In short, in the era of managed care, Medicare is an insurer that will pay extra for the intangible benefits of graduate medical education, the care of low-income patients and new construction.
However, debate is growing about whether providers deserve these extra payments or whether Medicare patients actually benefit from them.
Medicare's mushrooming spending is one factor driving that debate. In 1967, the program spent a total of $2.7 billion. That's pocket change to providers nowadays, when spending this fiscal year will top $211 billion.
Of that $211 billion, Medicare will funnel $17.8 billion to hospitals with teaching programs, a disproportionate share of indigent patients and certain capital costs (See chart below).
Combined with a growing movement to reform Medicare, these factors are fueling a public discourse about how the federal government's most popular program can best help the people it serves without being a sugar daddy for providers.
"Medicare ought to be a program for the elderly," says Gail Wilensky, a former HCFA administrator and current chairwoman of the Medicare Payment Advisory Commission (MedPAC), which makes recommendations to Congress. "We ought to refocus on the elderly because of the fragile financial nature of the program."
"(Medicare) was intended to pay fully for the medical care of its patients. It was not intended to subsidize anybody," says Robert Ball, who as commissioner of Social Security headed Medicare from its beginning in 1965 through 1973. "Medicare's under no obligation to pay more than exact costs."
The opposing viewpoint emerged at a recent Washington press conference, where the Catholic Health Association made its position on Medicare's obligations clear.
In launching an advertising campaign arguing that Medicare payment increases are the federal government's "moral responsibility," Catholic healthcare leaders said the Medicare payment policies imposed by the Balanced Budget Act of 1997 have affected providers' ability to serve the nonelderly population-including poor uninsured people.
"The result of these destructive cuts is that our entire healthcare system, not just those serving the elderly, is in crisis," says the Rev. Michael Place, president and chief executive officer of the CHA.
Other hospital industry representatives also are very clear about their views of Medicare's place in the hospital economic picture.
Because Medicare represents 40% of all hospital income-and in some areas a majority of hospital income-lower payments affect hospitals' ability to purchase equipment or expand services to all patients, for example, says Richard Pollack, executive vice president and director of government and public affairs at the American Hospital Association.
"In some people's minds, Medicare should only be a prudent payer for services. I think it's the wrong perspective," Pollack says.
Bruce Vladeck, another former HCFA administrator who is now a professor of health policy at Mount Sinai School of Medicine in New York, agrees.
"I reject the notion that those are extra payments for public goods," Vladeck says. "Because Medicare is so large a part of the healthcare system, it can't get away with not paying its share of those costs."
Why Medicare? Once upon a time, Medicare reimbursed providers based on their costs, including those for teaching graduate medical students, uncompensated care, bad debt and new construction.
The move to a prospective payment system in 1983 worried providers, who feared DRG payments would not cover these extra costs.
"In the old days, doctors billed whatever it took to keep the doors open," says David Durenberger, a former Republican senator from Minnesota who served in Congress from 1978 to 1994. "They would charge paying customers more to cover nonpaying customers and other costs. When we went to PPS, we realized we would reduce and eliminate lots of that cross-subsidization."
Intense lobbying yielded hospitals the extra payments they receive: graduate medical education, or GME, for teaching facilities; disproportionate share, or DSH, for providers that care for a large number of indigents; bad debt; and capital reimbursement.
Over the years, those extras started getting expensive for Medicare and favorable for providers and state-run Medicaid programs.
Congress moved to limit some of these extra payments in passing the Budget Reconciliation Act of 1991. That law began phasing out capital cost reimbursement, which for most hospitals will be included in DRG payments by 2001, and reforming DSH, which states were abusing so that their Medicaid programs wouldn't have to pay as much.
Some, like Wilensky, who worry about Medicare's financial viability, want to see even more changes to DSH and GME.
"The question is, whose obligation ought to be DSH?" she asks. "We have historically not had a decision about who ought to be funding the indigent population."
Judy Waxman, director of government affairs at the consumer advocacy group Families USA, says there is no easy answer to that question.
"We sympathize with the case to move these payments out of Medicare," Waxman says. "On the one hand, Medicare should not have to carry the burden. On the other hand, it could be worse if Medicare doesn't."
GME surcharge. Medical education payments are an acknowledgement that care at a teaching hospital costs more because it is less efficient-a statement that few dispute. For example, student doctors order more tests and often must consult with senior physicians on diagnoses and procedures.
