Risk Transfer: Cost Reduction in Drag for Medicare

Health policy titans debating the actuarial links between clinical quality and cost trends.  Presidential candidates struggling to find the best "gotcha" Medicare catch-phrase to use against their enemies.  Progressives and conservatives in a death struggle over competing health care "visions" on the role of government.  Yet, underlying all this political cacophony is general agreement that Washington DC's involvement in health care and insurance has increased.

Except, says the contrarian Disease Management Care Blog, that is less true than meets the eye.  That's because in one key respect, Federal involvement in the world's largest health insurance program called "Medicare" is actually decreasing. When viewed through the lens of "risk transfer," there is an ironic bipartisan agreement that Medicare's risk needs to be transferred elsewhere.  The only real disagreement is over where it should go.

Recall that insurance is a contractual agreement to exchange "risk" for "money" a.k.a. risk transfer.  Insurance is a business that accepts and "pools" risk and uses collected premiums to cover the cost of the bad events among the individual contract (or "policy") holders. As the likelihood or cost of a bad event (such as, for example, a death of a wage earner, a home fire, car accident or unexpected illness) increases, the cost of the insurance premium to fix, or "make whole" the bad event also increases. 

Basically, the Medicare program accepts risk in exchange for FICA taxes.  Medicare's problem is that both the likelihood and the cost of illness among its beneficiaries are turning out to be unaffordable.  Unable to increase the premium or decrease the cost of illness, the logical response is to transfer that risk (along with its inadequate levels of money) someplace else.

There are three non-exclusive risk-transfer options that the DMCB thinks are being proposed and implemented at the Federal level:

1) Transferring the risk (and the money) to commercial insurers.  That program is called "Medicare Advantage," which has been criticized for transferring proportionately too much money for the level of risk.  Another approach is Medicare's "secondary payer status," forcing any other active health insurers to pay first when there is any overlap in coverage.

2) Transferring the risk (and the money) back to the Medicare beneficiaries.  Variations of this is a recurring theme among the U.S. House of Representatives Republicans, who are proposing variations of a "defined benefit"  approach, such as capped premium support payments and vouchers.  If the cost of illness exceeds a threshold, it's ultimately up to the person, not the government to eat the economic difference.

3) Transferring the risk (and the money) to the heath care providers. This underlies the logic of the upside gainshare, ACO "two sided" risk, bundling and no-pay for "never events" as well as "hospital acquired conditions."  The logic here is that providers can mitigate risk through greater efficiency or quality.  By tying in the money that goes with it, Medicare is gambling that the physicians can ultimately "bend the curve."  The amazing thing here is that, following the debacle of HMO capitation in the 1990s, the providers are willing to go along with it.

All three options have the political advantage of obscuring cost reductions for Medicare with the patina of efficiency consumerism, quality and value.  The DMCB thinks of it as savings in drag.

What happens if Medicare's risk transfer legerdemain isn't successful?  Our politicians will have to return to the politically unpalatable options of increasing the premium or reducing costs through unilateral fee schedule reductions.  Alternatively, they can outsource that repugnant task that to a newly created animal called the Independent Payment Advisory Board.

That road could (see slide 36) ultimately lead to a single payer.  More on that in an upcoming post.