Published 5/1/2012
Vasanth Sathiyakumar, BA; A. Alex Jahangir, MD; William T. Obremskey, MD, MPH; Manish K. Sethi, MD

Will Medicare Work in a Private-Sector World?

The Ryan-Wyden plan presents an alternative to government funding

Medicare patients comprise a significant patient cohort for many orthopaedic surgeons. According to AAOS 2010 member census data, Medicare patients account for nearly one quarter of orthopaedic patients, and that percentage is even higher among generalists. For this reason, orthopaedic surgeons need to understand the impact of the various proposals for reforming Medicare.

A key issue in the debate over reforming Medicare focuses on privatization to drive down healthcare costs. Rep. Paul Ryan (R-Wisc.) and Sen. Ron Wyden (D-Ore.) have proposed that Medicare be allowed to compete for consumers in an open market against private insurance plans. Their plan aims to provide affordable private insurance choices for Medicare-eligible citizens through a “premium support” system.

The Ryan-Wyden Plan
Under their proposal, beginning in 2022, Americans who are age 54 years or younger will be able to choose between a traditional Medicare package and a variety of private insurance plans. Each year, during an annual enrollment period, participating private insurance plans will compete with Medicare for consumers in an open market system—the “Medicare Exchange.” The federal government will provide a “voucher” or subsidy to citizens age 65 years and older, equivalent to the premium of either the second-least expensive plan or Medicare—depending on which is less costly. Individuals who purchase the least expensive available plan will be able to keep the portion of the unused subsidy; those who wish to purchase more expensive plans must make up the difference in pricing through an out-of-pocket payment.

To ensure the success of the Ryan-Wyden plan, the Centers for Medicare and Medicaid Services (CMS) will mandate that all participating private insurance plans provide packages that are, at minimum, actuarial equivalents to the health coverage and benefits offered under Medicare. CMS will also enforce transparency by monitoring each plan to verify that accurate, adequate information is annually transmitted to all potential consumers.

Other consumer guarantees and protections under the Ryan-Wyden plan would include risk-adjusted assistance based on health status, age, and wealth. Specifically, a stratified assistance system would give wealthier individuals smaller subsidies. On the other end, those who qualify for Medicaid will continue to receive those benefits along with strengthened safeguards against increases in premiums and out-of-pocket costs or a lack of insurance choices. In addition, private insurance plans will be prohibited from disqualifying individuals based on pre-existing conditions.

Finally, the Ryan-Wyden plan provides an outline for easing the transition of workers into retirement by providing greater insurance options for small business employees prior to retirement. Under the plan, workers in small businesses of fewer than 100 employees will have the option of either choosing an employer-supported insurance plan or taking an equivalent monetary value of the employer contribution toward health care and instead using that value as a subsidy toward purchasing a private insurance option on the open market.

The political debate
Although crafted on a bipartisan platform, the Ryan-Wyden plan has received little Democratic support. The Obama administration has recently denounced the plan by stating that the competition would result in increased Medicare premiums, which would prompt consumers to turn to private insurance plans.

Both Rep. Ryan and Sen. Wyden have called for Medicare to bolster benefits and make the program more competitive with private options. But White House Communications Director Dan Pfeiffer has stated that, given an option, consumers would be more likely to take a subsidy and purchase private insurance rather than Medicare. In addition, House Minority Leader Nancy Pelosi (D–Calif.) believes that the plan does little to fix any underlying problems associated with Medicare and instead is trying to “put lipstick on a pig.” Others have voiced similar sentiments, stating that private sector solutions would dismantle the traditional foundation and guarantee of the Medicare safety net for seniors.

Republicans, however, have more favorable views. Both Mitt Romney and Newt Gingrich have voiced their support for the plan while Speaker of the House John Boehner believes the plan is a “step in the right direction.”

Many Republicans have praised Rep. Ryan for obtaining Democratic support for privatizing Medicare, which they believe will help the GOP cause in the 2012 presidential election. Many conservatives, however, criticize him for conceding on his original plan, which severely restructured Medicare without leaving a “traditional Medicare” option and for agreeing to a 10-year delay before the plan goes into effect in 2022.

Implications for orthopaedists
If implemented, the Ryan-Wyden plan could have a significant impact on practicing orthopaedic surgeons. Under the plan, the current Medicare structure would have to change to make the program more competitive in an open market environment, and these changes may have both positive and negative effects for physicians.

