Modernizing Medicare's Benefit Structure

I. IntroductionSenator John Breaux has referred to the Medicare program as a "65 Chevy."1 While this characterization is not necessarily an apt description in many areas, it is certainly true in terms of the structure and composition of the benefit package. The cost-sharing pieces of Medicare established by Congress in 1965 were an ad hoc collection of requirements that resulted from political horse-trading and concerns about limiting the program's costs.2 Parts of the program looked very much like the private insurance of the time.3 Despite general agreement since the 1970s that the benefit structure should be improved to reflect changes in the needs of Medicare beneficiaries and the evolution of private insurance over time, a major overhaul of the benefit package did not take place until December of 2003.4In part, the lack of progress is due to a major disagreement of whether changes should only come in the context of broader reforms.5 But, rather than tackle that issue head on, this Article assumes that, regardless of other reforms, an improved benefit package is needed and that no insurance arrangement is likely to succeed without such changes. Further, defining an appropriate benefit package is an important part of any debate regarding how much flexibility to allow if private plans are to be the future of Medicare: Which benefits are essential and which could be allowed to vary? Thus, benefit improvements represent a first step and one that can be separated from the broader discussion.II. Why Focus on Changes In Cost-Sharing and Benefits?Negotiations between the House and the Senate in 1965 created the basic structure of the Medicare program with its large variety of benefits and patchwork of limitations and definitions.6 The outcome of the negotiations was a complicated structure of hospital benefits with co-insurance days, lifetime reserve days, and a spell of illness concept that led to the potential for multiple hospital deductibles in a given year.7Changes over time have exacerbated the problems of the benefit structure. For example, when Congress introduced Medicare, it set the deductibles for Part A and Part B8 at nearly the same level: $40 and $50, respectively.9 Over time the Part A deductible has grown enormously, to $840 in 2003, compared to just $100 for Part B.'° Although the Part B premium was reduced from 50% to 25% of the costs of Part B services, the share of Medicare covered by Part B has grown substantially, thus keeping the share that beneficiaries pay of the full costs of Medicare through a premium nearly constant.11In addition to problems with cost-sharing, the scope of the benefit package is widely recognized as inadequate. In particular, Congress omitted drugs, although there was considerable discussion even in the late 1960s of the importance of adding drugs to the benefit package.12 Moreover, prescription drug coverage became more of an issue in the 1990s as the lack of drug coverage led to inefficient use of care. For example, when doctors prescribe drugs, but patients fail to use them, the patients' health conditions may worsen and increased hospitalizations can occur.Overall, Medicare's benefits cover just a little over half of the costs of acute care for the eligible population, making this program less generous than over 80% of private insurance policies.13 As a result, on average, beneficiaries now devote over 22% of their incomes for premiums and direct costs each year (not counting costs of institutionalization).14 Thus, prescription drug coverage is crucial to beneficiaries. As Figure 1 indicates, costs for Medicare beneficiaries stem from a range of sources-not just drug expenditures or Medicare cost-sharing. The costs that individuals bear from private supplemental insurance are substantial.15The inadequacy of benefits creates other problems as well. Most beneficiaries obtain protection through supplemental policies that vary dramatically in quality and comprehensiveness. …