The only way to reduce asymmetry is to provide transparency and empower enrollees to decide among plans in view of not just their medical benefits (with advice from providers), but also their costs.
Empowering Medicare Recipients to Increase Program Efficiencies:
A People First Plan
by Anuja Roy and Kome Okposo
Medicare Program Description
Medicare is a federal health insurance program primarily for seniors, but it also serves younger people, as roughly 12% of its beneficiaries are under the age of 65. Medicare is funded by two separate trust funds: the Hospital Insurance trust fund (HI) and the Supplementary Medical Insurance trust fund (SMI). HI, otherwise known as Medicare Part A, helps pay for inpatient hospital services, hospice care, skilled nursing facilities, and home health services following hospital stays. SMI consists of Medicare Part B and Part D. Part B helps pay for physicians, outpatient hospitalization, home health, and other services for individuals who have voluntarily enrolled. Part D provides subsidized access to drug insurance coverage for all beneficiaries that choose to opt into Part D benefits, and premium and cost-sharing subsidies for low-income enrollees. Medicare also has Part C, which serves as an alternative to traditional Part A and Part B coverage based on a traditional fee-for-service model. Under the Part C option, beneficiaries can choose to enroll in and receive care from private Medicare Advantage and certain other health insurance plans. Medicare Advantage and Program of All-Inclusive Care for the Elderly (PACE) plans receive prospective, capitated payments for such beneficiaries from the HI and SMI Parts A and B trust fund accounts.
Medicare Spending Impacts Costs on its Enrollees
From its inception in 1966, Medicare has almost always required a net flow of funds from the federal budget. Total payments to the public have exceeded total receipts virtually every year. It is worth noting here that Medicare spending impacts not just the federal budget, but the national debt, reimbursements to providers, and—most importantly—costs to its enrollees. Despite the costs, many Americans favor mechanisms that provide genuinely ‘necessary medical care’, regardless of patients’ ability to pay.
The Principal-Agent Problem in Healthcare
Determining what is ‘necessary medical care’, however, is a challenge. For this reason, patients rely on providers to help make these highly personal decisions. In doing so, they highlight a major aspect of the healthcare sector that is different from other traditional marketplaces: information asymmetry, leading to a principal-agent relationship. Information asymmetry results from patients’ lack of adequate medical information and knowledge. Due to this lack of knowledge, patients, the principal parties interested in their own health, must entrust healthcare providers to function as their agents in making decisions.
For such a relationship to truly benefit the principal, the agent must not favor any outside interests when offering advice and decisions. Some economists suggest that government regulation of this relationship can solve the “Principal-Agent Problem” that arises when agents have conflicts of interest. Most economists would agree, however, that government regulation alone cannot fully solve the Principal-Agent problem; instead, it is considered one tool among many that can be used to mitigate the issue, with a focus on aligning incentives through contracts and performance-based compensation being more effective in most situations. A notable example of such a guardrail in the United States is the requirement to disclose (or, in MN, the outright prohibition of) the receipt of gifts from pharmaceutical companies so that physicians do not preferentially prescribe drugs that may not be best suited for individual patients.
In addition to direct regulations of healthcare providers, the federal government shapes payment and service delivery models through Medicare, indirectly acting as an agent for the patient’s financial decisions. But unlike medical decisions, spending decisions do not require extensive schooling; they are best left to the people (as ultimate consumers of healthcare), whose payroll taxes (average of 36.3%), and premiums (average of 15.3%), amounting to about 52% of Medicare income that went in to pay for $1,037 Billion or $1.01 Trillion of Medicare expenses in 2023. (This does not include taxes on social security benefits, or other costs to patients like copays, deductibles, and coinsurances.)
Current Structure and Financing of Medicare
Medicare is made up of four separate parts, described below and summarized in Figure 1.
