Editor’s Note: The post below by E. Richard Brown, Gerald F. Kominski, and Steven P. Wallace discusses the lessons of Medicare for the new public health insurance that Congress is considering creating as part of comprehensive health reform. It complements a study published today in Health Affairs by Commonwealth Fund researchers discussing how consumers rate Medicare and employer-sponsored coverage, as well as the implications of those ratings for a possible new public health plan.

Biographical information for Brown can be found by clicking on his name above. Kominski is a Professor of Health Services in the UCLA School of Public Health. He also serves as Director of Health Economics and Evaluation Research (HEER) Program at the UCLA Center for Health Policy Research. His research focuses on evaluating the costs and cost-effectiveness of health care programs and technologies; improving access and health outcomes among ethnic and vulnerable populations; and developing models for forecasting population health. Wallace is Professor and Vice-Chair of the Department of Community Health Sciences in the UCLA School of Public Health, and Associate Director of the UCLA Center for Health Policy Research. He is a leading scholar nationally in the area of aging in communities of color. His current research focuses on understanding the relative impact of structural and cultural factors in access to health care for diverse elders; improving the measurement of economic security for older adults; and developing innovative models of improving the capacity of community based organizations to find, understand, and use empirical data in their planning and advocacy.

As Congress grapples with whether a new public health insurance plan should be created as part of health care reform, they should take stock of the nation’s experience with Medicare as a public program. Medicare’s strengths and limitations offer a number of lessons for the current debate.

Lesson 1: Stability And Security

For over 40 years, Medicare, a public program, has been a constant in the lives and health of the elderly and disabled. This stability is a contrast to the patterns typical among private health plans. Private insurers typically start and stop various lines of insurance benefits and products in the group and individual markets. In the individual market, private plans may enroll people and then drop them or raise their rates if they develop serious health problems. Medicaid, a program restricted to very low-income people and now largely run under contracts to private insurers in many states, also alters benefits with every up and down in state revenues — a legacy of its origins in the state-run welfare system.

Medicare is different: It’s coverage people can count on. No individual is dropped because of health problems. Between 1999 and 2002, many private managed care plans dropped out of Medicare+Choice, forcing nearly two million beneficiaries to find other options. The public Medicare plan was still there for its enrollees and as the back-up plan for many who lost their Medicare+Choice private plan. Thus, a public health insurance plan, operated by the federal government, is much more likely to provide enrollees with security and confidence than is true for private health plans — the first lesson Medicare can teach us.

Lesson 2: Uniform Eligibility And Benefits Nationwide

Medicare provides the same eligibility and benefits throughout the nation. What Medicare offers older and disabled adults does not depend on where they live. As a federally administered program, Medicare Parts A (hospital insurance) and B (medical insurance) have avoided the interstate and local variation in eligibility and benefits that has characterized Medicaid and the private health insurance market. Eligibility is based on simple, universal criteria (age or disability) so that the sickest, who need it the most, are able to obtain affordable coverage. This social insurance principle of geographic equity is violated in Medicare only when individuals enroll in contracted private health insurance plans under Medicare Parts C (Medicare Advantage — that is, managed care) and D (prescription drug insurance).

Private health insurance benefits vary widely across markets, regions, and states, and eligibility is typically plan-specific. Medicaid eligibility and benefits also vary by state because it is administered by the states. So the second lesson is this: to match Medicare’s equitable character, the new public plan should operate under uniform eligibility rules and with the same benefit package nationwide.

Lesson 3: Transparency And Consistency Of Benefits

Medicare benefits are explicit, and they are administered using transparent criteria. In contrast, private health insurance plans, including Medicare Advantage plans and prescription drug plans, have explicit benefits, but they vary from plan to plan, and they may be granted or denied based on each health plan’s differing interpretation of “medical necessity.”

Both enrollees and providers benefit from the consistent application of the criteria used for “medical necessity.” While the criteria for several Medicare benefits have changed over the years, major policy changes (such as those for home health care) are well publicized in advance so that enrollees and providers can prepare for the changes. This probably contributes to the finding that Medicare enrollees were much less likely than younger privately insured people to report that their insurance did not pay for a service that they had thought would be covered. After income, health status, and a number of other factors were controlled for, people with Medicare were more satisfied than younger privately insured people and reported fewer negative plan experiences.

Consistency and transparency enhances enrollees’ feelings of security and reduces providers’ uncertainty about reimbursement. And by narrowing areas of administrative interpretation and reducing confusion about benefit administration, these features also lower administrative costs for the program and providers. In contrast, private health plans’ general lack of transparency about covered services and frequent changes in benefits create uncertainty and, often, confusion among enrollees and providers as to what is covered and what is not covered. Worse still, it puts people at financial risk and may force many to forgo needed care.

Nevertheless, although the consistency of Medicare benefits over time has advantages in predictability, the process for adopting Medicare benefits could be made more responsive to the changing needs of enrollees. Medicare was particularly slow to establish a prescription drug coverage program, long after such coverage was available in most private health plans, Medicaid, and the Department of Veterans Affairs (VA). The absence of prescription drug coverage could be blamed on the political difficulty of adding such a high-cost benefit to the program.

