summer 2015 issue of Generations is available on AgeBlog thanks to the generous support of The Benjamin Rose Institute on Aging, Compassion & Choices and Robert Wood Johnson Foundation President's Grant Fund of the Princeton Area Community Foundation. Click here to read more.

This article is taken from the Summer 2015 issue of ASA’s quarterly journal, Generations, an issue devoted to the topic, “Medicare at 50.” ASA members receive Generations as a membership benefit; non-members may purchase subscriptions or single copies of issues at our online storeFull digital access to current and back issues of Generations is also available to ASA members and Generations subscribers at Ingenta Connect. For details, click here.