CATO Forum on Medicare

, Michael Watson, Leave a comment

At a policy forum at the CATO Institute in Washington, DC, on June 27, 2011, Lorens Helmchen of George Mason University presented a proposal to reform Medicare co-payments to reduce cost growth. Mark Pauly of the University of Pennsylvania’s Wharton School of Business and Michael Cannon of CATO joined Helmchen to critique the proposal and to present alternatives.


Helmchen’s proposal would change Medicare payments to doctors from a pure fee-for-service system to a lump-sum indemnity benefit. Under Helmchen’s plan, beneficiaries would receive a cash supplement rather than pay a co-payment if they chose lower-cost alternatives for medical treatment. The program would save Medicare money if the cost of paying those who switch from expensive to inexpensive treatments were less than the amount it currently costs to pay them to use the expensive treatments.


Helmchen suggested that his proposal should begin as a regionalized pilot program with comparative effectiveness research.


Pauly argued that Helmchen’s proposal is based on the sound economic principle of indemnity insurance, which he noted is used as a general practice (but not in pure form) in auto insurance. Pauly noted that indemnity payments are difficult to assess if the extent of damages are uncertain and that this frequently occurs in medical care. Pauly also expressed concern that some low-income beneficiaries might be susceptible to short-sighted decisions in accepting the cash payment and proposed an income-based pilot program, with high-income individuals first to exercise the pilot option.


Cannon expressed concerns that political control of the process both now and under Helmchen’s plan would reduce the effectiveness of any reform. Cannon argued that lobbyists for high-cost treatments would affect policy decisions and that opponents would be able to demagogue bureaucrat decisions. Cannon also noted that Americans tend to distrust independent, unconstrained bureaucracy. As an alternative Cannon proposed a “bundled payment” to the consumer, which would allow consumers to choose from any privately provided health plan at the cost of the bundle.

Michael Watson is an intern at the American Journalism Center, a training program run by Accuracy in Media and Accuracy in Academia.

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