Thus, Medicare’s third lesson is that the new public health plan should emulate Medicare’s transparency and specificity, but that Congress should delegate the responsibility for deciding what specific benefits will be covered to the health plan’s independent governing board. The new public plan should include comprehensive benefits that are periodically reviewed for their adequacy, using either scientific assessments of the effectiveness of clinical procedures and support services, or a benefits benchmark, such as the Federal Employees Health Benefits (FEHB) program. In contrast, the lack of open periodic reviews of the adequacy of private-plan benefits or their “effectiveness” (which are currently considered business trade secrets) leads to care denials by private plans for which they are unaccountable and which may be inappropriate.

Lesson 4: Innovating Provider Payment Reforms

For more than two decades, Medicare has been an innovator in developing new models of provider payment, both for institutional providers like hospitals and for professional providers like physicians. These innovations were primarily designed to control health care costs and increase the value received for existing health expenditures.

In 1983 Medicare implemented the prospective payment system (PPS) for inpatient hospital services, a significant innovation in which hospitals are paid a bundled fee for each admission, classified into categories knows as diagnosis-related groups (DRGs), rather than being paid for the cost of each itemized service provided during a hospital stay. These DRG-based bundled payments incentivize hospitals to provide more efficient care while also recognizing legitimate cost differences associated with the varying mix of diagnoses resulting in hospitalization.

Medicare’s inpatient PPS resulted in a decrease of more than 10 percent in length-of-stay between 1983 and 1985, and Medicare admissions declined as hospitals shifted procedures to the outpatient setting. Medicare’s leadership led to changes in clinical practice, producing reductions in length-of-stay even for insurers that did not immediately adopt DRG payments. Private insurers soon followed Medicare’s lead and adopted bundled payments based on prospectively determined rates. Similarly, Medicare’s adoption in 1992 of a national fee schedule for payment of physician services, based on the resource-based relative value scale (RBRVS), led commercial insurers to use the RBRVS-based fee schedule to pay physicians. And Medicare has continued to develop and implement other PPSs to provide incentives for efficiency in other health care delivery sectors, including skilled-nursing facilities, outpatient hospital services, home health care, inpatient rehabilitation facilities, and long-term care hospitals.

Thus, the fourth lesson is that a large public plan, as most analysts expect it to be, has the ability to innovate and lead all health insurers in reforming the delivery system, reining in costs, and driving up value. A major challenge facing the U.S. health care system today is to develop delivery models that provide care coordination, particularly for chronic illnesses. The public plan should strive to be a leader not only in managing chronic illnesses more effectively, but in preventing chronic illnesses in young and middle-aged populations by focusing on both clinical services and community-based interventions. These innovative models are likely to be adopted by private health insurance plans, much as DRGs and the RBRVS-based physician fee schedule were, resulting in beneficial spillover effects for the private sector and its enrollees.

Lesson 5: Keeping Administrative Costs Very Low

Medicare consistently operates with far lower administrative costs than private health insurers, an advantage that the new public health insurance plan should be able to emulate. The administrative costs of public Medicare fee-for-service (Parts A and B) are slightly less than 3 percent of total program expenditures. These low administrative costs are attributable to its prospectively determined payment rates for most facility care and professional provider services, high rates of stable enrollment, low expenditures for marketing, no medical underwriting or experience rating, consistency of benefits and transparency in their administration, and economies of scale.

Private Medicare Advantage plans have been less effective in achieving administrative savings because these private health plans spend more on marketing, make more frequent changes in health plans by individuals, provide less transparent administration of benefits, and pay shareholder profits and executive compensation. Medicare Advantage plans have demanded — and received — from Congress excess payments per capita now averaging 114% more than per capita expenditures for similar individuals in the public fee-for-service Medicare plan, without any evidence of better performance or outcomes.

For the new public plan, lesson five is to minimize “churning” of enrollment and keep administrative processes as simple as possible, to keep administrative costs low. These goals involve establishing transparent policies and practices for administering benefits and paying providers, which will yield higher levels of enrollee satisfaction and lower costs for providers as well as for the public health insurance plan itself.

Lesson 6: Public Accountability

As a public program, Medicare has been accountable to the public, in contrast to private health insurers’ accountability to a privately appointed board of directors and, for investor-owned health plans, shareholders as well. Medicare’s mission is to serve its enrollees and the public, and it must answer to Congress for its actions. Investor-owned insurers are expected to generate a profit that is distributed to shareholders. Not-for-profit health plans do not generate profits, but their operations and their excess revenues over expenses are guided by private, self-perpetuating boards. The public accountability for serving enrollees’ interests lies at the heart of Medicare’s strength, as enumerated above.

Thus, Medicare’s final lesson for the new public health insurance plan is that it should be founded on public accountability and singular commitment to the interests of the population it was created to serve. Although members of Congress represent those who elected them, Congress is a very political body that is also very responsive to powerful interests. The new public plan would have more flexibility to innovate provider payments and reform the delivery system to improve quality and value if it were less subject to powerful political interests. Establishing a board of directors appointed by Congress and the president would retain Medicare’s public accountability but provide some insulation from powerful political interests.

In sum, Medicare’s experience of more than four decades of providing stability and security for older and disabled Americans is a huge advantage that will be essential elements of a new public health insurance plan under health reform. Similarly, Medicare’s public accountability, its uniform nationwide eligibility and benefits, its transparency in decision making, and its low overhead costs are all strengths that a new public health insurance plan can offer that even a regulated private health insurance market would not. The public plan also should be a leader in innovating provider payment reforms and in serving as a benchmark against which the performance of private health insurers can be compared as we seek to extract more value from the dollars we spend on health care. As a result, both individual choice and setting market norms make it important that there be a national public plan that models Medicare’s strengths in national health care reform.