· Part A, the original extent of Medicare, has a fee-for-service (FFS) model, where Medicare Administrative Contractors (MACs) pay hospitals based on the healthcare services used by enrollees. Part A is funded primarily through payroll taxes paid by most employees, employers, and the self-employed, income taxes paid on Social Security benefits, interest earned on the trust fund investments, and Medicare Part A premiums from people ineligible for premium-free Part A.
· Part B is similar to Part A but covers additional healthcare services including physician and other outpatient services and are funded by funds authorized by Congress, premiums from people enrolled in Medicare Part B (Medical Insurance), other sources, such as interest earned on trust fund investments, and payments from states. Government contributions, which are set prospectively based on projected annual program costs, are the largest contributor to SMI that pays for Part B benefits, as well as Medicare Program administration, like costs for paying benefits and for fighting fraud and abuse.
· Part C, or Medicare Advantage, includes the same services as Parts A and B, as well as other offerings, through private plans. Unlike Parts A and B, Part C uses capitation, which means that the government pays managed care organizations (MCOs) a predetermined fee per enrollee, regardless of the services used. Like Part B, funds authorized by the Congress, premiums from enrollees, and the SMI trust fund help pay for Part C.
· Part D, the Prescription Drug Program, can either be covered through MACs or through MCOs. Like Parts B and C, it is funded by premiums from enrollees, the SMI trust fund and by general revenues (government contributions).
The revenues for Medicare Parts B and D are determined annually to meet expected spending obligations for the coming year, meaning that the SMI trust fund does not face a funding shortfall, in contrast to the HI trust fund. Both the HI Trust Fund and the SMI Trust Fund, which are the two Medicare trust funds, are considered part of the federal budget; however, they are managed separately within the budget, with the SMI Trust Fund often drawing more heavily from general federal revenues compared to the HI Trust Fund which primarily relies on payroll taxes.
Figure 1. Summary of the current Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees pay into the system but do not decide how money is spent.
Inefficiencies in Medicare
The current system is rife with inefficiencies that lead to excess costs. Medicare Advantage (MA), which most Medicare enrollees now opt into, has the disadvantage of being more complex than the simpler FFS model. This is, roughly, how MA plans work:
1) The federal government sets a benchmark rate that it is willing to spend on each enrollee in MA plans.
2) Companies bid below the benchmark—earning rebates from the government.
3) To keep costs down, health plans use tools like pre-treatment approvals known as prior authorization and networks of selected providers. Medicare Advantage plans can use savings accrued from such approaches to bid below a benchmark rate, resulting in rebates from the federal government that must be used to reduce cost sharing or premiums or provide supplemental benefits.
4) Federal policy also sets those benchmark rates above traditional Medicare spending. For example, benchmarks averaged 9% more than traditional Medicare spending in 2023, increasing the size of these rebates.
5) Plans win enrollees by advertising benefits (including sometimes dental and vision coverage for minimal costs), but place obstacles towards obtaining them, once enrolled. Insurers often operate within limited networks of providers and require prior authorizations (pre-approval of certain medications or procedures before they can be covered by insurance) or step-edits (the prescription of drugs in a particular order) for treatments, thereby keeping down their costs.
All this complexity comes with the additional cost of overpayments due to high benchmarks and increased administrative spending—amounting to $83 billion in 2024 alone. The federal government clearly cannot afford to be an agent for patients’ financial decisions.
A People-First Plan for Medicare
Despite Americans’ major contributions to funding Medicare, they are the last to be consulted about spending, if at all! The government also fails to address the problem that necessitated the agency relationship in healthcare in the first place —information asymmetry! The only way to reduce asymmetry is to provide transparency and empower enrollees to decide among plans in view of not just their medical benefits (with advice from providers), but also their costs.
We propose a plan that puts people first, and empowers them as follows:
1. Provide healthcare checks directly to enrollees. This plan is described below and summarized in Figure 2.
2. HI and SMI funds, along with other revenue and federal funds, are sent to a ‘One-Medicare’ Fund
3. Medicare deposits an annual benefit into a Health Savings Account for each enrollee.
4. Enrollers are required to opt into an insurance plan, but they will now be able to decide which services are truly necessary to them and worth paying for.
