October 1995 Bulletin

Position Statement - Principles of Medicare Reform

Medicare is the Federal health insurance program for the nation's elderly. Part A of the program covers inpatient hospital services, inpatient care in skilled nursing facilities after hospitalization, home health care and hospice care, among other services. Part B of the program covers physician services, outpatient hospital care, diagnostic services, durable medical equipment and ambulance services, among other services.

According to government projections, the Hospital Insurance Trust Fund, which finances Part A of the Medicare program, will be depleted by the year 2002. Spending on the Part B portion of the program may double in the next seven years. By the year 2000, the entire Medicare program may add as much as $150 billion to the total annual Federal deficit, nearly three-fourths of the current total annual deficit.

Factors causing the growth in Medicare costs include but are not limited to:

The American Academy of Orthopaedic Surgeons believes that the Medicare program needs fundamental reform because of its impending financial crisis which will threaten patient access to medical care. To achieve Medicare reform, the Academy believes that policy makers must undertake a thorough review of all program components, including health care delivery and benefits, payments to providers, and financing.

Health Care Delivery and Benefits

Medicare Managed Care

Many policy makers are now calling
for the expansion of managed care into Medicare as a way to cut costs even though there is no reliable evidence yet
to indicate that such an expansion would result in any savings. Since the Medicare population is generally less healthy and more expensive to treat than the younger population, the rapid expansion of a new and evolving health care delivery system into Medicare may adversely affect the quality of care and access to appropriate providers.

The Academy believes that if managed care is expanded in the Medicare program, there should be effective patient protection measures to ensure that quality and access are not jeopardized. Among these measures should be the following:

Point-of-Service: The Academy believes that every managed care plan should be required to have a point-of-service feature automatically built into it that would allow patients access to any physician of their choice outside the plan for medically necessary services at a non-prohibitive additional co-payment. If a managed care plan provides care that the patient finds unsatisfactory, that patient would have a means to seek care outside the plan. The frequency at which the point-of-service feature is used can also help the managed car plan better evaluate patient satisfaction with its services.

Prohibition of Incentives that Interfere with Medical Judgment: The Academy supports existing Federal law that prohibits managed care plans from operating a physician incentive program containing direct or indirect inducements to reduce or limit medically necessary services or patient referrals for such services.

Full Disclosure to Enrollees: The Academy believes that every managed care plan should be required to provide all prospective and current enrollees with easily understood written information describing the terms, conditions and benefits of the plan. Managed care plans should also be required to provide this information to enrollees verbally, at the request of enrollees.

Managed Care "Opt Out": The Academy believes that Medicare beneficiaries who leave a managed care plan at the time of re-enrollment to join another plan or to return to the standard fee-for-service system should not experience delays in receiving benefits.

Limits on Managed Care Administrative Costs: Managed care plans vary greatly in regard to administrative costs and the amount of revenues devoted to patient care. The Academy believes that public funds should not be used to boost the profits of managed care plans at the expense of patient care. In order to eliminate excessive administrative costs, managed care plans which do not spend at least 85 percent of the premium dollar on patient care should not be allowed to enroll Medicare beneficiaries.

Pre-selection of Enrollees: The Academy believes that managed care plans should be prevented from pre-selecting or "cherry picking" lower risk beneficiaries so that adverse selection does not occur in the standard fee-for-service system and so that all Medicare beneficiaries would have equal access to the full range of health care options.

Quality Standards: The Academy believes that there should be minimum standards that managed care plans must meet in order to enroll Medicare beneficiaries. These standards should be established by private sector organizations, such as medical societies, hospital associations, insurers and managed care organizations , accrediting agencies, employers, and patient groups, working in partnership with one another and with the Federal government.


A solution to the Medicare financial crisis could involve privatization of part or all of the program. Privatization could reduce costs and shift much of the financial risk in patient care from the Federal government to the private sector. It would also give beneficiaries a wider range of health care options from which to choose.

One approach is for the Federal government to give beneficiaries defined contributions based on individual income and health status, among other factors. These contributions would be used by beneficiaries to choose from a range of private plan options or the standard fee-for-service system with the government continuing as the insurer.

