Center for Health Policy receives grant to study ways to save Medicare program

A team of health economists will spend the next three years examining the nation's faltering Medicare system in an effort to help reform and save the federal government's largest entitlement program.

Alan Garber, director of the Center for Health Policy/Primary Care and Outcomes Research (CHP/PCOR), will lead the research initiative, based at the center and the Stanford Institute for Economic Policy Research (SIEPR), with support from a $350,000 grant from the Smith Richardson Foundation. According to Garber, who also is a physician with the Veterans Affairs Palo Alto Health Care System, the project is timely because rising per capita health expenditures and demographic changes will lead to a fiscal crisis in the health care program if changes are not made soon.

"The public is increasingly aware that Medicare, not Social Security, poses the greater long-term threat to the federal budget," he said. "But the political will to pursue this problem has been lacking."

In addition to Garber, the group of researchers includes Victor R. Fuchs, economics professor emeritus at CHP/PCOR; SIEPR Director John Shoven; and Dana Goldman, director of the health economics program at the Rand Corp.

The group will work with consultants from around the country on topics addressing several key issues, such as defining eligibility for Medicare, identifying alternative financing options, changing the structure of Medicare benefits and estimating the impact of Medicare reform on revenues, expenditures and the health of the elderly.

"This project is designed to come up with a plan for Medicare reform, based on the best thinking in several fields, including public finance, the operations of the commercial health systems, health economics and political considerations," Garber said. "We are not endorsing any one strategy, but rather reviewing the broad menu of options that policymakers might pursue, with the goal of producing a specific plan that could be implemented in five to 10 years."

The team has identified problems with Medicare that, coupled with changing demographics, are at the root of the system's problems, Garber said. The fee-for-service structure of the program—in contrast to a managed care model made popular during the 1980s by the growth of health management organizations—compromises the ability of the Centers for Medicare and Medicaid Services to control the volume and appropriate use of medical care reimbursed by the system.

With as much as 80 percent of Medicare beneficiaries receiving supplemental health insurance, patients are not accountable for the full cost of treatment, Garber said. Under the current system, he added, the demand for certain expensive technologies and treatments has exceeded the level at which the government can afford to supply them. The initiative will look at ways to develop competition and increase efficiency in health care markets used by Medicare beneficiaries, he said.

According to the health economists, demographic change more than anything else will lead to failure of the Medicare system. Rising health care expenditures have been largely unaffected by demographic change over the past half century, but as baby boomers age and their medical needs increase, they will strain the system even if they are healthier than previous generations, the researchers said. Policies to accommodate this group will be a central focus of the research initiative, Garber said.