Figure 2. Summary of the proposed Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees are included as decision-makers, unlike in Figure 1.
Benefits of the People-First plan
Without the inefficiencies of the current system, the costs of direct enrollment in health insurance should be comparable to those of Traditional FFS Medicare and employer-sponsored health insurance plans, so we can estimate the average Medicare payment amount to be comparable to (or even less than) the average government benchmark capitation payment of $12,000 per enrollee. The average federal spending per enrollee in Medicare could decrease from the current $15,400 to align with employer-sponsored insurance costs ($8,941). This is lower than the $15,400 the federal government currently spends per enrollee (or, $16,698 per beneficiary) and, most importantly, puts the people back in charge of their own healthcare decisions!
Discussion
Measures recommended to rein in Medicare expenses and provide excellent quality care alternate between whether the private market or the government should take more accountability for ensuring affordable care for the enrollees. Often, such recommendations ignore the intellect of the enrollees themselves who have the most at stake and the most to gain. There may be debate about government spending, the political will or ability to cut spending, and the mechanism to do so.
There should not be any debate whatsoever about whether the population needs to be empowered to make choices and thereby understand the concepts of limits and trade-offs. The complexity of the current system allows for non-transparent pricing, conflicts of interest, and a sense of helplessness in the patient, who should instead be empowered to make decisions in a thriving democracy that we pride ourselves on.
The federal government is now involved in a relationship that should strictly be between the patient and the healthcare provider. Without a guarantee of payment from the government, providers will have to compete for dollars from the consumer. It would behoove the current administration (in keeping with its current mandate from the voters) to offer broad policy protections for consumers while helping them disentangle the complexities of not just insurance offerings but care provision, as well.
Medicare, as it stands today, injects the federal government between patients and their providers. Our proposal for a ‘people-first’ plan empowers citizens to seek information and knowledge to make their own decisions regarding care and the associated finances.
A People First Plan
by Anuja Roy and Kome Okposo
Medicare Program Description
Medicare is a federal health insurance program primarily for seniors, but it also serves younger people, as roughly 12% of its beneficiaries are under the age of 65. Medicare is funded by two separate trust funds: the Hospital Insurance trust fund (HI) and the Supplementary Medical Insurance trust fund (SMI). HI, otherwise known as Medicare Part A, helps pay for inpatient hospital services, hospice care, skilled nursing facilities, and home health services following hospital stays. SMI consists of Medicare Part B and Part D. Part B helps pay for physicians, outpatient hospitalization, home health, and other services for individuals who have voluntarily enrolled. Part D provides subsidized access to drug insurance coverage for all beneficiaries that choose to opt into Part D benefits, and premium and cost-sharing subsidies for low-income enrollees. Medicare also has Part C, which serves as an alternative to traditional Part A and Part B coverage based on a traditional fee-for-service model. Under the Part C option, beneficiaries can choose to enroll in and receive care from private Medicare Advantage and certain other health insurance plans. Medicare Advantage and Program of All-Inclusive Care for the Elderly (PACE) plans receive prospective, capitated payments for such beneficiaries from the HI and SMI Parts A and B trust fund accounts.
Medicare Spending Impacts Costs on its Enrollees
From its inception in 1966, Medicare has almost always required a net flow of funds from the federal budget. Total payments to the public have exceeded total receipts virtually every year. It is worth noting here that Medicare spending impacts not just the federal budget, but the national debt, reimbursements to providers, and—most importantly—costs to its enrollees. Despite the costs, many Americans favor mechanisms that provide genuinely ‘necessary medical care’, regardless of patients’ ability to pay.
The Principal-Agent Problem in Healthcare
Determining what is ‘necessary medical care’, however, is a challenge. For this reason, patients rely on providers to help make these highly personal decisions. In doing so, they highlight a major aspect of the healthcare sector that is different from other traditional marketplaces: information asymmetry, leading to a principal-agent relationship. Information asymmetry results from patients’ lack of adequate medical information and knowledge. Due to this lack of knowledge, patients, the principal parties interested in their own health, must entrust healthcare providers to function as their agents in making decisions.
