In February of this year, Senator Debbie Stabenow of Michigan introduced Senate bill 470, the Medicare at 50 Act, into the Senate. The bill would allow individuals and presumably employers to purchase Medicare insurance at age 50. Since the bill’s introduction, it has garnered the support of 18 other Senators as co-sponsors.
Senator Stabenow calls the bill a “win-win for Michigan families. It will help strengthen Medicare, lower costs and improve care for millions of people.”
Proponents of the bill suggest that “buying Medicare coverage” instead of employer-based or ACO Marketplace insurance would be less expensive, mainly because what Medicare pays for services is less on average than what insurance companies pay for the same service. They also tout Medicare’s administrative efficiency and eliminate the private insurance company profit margins as other ways this will reduce costs. Another benefit of the bill is its impact on people who are not yet 65 but would like to retire. Those people would theoretically be able to buy an affordable Medicare policy that may allow them to retire early. This will help with unemployment by opening up jobs for younger Americans. Businesses both large and small would benefit from lower-cost health insurance options for their older employees. Even the insurance companies would win under this new bill. They would get rid of some of their most costly and risky covered individuals, which should lower the cost of their product for everyone else. Further, most of those same insurance companies offer Medicare Advantage products they could sell to these individuals. Those products are very profitable for insurance companies.
So, what’s not to love? If this bill does all of that, why don’t we pass it right away? Well, like all things in life, the devil is in the details. While it may be that Medicare at 50 will prove to be a win for individuals, employers, and insurance companies, it most certainly won’t be a good thing for doctors and hospitals. You see, one man’s expense is another man’s revenue. A CMS actuarial study showed that, on average private insurance pays hospitals 40% more than Medicare for the same service and 30% more to physicians than Medicare for the same service. This means that for every patient that converts from a private insurance plan to a Medicare plan, the hospital takes a 40% pay reduction and doctors take a 30% reduction. For some specialties, like pediatrics and obstetrics, there would be almost no impact due to the population they serve. However, for many specialties that treat predominately older patients, the impact could be devastating.
Why is there such a disparity between what Medicare pays and what private insurance pays? The simple answer is that our legislators have decided to under-fund Medicare by holding payment rates constant rather than keeping up with inflation. This has turned private insurance into an indirect tax.
Consider this: Medicare pays physician services based on a rate per RVU. The rate is known as the conversion factor. Think of it as something similar to an employee’s hourly wage. If you make $15 per hour and work a 10-hour shift, you earned $150. For Medicare, its units of work (RVUs) and not hours worked. In 1998 the Medicare conversion factor was $36.68 per unit. So, if a service like an office visit was valued at two units, your doctor would get paid $72.74. Fast forward 22 years, and in 2020, the Medicare conversion factor is now $36.09 without the temporary COVID adjustment. That’s right; it’s gone down in 22 years. So, that same office visit that your doctor got paid $72.74 in 1998, he or she would get paid $72.18 today. Over that same period of time, general inflation, or CPI-U, has gone up 58%. So, if Medicare had done nothing more than keep up with general inflation, that office visit should be paid today at a rate of $115.92. Lately, there has been a great deal of debate on the federal minimum wage not keeping up with inflation. Since 1998 the Federal minimum wage has gone up 41%. While that has not quite kept up with the 58% increase in inflation overall, it’s certainly better than the 1.6% reduction that physicians have faced from the Medicare conversion factor.
With the cost of running a medical practice going up every year, how have doctors been able to stay in business? One of the main ways was demanding higher reimbursement from commercial insurance companies who pass those costs on to you and your employer. Thus, the “indirect tax” I mentioned earlier.
This approach that has worked for the last 20 years or so is in jeopardy if Medicare at 50 is passed. That’s because large numbers of patients may suddenly switch from private insurance to Medicare coverage. The resulting loss in revenue could be devastating to physicians and hospitals. How are doctors going to respond to this change? Some of them may demand even higher reimbursement from commercial payers driving up the cost of insurance even further. Others may stop seeing Medicare patients altogether. Some may consider this to be the last straw and retire early themselves. Almost half of all practicing physicians are over the age of 55. Can you imagine the physician shortage that would be caused if even half of those physicians over the age of 55 suddenly retired? Imagine what the next pandemic will be like if we’ve lost 25% of the physicians who care for all of us?
At this point, some people are probably thinking that doctors are all rich and they can afford to take a pay cut. While I disagree with those people, I am also sure they have no idea just how much of a pay cut this could be. Let’s take a look at one medical group. This is a client, so I have access to their data and know how much their doctors make. The client is a specialty group, and their doctors make around $400,000 per year. If this bill gets passed and only 50% of their patients between 50 and 64 buy into Medicare, the doctors in that group will each take a pay cut of $250,000 a year. That’s a 62% reduction in their income. If 80% of their patients over 50 buy into Medicare, the doctors would have to work for free. That’s right, zero salary. So, how many practices do you think will be able to get their doctors to work for free?
The point of all of this is twofold. First, the solutions to our health care problems in this country are not easy. There is no magic bullet. Secondly, just like drug side effects, policymakers need to be careful to consider the harmful side effects of their decisions. In some cases, the side effects can be worse than the condition they are trying to cure. Having a Medicare insurance card doesn’t help much if there are no doctors there to accept it.