Medicare influence on private insurance: good or ill?

Medicare has profoundly affected private insurance market oportunites, the technology and infrastructure used by private insurance, the culture and expectations of providers with whom private insurers must deal, and the culture and expectations of the employers and individuals who purchase private insurance. The Medicare program might be characterized as the pre-eminent fee-for-service (FFS) indemnity health insurance program in the United States. It protects or indemnifies its beneficiaries against the costs of covered health services by any licensed physician or health care provider they choose and pays bills for their services. Medicare's pre-eminence has been earned by taking what was state-of-the-art private practice at the time of the program's passage and greatly refining it through research and demonstration over its 30-year lifetime. In this refinement process, Medicare has profoundly influenced private insurance practices and markets, both for good and ill—from the perspective of private insurers. Private insurance practice today, ironically, is rapidly moving away from the FFS indemnity model. Medicare is in danger of being left behind, and the direction of influence between Medicare and private insurance being shifted. To better understand Medicare's past influence and potential future, it is useful to look at four areas: private insurance market opportunities; insurance technology and infrastructure; provider culture and expectations of insurance; and insurance buyer culture and expectations of insurance. This article looks at Medicare's past and future influence in the framework of shifting paradigms. The shifts are explained in the rest of this article and summarized in Table 1. It is worth noting that many of the influences for good and ill described here apply to all FFS insurers, not just to Medicare. Table 1 Shifting Paradigms in the Medicare Framework Insurance Market Opportunities Prior to 1965, private insurance found a relatively weak market in the population over 65 years of age. The Medicare program opened two new markets to private insurers. Administrative Services The paradigm shift is from the use of intermediaries to handle administrative services to the bearing of this burden by plans that are under at-risk contracts. Past Medicare legislation called for the use of private insurers to handle the administrative processing for the program. The use of intermediaries, as they are called under Part A, and carriers, as they are called under Part B, allowed the program to be set up rapidly, using private processing capabilities already in place. It also allowed private insurers, particularly Blue Cross and Blue Shield plans, to profit greatly from the enactment of the program. Medicare's vast processing load required—and Medicare financed—upgrades of private insurers' administrative services capabilities across the country. These capabilities proved very important to insurers in subsequent years as private employers increasingly moved to self-insure their employees and purchase administrative services from insurers. Today, this insurance administrative services market, however, is undergoing an important shift. It is being eroded by the increasing enrollment of health maintenance organizations (HMOs) and other managed care plans, with whom employers generally contract on an at-risk basis, and by formerly self-insured employers who are electing to return to at-risk contracts with health plans for all of their employees. To some extent, Medicare is moving in the same direction as private employers, as more beneficiaries move from employers' traditional self-insured FFS plans into at-risk HMOs. Indeed, the nearest parallel to Medicare is the large private or public self-insured employer.