For such a relationship to truly benefit the principal, the agent must not favor any outside interests when offering advice and decisions. Some economists suggest that government regulation of this relationship can solve the “Principal-Agent Problem” that arises when agents have conflicts of interest. Most economists would agree, however, that government regulation alone cannot fully solve the Principal-Agent problem; instead, it is considered one tool among many that can be used to mitigate the issue, with a focus on aligning incentives through contracts and performance-based compensation being more effective in most situations. A notable example of such a guardrail in the United States is the requirement to disclose (or, in MN, the outright prohibition of) the receipt of gifts from pharmaceutical companies so that physicians do not preferentially prescribe drugs that may not be best suited for individual patients.
In addition to direct regulations of healthcare providers, the federal government shapes payment and service delivery models through Medicare, indirectly acting as an agent for the patient’s financial decisions. But unlike medical decisions, spending decisions do not require extensive schooling; they are best left to the people (as ultimate consumers of healthcare), whose payroll taxes (average of 36.3%), and premiums (average of 15.3%), amounting to about 52% of Medicare income that went in to pay for $1,037 Billion or $1.01 Trillion of Medicare expenses in 2023. (This does not include taxes on social security benefits, or other costs to patients like copays, deductibles, and coinsurances.)
Current Structure and Financing of Medicare
Medicare is made up of four separate parts, described below and summarized in Figure 1.
· Part A, the original extent of Medicare, has a fee-for-service (FFS) model, where Medicare Administrative Contractors (MACs) pay hospitals based on the healthcare services used by enrollees. Part A is funded primarily through payroll taxes paid by most employees, employers, and the self-employed, income taxes paid on Social Security benefits, interest earned on the trust fund investments, and Medicare Part A premiums from people ineligible for premium-free Part A.
· Part B is similar to Part A but covers additional healthcare services including physician and other outpatient services and are funded by funds authorized by Congress, premiums from people enrolled in Medicare Part B (Medical Insurance), other sources, such as interest earned on trust fund investments, and payments from states. Government contributions, which are set prospectively based on projected annual program costs, are the largest contributor to SMI that pays for Part B benefits, as well as Medicare Program administration, like costs for paying benefits and for fighting fraud and abuse.
· Part C, or Medicare Advantage, includes the same services as Parts A and B, as well as other offerings, through private plans. Unlike Parts A and B, Part C uses capitation, which means that the government pays managed care organizations (MCOs) a predetermined fee per enrollee, regardless of the services used. Like Part B, funds authorized by the Congress, premiums from enrollees, and the SMI trust fund help pay for Part C.
· Part D, the Prescription Drug Program, can either be covered through MACs or through MCOs. Like Parts B and C, it is funded by premiums from enrollees, the SMI trust fund and by general revenues (government contributions).
The revenues for Medicare Parts B and D are determined annually to meet expected spending obligations for the coming year, meaning that the SMI trust fund does not face a funding shortfall, in contrast to the HI trust fund. Both the HI Trust Fund and the SMI Trust Fund, which are the two Medicare trust funds, are considered part of the federal budget; however, they are managed separately within the budget, with the SMI Trust Fund often drawing more heavily from general federal revenues compared to the HI Trust Fund which primarily relies on payroll taxes.
Figure 1. Summary of the current Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees pay into the system but do not decide how money is spent.
Inefficiencies in Medicare
The current system is rife with inefficiencies that lead to excess costs. Medicare Advantage (MA), which most Medicare enrollees now opt into, has the disadvantage of being more complex than the simpler FFS model. This is, roughly, how MA plans work:
1) The federal government sets a benchmark rate that it is willing to spend on each enrollee in MA plans.
2) Companies bid below the benchmark—earning rebates from the government.