As a long-term approach, today's under age 65 working population should be permitted to have Medical Savings Accounts (MSAs) for their retirement. As members of this population become eligible for Medicare, they would still receive government contributions, but they would also be able to use funds from their MSAs to enhance their health care purchasing power (e.g., purchase health care coverage at a cost that exceeds the amount of the government contribution). MSAs also would make future beneficiaries less dependent on the government contribution. This is important because there is no guarantee that future government contributions will be high enough to meet even one's basic health care needs.

The Academy believes that policy makers should give serious consideration to privatizing all or part of the Medicare program.

Payments to Providers

Cuts in Payment

Cuts in payments to providers have been the traditional means by which government policy makers have sought to curb Medicare spending. From 1981-1993, Medicare payments to hospitals and physicians were cut by $98 billion. Physician payments, which account for 23 percent of total Medicare expenditures, have been cut by 32 percent through such measures as fee freezes, fee reductions, limits on balance billing, and implementation of the "resource-based" payment system.

Medicare payment rates have fallen sector. If current trends continue, by the year 2004 Medicare reimbursement will drop well below 50 percent of private sector rates, making severe access and quality problems probable as providers attempt to deliver care below their actual costs.

The Academy believes that further cuts in payments to providers will threaten access to quality care. The Academy also believes that the short-term savings gained by cutting physician and hospital reimbursement will not solve Medicare's long-term financial crisis.

Graduate Medical Education Funding

The Federal government, through Medicare, is the largest financial supporter of graduate medical education. The private sector contributes to graduate medical education by paying the higher charges of teaching hospitals. In recent years, however, the private sector has become less willing to pay these higher charges. If the Medicare program involves more managed care and/or privatizes, support for graduate medical education may decrease significantly, threatening quality and access for all Americans.

In addition, Medicare's current funding formulas for graduate medical education have led to increases in the number of trainees, which may not be consistent with the nation's current needs.

The Academy believes that a mechanism needs to be developed to ensure that all payers contribute equitably to graduate medical education funding. In addition, a mechanism should be developed to ensure that the number of residency positions funded through Medicare and other payers actually reflects the nation's health care needs.

Fraud and Abuse

Fraud and abuse account for an undetermined amount of wasteful spending throughout the Medicare program, threatens the health and welfare of patients and undermines the mutual trust and respect which is at the core of the provider/patient relationship.

The Academy strongly supports and will continue to cooperate in efforts to eliminate fraud and abuse in the Medicare program. The Academy will also continue its educational efforts to address this issue.


The way in which Medicare is financed will also have serious consequences for patient access to quality care.

Currently, Medicare Part A is supported by a 2.9 percent payroll tax on annual wages. Part B is financed through general revenues. Both parts are also funded through contributions from beneficiaries in the form of premiums (Part B), deductibles (Parts A and B) and co-payments (Parts A and B).

When Medicare began in 1966, Part B premiums paid 50 percent of program costs and Part B deductibles paid about 45 percent of the average charges for medical services. Today, Part B premiums pay only about 26 percent of program costs and deductibles pay less than 5 percent of average charges. While consumer prices have more than tripled between 1966 and 1993, the Part B deductible has only doubled from $50 to $100 per month. There is no premium for Medicare Part A and there is no co-payment required for home health, clinical laboratory, pathology and skilled nursing facility services.

As contributions from beneficiaries have gone down in relation to costs, these costs have been covered, increasingly, by working people under age 65 through higher general revenue taxes. This financial burden on younger working people is compounded by the fact that the number of workers is shrinking in proportion to the growing number of Medicare beneficiaries. Moreover, many young workers are not able to afford their own health insurance, yet must contribute their taxes to Medicare coverage for the elderly.

The Academy believes that most beneficiaries should assume greater cost-sharing responsibility for the Medicare program, with protections for low income beneficiaries, in order to preserve their access to quality care. The following options for financing reform should be considered by policy makers:

Indexing Part B premiums to maintain beneficiary cost-sharing at a level at least equal to or higher than today's level.

Reducing the subsidy for Medicare Part B premiums for high-income beneficiaries so that they assume a greater share of program costs.

Increasing Part B deductibles and indexing them to maintain beneficiary cost-sharing at a constant level.

Restructuring Part A financing, including a Part A premium.

Establishing a co-payment for home health, clinical laboratory, pathology and skilled nursing facility services.

Raising the eligibility age for Medicare beneficiaries to be consistent with the Social Security program.

Eliminating the costs generated by the increased utilization of services due to Medigap first dollar coverage.

August 1995

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