Fixing the Big Ms

Another election year, another debate over healthcare spending.

An announcement from the Obama administration regarding reduced payment rates for Medicare Advantage plans in 2015 has had journalists quick to point out the implications for the 2014 midterms. Government spending on healthcare is a perennial issue, with candidates of both parties walking a tightrope between concerns over how to finance growing costs and a reluctance to threaten the health benefits of their voters.

Most politicians, voters, economists and policy experts agree there is something wrong with the way the US government spends money on healthcare. The problem is deciding how much spending is the “right” amount, and what changes can and should be made to spending policies without jeopardizing the health of the elderly and poor.

Federal spending on healthcare benefits comes largely in the form of the two big “Ms”: Medicare and Medicaid. Medicare provides coverage to everyone over the age of 65, provided that they (or their spouse) have worked for at least ten years. Individuals receive coverage through different combinations of four “parts” of coverage. Most services are covered either by combining Part A, which covers hospital stays, with Part B, for primary care and outpatient services, or by enrolling in Part C (called Medicare Advantage), in which private plans receive payments from the government to cover all the benefits an enrollee would otherwise get through Parts A and B. Finally, enrollment in Parts A and B (often referred to as “traditional Medicare”) or Medicare Advantage is typically supplemented with enrollment in Part D, which provides coverage for prescription drugs.

Separately, Medicaid covers low-income children and their families, as well as pregnant women, people with disabilities, and the low-income elderly. Coverage is paid for through a matching system in which every dollar a state spends on care is met with a dollar or more of federal funding—the exact rate of matching depends on each state’s annual income. Under the Affordable Care Act (ACA), states may additionally expand their Medicaid programs to include low-income childless adults, with the federal government paying for most of their care.

Taken together, spending on Medicare and Medicaid made up about 25 percent of the federal budget in 2013. The Congressional Budget Office projects that percentage will grow to nearly 28 percent by 2024, driven mostly by increasing enrollments as more baby boomers turn 65 and Medicaid eligibility expands. Given the magnitude of the money involved, it’s no wonder that these programs are often the targets of efforts to curb government spending.

However, the importance of Medicare and Medicaid lies not just in their cost, but in their function as a social safety net. Last year, the two programs provided healthcare coverage for about 109 million Americans, a number that will only grow with time. That means changes to benefits (whether the type of services covered, the amount paid per service, or the rules on eligibility) potentially affect one out of every nine Americans, most of whom are children, elderly, or disabled.

What is more, the fact that these programs are “entitlements” means every individual who meets the qualifications must receive coverage if they apply, with no limit on how many people can enroll or how much the government can spend. This creates a sense of security even among people who are not currently enrolled: When I turn sixty-five or if I fall on hard times, I too will have coverage for my medical care. Those expectations broaden the pool of people potentially affected by changes to Medicare and Medicaid, thereby magnifying the potential political fallout of any suggestions for change.

Despite, and perhaps because of, the potentially enormous ramifications of change, debate over what should be done with the two big “Ms” of healthcare has been a staple of the 2008, 2010, and 2012 elections, and 2014 is shaping up to be no different.

Those calling for reform in federal healthcare programs generally fall into two camps: fiscal conservatives looking to reduce federal spending, and social liberals who believe the government should be providing better care for more people. Politically viable solutions likely need to do both, creating change through improved efficiency rather than cuts.

From the conservative side, one proposal championed by Congressman Paul Ryan would turn Medicaid into a block grant rather than an entitlement. Under this plan, the federal government would give each state a set amount of money, rather than guaranteed matching of whatever the state spends, and greater responsibility for determining how those funds should be spent. While the plan would effectively cut billions of dollars of support for Medicaid and reduce the number of people covered, proponents argue giving more power to the states would introduce greater efficiency and lead to both state and federal savings.

Under the Obama administration, liberal reforms have moved far in the opposite direction. The ACA expansion made Medicaid coverage available to more people rather than fewer, and instead of leaving spending decisions to the states, the federal government is picking up most of the tab for the newly covered population of low-income, childless adults.

At the same time, the ACA attempts to reduce per-enrollee spending and increase the quality of care through the introduction of accountable care organizations for some Medicare enrollees. These organizations are essentially networks of providers, including primary care physicians, specialists, and hospitals, that are given targets for how much they should spend on care for each of their patients. Groups that spend less than the target amount get to keep some of the savings, while those that overshoot may face a penalty. The idea is to create incentives for providers to coordinate among themselves in the hopes of saving money and providing better care to each patient. However, the first year of the program yielding mixed results, with some participants dropping out while others experienced significant savings.

As the 2014 campaign season picks up steam, arguments over reforming the big Ms will only become more prevalent. In following the debate, it’s important to remember that neither side can guarantee their plan will manage to save money and improve care, and both are terrified of alienating constituents. In the end, it is up to voters to decide how much we are willing to spend to provide healthcare for the most vulnerable among us, with the full knowledge that one day, we may be among them.