3) To keep costs down, health plans use tools like pre-treatment approvals known as prior authorization and networks of selected providers. Medicare Advantage plans can use savings accrued from such approaches to bid below a benchmark rate, resulting in rebates from the federal government that must be used to reduce cost sharing or premiums or provide supplemental benefits.
4) Federal policy also sets those benchmark rates above traditional Medicare spending. For example, benchmarks averaged 9% more than traditional Medicare spending in 2023, increasing the size of these rebates.
5) Plans win enrollees by advertising benefits (including sometimes dental and vision coverage for minimal costs), but place obstacles towards obtaining them, once enrolled. Insurers often operate within limited networks of providers and require prior authorizations (pre-approval of certain medications or procedures before they can be covered by insurance) or step-edits (the prescription of drugs in a particular order) for treatments, thereby keeping down their costs.
All this complexity comes with the additional cost of overpayments due to high benchmarks and increased administrative spending—amounting to $83 billion in 2024 alone. The federal government clearly cannot afford to be an agent for patients’ financial decisions.
A People-First Plan for Medicare
Despite Americans’ major contributions to funding Medicare, they are the last to be consulted about spending, if at all! The government also fails to address the problem that necessitated the agency relationship in healthcare in the first place —information asymmetry! The only way to reduce asymmetry is to provide transparency and empower enrollees to decide among plans in view of not just their medical benefits (with advice from providers), but also their costs.
We propose a plan that puts people first, and empowers them as follows:
1. Provide healthcare checks directly to enrollees. This plan is described below and summarized in Figure 2.
2. HI and SMI funds, along with other revenue and federal funds, are sent to a ‘One-Medicare’ Fund
3. Medicare deposits an annual benefit into a Health Savings Account for each enrollee.
4. Enrollers are required to opt into an insurance plan, but they will now be able to decide which services are truly necessary to them and worth paying for.
Figure 2. Summary of the proposed Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees are included as decision-makers, unlike in Figure 1.
Benefits of the People-First plan
Without the inefficiencies of the current system, the costs of direct enrollment in health insurance should be comparable to those of Traditional FFS Medicare and employer-sponsored health insurance plans, so we can estimate the average Medicare payment amount to be comparable to (or even less than) the average government benchmark capitation payment of $12,000 per enrollee. The average federal spending per enrollee in Medicare could decrease from the current $15,400 to align with employer-sponsored insurance costs ($8,941). This is lower than the $15,400 the federal government currently spends per enrollee (or, $16,698 per beneficiary) and, most importantly, puts the people back in charge of their own healthcare decisions!
Discussion
Measures recommended to rein in Medicare expenses and provide excellent quality care alternate between whether the private market or the government should take more accountability for ensuring affordable care for the enrollees. Often, such recommendations ignore the intellect of the enrollees themselves who have the most at stake and the most to gain. There may be debate about government spending, the political will or ability to cut spending, and the mechanism to do so.
There should not be any debate whatsoever about whether the population needs to be empowered to make choices and thereby understand the concepts of limits and trade-offs. The complexity of the current system allows for non-transparent pricing, conflicts of interest, and a sense of helplessness in the patient, who should instead be empowered to make decisions in a thriving democracy that we pride ourselves on.
The federal government is now involved in a relationship that should strictly be between the patient and the healthcare provider. Without a guarantee of payment from the government, providers will have to compete for dollars from the consumer. It would behoove the current administration (in keeping with its current mandate from the voters) to offer broad policy protections for consumers while helping them disentangle the complexities of not just insurance offerings but care provision, as well.
Medicare, as it stands today, injects the federal government between patients and their providers. Our proposal for a ‘people-first’ plan empowers citizens to seek information and knowledge to make their own decisions regarding care and the associated finances.
Fig. 1
Summary of the current Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees pay into the system but do not decide how money is spent.
Fig. 2
Summary of the proposed Medicare system. Boxes represent decision-making points and arrows represent the flow of funds. Note that enrollees are included as decision-makers, unlike in Figure 1.
