LDI Health Policy Seminar Series
Summary: The Future of Medicare
Gail R. Wilensky, Ph.D.
March 3, 2000

On March 3, Gail R. Wilensky, PhD, provided an insider’s view of the evolution of managed care and its role in Medicare at a noontime seminar at the Leonard Davis Institute of Health Economics. Dr. Wilensky now chairs the Medicare Payment Advisory Commission, and had been a policy adviser in the Bush Administration.

First, she reminded the audience of the reasons that managed care emerged as an alternative to the indemnity plans of the 1970s and 1980s. The health care system at the time, she said, was “inherently inflationary.” Three factors converged to make rising costs inevitable: increasing amounts of third-party payment, fee-for-service reimbursement, and the liability system. Third-party coverage made it easy for individuals to ignore prices; the fee-for-service system encouraged providers to do more and be paid more; and the liability system encouraged providers to do more because doing less exposed them to liability risks in the event of a bad outcome.

Dr. Wilensky noted that rising costs, in themselves, were not the problem. “It’s not that an increasing share of the GDP or GNP [for health] is necessarily bad or good. The frustration came from a sense that no one was minding the store,” she explained. In addition, she noted that the system allowed for little integration of care, at a time when increasingly complex therapeutic regimens and physician subspecialization often meant that no single physician was in charge of all the care of an individual patient.

These financial and delivery issues led to the growth of managed care. Dr. Wilensky readily acknowledged the shortcomings of the present delivery system, where “coordination of care is more the exception than the rule.” She argued that the promise of disease management remains unfulfilled in part because of the lack of information systems to support such activities. Despite these shortcomings, she stated, “We are not going back to the fee-for-service world.”

The future of managed care hinges on societal decisions about how to pay for health care, Dr. Wilensky noted. Although the U.S. relies on employer-sponsored insurance for the non-elderly, reliance on this type of coverage alone has produced substantial numbers of people without insurance. She explained that employer-sponsored insurance had its roots in WWII, but is not likely to work as well in this service-dominated economy characterized by many part-time workers and individual entrepreneurs. “On a practical level…we need another system to at least go alongside employer-sponsored insurance,” she maintained.

Key questions in developing a new system include how much choice to offer, who will be making the choice, and how much information will we want on quality and outcomes. “If we tip toward individual insurance, information on quality may become more important, especially if the data are credible,” she said.

“We are clearly stumbling” in implementing managed care in the Medicare program, Dr. Wilensky said. A great amount of uncertainty exists on levels of payments to health plans, as well as in how to risk-adjust those payments to avoid inducing “bad behavior.” Recent steps by the Medicare officials to risk-adjust have worsened the situation, she maintained. For example, as of January 2000 payments to plans are adjusted based on each enrollee’s inpatient diagnoses in the past year. This method of risk adjustment penalizes plans that are successful in keeping their chronically ill enrollees out of the hospital.

In looking toward the future, Dr. Wilensky asked, “Will Medicare lead the way, or will it follow?” In the 1960s, architects of Medicare deliberately constructed it to mimic the prevalent insurance system (Blue Cross Blue Shield), reimbursement mechanisms, and benefit package. In the 1990s, this design doesn’t work anymore, Dr. Wilensky explained. She noted that Medicare benefits are “stuck” in the 1960s, with no outpatient drug coverage and no “stop-loss” provisions.

Beyond the benefit package, Medicare also must change because its financing structure is not stable, she said. As more of the “baby boomers” reach retirement age, the present financing system, with its cross-subsidies across income and age classes, cannot withstand the pressure. “It may force us to think through the social insurance concept…[and ask] how and what you pool.” She added that these demographic pressures may lead to higher-income individuals being asked to finance more of their care.

Dr. Wilensky called herself an “optimist” when she thinks about the future of the health care system. “I think we’ll get there, if we don’t put legislative structures in place that force us to view our future through a rear-view mirror.” She called for a limited governmental role, and forecast that the market would demand better information on outcomes and effectiveness. “This is a country in love with consumer reports.” She indicated that quality considerations could have large impact on purchasing decisions, and possibly reimbursement mechanisms, if we can figure out how to improve and integrate the data.

An audience member broached the subject of government single-payer financing of health care, and the possibilities it presents for integrating existing data systems. Putting aside the question of whether it should happen, Dr. Wilensky said that she does not think it will happen. “It’s a power structure question,” she added, noting that she has heard widely diverse opinions across the country on the appropriate role of government. She thought it highly unlikely that a $1.1 trillion sector of the economy would be transferred to the government.

Related Links:
Medicare Payment Advisory Commission: an independent federal body that advises the U.S. Congress on issues affecting the Medicare program


Biosketch: Gail R.Wilensky, Ph.D.

Gail Wilensky, chairs the Medicare Payment Advisory Commission, and serves as the John M. Olin Senior Fellow at Project HOPE, where she analyzes and develops policies relating to health reform and to ongoing changes in the medical marketplace. In both capacities, she testifies frequently before congressional committees, acts as and advisor to members of Congress and other elected officials, and speaks nationally and internationally before professional business and consumer groups. Previously, she served as Deputy Assistant to President Bush for Policy Development, advising him on health and welfare issues. Prior to that, she was Administrator of the Health Care financing Administration, overseeing the Medicare and Medicaid programs. Dr. Wilensky is and elected member of the institute of Medicine, and serves as a trustee of the Combined Benefits Fund of the United Mineworkers of America and the Research Triangle Institute. She is an advisor to the Robert Wood Johnson Foundation and the Commonwealth Fund and is a director on several corporate boards. Dr. Wilensky received a bachelor’s degree in psychology and a Ph.D. in economics at the University of Michigan.


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