For example, the plan specifically states that the current Medicare reimbursement formula is outdated and must be reformed. A more favorable fee schedule for physicians will ensure that consumers who choose traditional Medicare in the open market will have access to a large network of physicians. These increases in Medicare reimbursement will positively affect the reimbursement formulas of private insurance companies, resulting in increased physician paybacks across the board.

The Ryan-Wyden plan therefore creates a system that theoretically should help orthopaedic surgeons when it comes to reimbursement, regardless of the type of insurance carried by patients.

On the other hand, the plan attempts to curb healthcare costs associated with Medicare by capping cost growth at 1 percent over the Gross Domestic Product (GDP) adjusted for inflation, beginning in 2023. If Medicare cost growth exceeds this amount, the plan calls for reductions in those sectors responsible for the increased costs—and this could lead to cuts in reimbursements to physicians. Historically, over the past decade, Medicare costs have grown at a rate that exceeds the formula in the Ryan-Wyden plan. Thus, although the plan would revise the physician reimbursement formula, its attempt to cap costs and reduce overall spending could result in decreases in physician reimbursements.

Furthermore, although the Ryan-Wyden plan stipulates that private insurers cannot discriminate among potential consumers based on age and pre-existing conditions, it also allows participating private plans to provide a benefit package that is an “actuarial equivalent” of the package provided by Medicare. This means that insurers would not have to match Medicare benefits, but could substitute benefits with similar current values under a given set of assumptions. This would permit private providers to forego services such as radiation therapy for cancer patients that are provided under Medicare in favor of offering more supportive measures benefitting healthier patients. As a result, healthier patients might seek private coverage while sicker patients remain in Medicare, despite the open market exchange.

Such a situation would undoubtedly place a strain on practicing orthopaedists and their resources. As a result, some orthopaedic surgeons may care for a sicker population with a relatively unfavorable reimbursement schedule. Even if both Medicare and private plans improve their fee schedules, private insurers would enroll healthier patients who require fewer healthcare needs.

The impact of this situation is already being seen. For example, even a salaried center such as the Mayo Clinic has had to stop accepting new Medicare patients at its Arizona location due to a loss of approximately $840 million in providing care for patients that had Medicare instead of private insurance.

A waiting game
The long-term outcomes of private sector reform solutions as described under the Ryan-Wyden proposal are still unknown. Current issues center on whether a private sector solution for Medicare will actually lower costs. Some officials fear that market competition will not halt rising healthcare expenditures and consumers will face higher, unaffordable premiums. Previous attempts at private sector solutions to reduce healthcare costs have yet to reach their goals. All private sector solutions still rely on fee-for-service payment systems, which do not address the problems of increased utilization due to fraud, unnecessary care, and ineffective care.

For example, the Ryan-Wyden plan derives inspiration from the Federal Employee Health Benefits Program (FEHBP), which also includes “premium support” for federal employees who wish to purchase private insurance. However, the FEHBP “premium support” plan has failed to reduce costs. Furthermore, healthcare reform policies in Massachusetts in 2006 required all Massachusetts residents younger than age 65 to purchase health care from an insurer through an open market “exchange” system. However, this competition has failed to reduce costs and instead has increased state government expenditures on health care by 42 percent.

Whether the Ryan-Wyden plan will succeed in reducing costs despite the failures of similar plans remains to be seen. The practicing orthopaedic surgeon should be fully aware of potential changes the plan would make to physician reimbursements, the types of patients, and the insurance plans available if the Ryan-Wyden plan is implemented. An understanding of these issues will help orthopaedic surgeons prepare for these changes and provide feedback to their federal representatives who will vote on these issues.

Vasanth Sathiyakumar, BA; A. Alex Jahangir, MD; William T. Obremskey, MD, MPH; and Manish K. Sethi, MD, are associated with the Vanderbilt Orthopaedic Institute Center for Health Policy.

Did you know…?

  • Healthcare costs constitute the largest sector of the American economy at 18 percent of the U.S. GDP.
  • 48 million Americans are currently enrolled in Medicare, and the projected enrollment in 2030 is 78 million.
  • Medicare costs have been growing at a rate twice as fast as the U.S. economy.
  • The U.S. Government pays for 46 percent of all healthcare expenditures.
  • Medicare’s Hospital Insurance Fund is predicted to be exhausted by 2024.


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