(7 of 8)
Under the Heritage Foundation proposal, the government's annual payment would vary based on age and sex but not medical condition; Medicare-qualified insurance plans, though, would be forbidden to discriminate against sicker people. This puts much of the burden of risk pooling on private insurers. There would be a tremendous incentive for insurers to "cherry pick"--to try to sign up healthier people--as is happening in a small way now with Medicare's HMO option. Even without purposeful discrimination, healthier people will naturally drift toward the cheaper, less elaborate plans, making them cheaper still--not because of greater efficiency but because of what is known as "adverse selection." The consequence? To avoid punishing sick people--simply for being sick--will require far more government regulation than free-market enthusiasts for managed competition care to admit.
Managed competition and managed care are not the only ways to bring free-market discipline into Medicare. In fact, by retaining the basic principle of insurance, they preserve health care as a salad bar where you can eat as much as you want at no extra cost. The Cato Institute, a libertarian think tank, wants to go further: arrange it so that people pay for most normal medical expenses out of their own pockets. Cato would gradually increase Medicare's deductibles and copayments--currently $716 for the first 60 days of a hospital stay, and $100 a year plus 20% of doctors' bills and outpatient services--until the first several thousand dollars of seniors' health-care expenses each year would be uninsured. ("If necessary," Cato says grudgingly, there could be a subsidy for lower-income elderly folk.) In essence, this would convert Medicare into an insurance program for very large, "catastrophic" health-care expenses only. The theory is that people will watch every penny when they are paying the bills themselves.
The theory is undoubtedly correct. But there are problems too. As mentioned, there are limits on people's ability and inclination to be rational consumers when it comes to health care. Furthermore, the worst health-care inflation is occurring in big-ticket items, such as major surgery, which cost more than the annual out-of-pocket threshold. The big savings to the government would come not from any triumph of market-based efficiency but simply from making seniors pay more of the cost. And the government would lose some of that money again if, as proposed, people are encouraged to set up tax-free "Medisave" accounts to pay for the annual out-of-pocket expenses.
President Clinton argued last year that you can't reform Medicare without reforming the whole health-care system. That is partly right and partly wrong. It's true that the real problem is the rising cost of health care in general, not Medicare per se. But Medicare is now behind the rest of the health-care system in health-cost management innovation. And Medicare, as the country's largest single health-care financing system by far, can and ought to lead the way in finding solutions (since general reform appears out of the question for now).