"Teaching hospitals provide specialized services at higher costs, and if we're not going to shut the elderly out of them, making a medical payment is the thing to do," Wilensky says. "It's an access issue."
"As consumers, we recognize that medical education needs to be supported, but we don't know the best way to do it," says Mike Donio, director of projects at the People's Medical Society, a healthcare consumer advocacy group based in Allentown, Pa.
That's exactly the problem with GME: Nobody, not even MedPAC, knows the best way to do it.
In August the commission advised Congress to combine direct and indirect medical education payments to teaching hospitals, a move hospitals oppose. Current policy dictates that Medicare pay teaching hospitals for direct costs, or the training of physicians, and indirect costs, including oversight of the training programs.
A single payment system "better accounts for the higher costs of the enhanced patient care those hospitals provide to Medicare beneficiaries," MedPAC said in its report to Congress (Aug. 9, p. 4).
"Conceptually, it's right," Vladeck says of MedPAC's proposal.
But the AHA's Pollack acknowledges that all payers, not just Medicare, ought to contribute to the costs of graduate medical education.
While hospitals have large organizations, such as the AHA, to lobby Congress for them, they don't individually have the same negotiating clout needed to wrest such contributions from private insurers in their respective markets.
"In the pluralistic system we have now, and in the absence of a rational healthcare delivery system, we have to use all the different levers to get care to the patients. We're doing the best we can," Pollack says.
Robert Reischauer, a former director of the Congressional Budget Office and now a senior fellow at the Brookings Institution, says there is no other way for the government to fund such public goods as physician training, research and subsidies for essential rural and inner-city hospitals.
"From a philosophical vantage point, (Medicare) shouldn't be bearing the burden of things that are public goods," Reischauer says. "But we have no other mechanism for supporting those desirable national objectives."
A change in Medicare's role from money drain to comfortable cushion is partly driving hospitals' claim that the Balanced Budget Act is sending them into an economic crisis, says Stuart Guterman, principal research associate at the Urban Institute in Washington.
For much of the life of the program, private insurers paid hospitals 116% of the costs of caring for those patients. Hospitals used that extra 16% to offset their Medicare losses, since Medicare was paying less than 100% of the costs of beneficiaries' care.
By 1992, private insurers were paying 131% of costs, as costs per case rose 9% per year from 1986 to 1992 while Medicare payments rose only 6.7%.
But from 1992 to 1997, as hard-line managed-care payment policies became more dominant, private insurers' payments actually shrank an average of 0.2% per year. Meanwhile, costs rose 2% per year and Medicare payments increased more than twice that at 5.2% per year.
As a result, private insurers were paying 117% of costs by 1997. And instead of pulling hospital profits down, Medicare was contributing slightly to margins, Guterman says.
"That's when you reached a point where hospitals began viewing Medicare as a good payer," Guterman says. "The (budget law) is cutting out the cushion that Medicare provided. The question is, Is Medicare supposed to provide a surplus because private payers are more stingy?"
Carol Cox Wait, president of the Committee for a Responsible Federal Budget, points out that when Medicare costs were accelerating faster than projected in the 1980s, providers weren't offering to repay the extra money to the federal government.
"I think it's absolutely charming that when you turn this around . . . that people claim we're entitled to the difference between what was anticipated to be saved and what was saved (under the budget law)," Wait says. "The fact that we've saved more than we expected is no reason to throw money at the program."
Backstop program. Vladeck notes that Medicaid varies from state to state, and it's increasingly not paying its share of those costs. Medicaid's use of managed care has led to a drop in payments to providers.
"Politically, we have made a decision in this country that Medicare beneficiaries should have access to quality healthcare services. We seem to have backed away from that in Medicaid," Vladeck says.
Private insurance also is increasingly not paying its share of those costs. "They have short-term agendas," he says. "They try to take advantage of market circumstances."
In the early '90s, Medicare was overpaying hospitals. Medicare was carrying private insurers for five or six years prior to the budget law.
"In the political world, it's a no-win situation," Vladeck says.
Going to war. In their fight against budget law-mandated reductions in Medicare, providers have pulled out all the stops. That includes threatening to cut off non-Medicare services such as pediatric clinics, which hospitals fund with their extra Medicare dollars (June 21, p. 2).
That some of those public goods are popular in the communities that hospitals serve makes Medicare a vulnerable target when hospitals start to struggle, Reischauer says.
He compared hospitals' threats to shut down services seldom used by Medicare beneficiaries-such as free medical clinics or obstetric wards-with Congress' threat to cut the budget and the federal government's response of threatening to shut down the Washington Monument.
To those providers who may use the closure of services unrelated to seniors as arguments in favor of increasing Medicare payments, Ball says, "They'd be well-advised to stick to the argument that Medicare is not paying fully for the cost of its patients."
By contrast, commercial insurers are more immune to such arguments when they negotiate rates for hospitals.
"The method for determining (Medicare) payments is a political process and not an economic process," Reischauer says.
That's a view shared by John Berthoud, president of the 300,000-member National Taxpayers' Union, based in Alexandria, Va.
"I think a lot of the time, the taxpayer is seen as the easiest mark" when providers struggle, Berthoud says.
Show me the numbers. MedPAC's Wilensky believes that while there is some as-yet-unquantified value in GME, Medicare's other extras should be moved out of the trust fund.
Take DSH payments, for example. "People argue that low-income seniors cost more (to treat), but there's no empirical evidence for that," Wilensky says.
MedPAC and HCFA are co-sponsoring "snapshots" of the financial and clinical state of hospitals. This way, MedPAC and Congress will have more and better information on which to base their payment decisions, she says.
"We and the Congress are very frustrated that with all the change going on, we don't have a good picture of where hospitals are," Wilensky says. "It bothers MedPAC enormously that we are asked to make recommendations without reliable, current data."
Durenberger, the former senator, echoed Wilensky's dismay.
"The frustration for members of Congress is they can't distinguish between efficient and inefficient providers, because members who represent the inefficient ones won't let them," Durenberger says. "We have to come to grips with practice disparities."
Better data are needed to justify even GME payments, which many in Congress support. At its October meeting, MedPAC commissioners learned that there was no study or survey that quantified the cost or value of enhanced care at teaching hospitals.
One healthcare lobbyist, who asked not to be named, says that when developing an indirect medical education payment policy, architects of the law just picked a number "out of the sky."
"In 1983, we were sitting around trying to figure out how to do this (indirect medical education) thing," the lobbyist says. "There was a study that suggested the cost was 6.7% (of the DRG payment for each 10% increase in the resident-to-bed ratio), so we just took that number and said, 'Why don't we double it?' No one had a clue how to come up with a number for (indirect medical education)."
Wilensky says MedPAC wants to avoid such haphazard policymaking in the future. The life of the Medicare program depends on it, she says.
"To make appropriate BBA fixes, you really need to have current data, not just old data with new projections," Wilensky says. "(Without good data) it does make it difficult for everyone to know how to respond."
Complicating matters is the evolution of Medicare from an arcane public policy concern to a program encompassing a host of politically charged issues.
"For a long time, Medicare politics was very inside baseball," Vladeck says. "The broader political system couldn't have cared less. That has definitely changed."
President Clinton promised universal coverage in his first term but wasn't the first president to see such a proposal fail to pass Congress. The administrations of Franklin D. Roosevelt, Harry Truman, Lyndon B. Johnson, Jimmy Carter and Gerald Ford all tried to gather support for the concept.
However, the closest Americans have ever come to that ideal is Medicare and Medicaid.
"President Clinton substantially raised the visibility of healthcare as a political issue and correctly sensed that it is a more salient issue with the public," Vladeck says. "To Democrats, Medicare is the best thing they have going for them."
As Medicare has become more political, so have providers' lobbyists. They have learned which strings to pull to get Congress' attention, including pointing to the jobs a community could lose if Medicare didn't pay a hospital more.
"About 70% of hospital revenue goes into salaries," one veteran hospital lobbyist says. "It's about 20 employees for every $1 million. So Medicare is really a jobs program. Lots of hospitals (make that argument) when they lobby providers."
Some argue that Medicare wouldn't have so many burdens and hospitals wouldn't have so many wants if the federal government insured everybody.
"We hear more and more that hospitals can't provide free care like they used to because there's just no cushion," says Waxman of Families USA. "If you had everyone covered, that would solve a lot of hospitals' (financial) problems."
Adds Vladeck: "When you have no national health policy, one national program gets a lot of attention. In an era when so large a segment of the political elite is obsessed with privatization, one of those things that drives the politics of Medicare is that it's so successful for a government program. Medicare is a popular program, and that's part of what makes people crazy."