Comparison With Private Insurance
Medicare differs from private insurance available to working Americans in that it is a social insurance program. Social insurance programs provide statutorily guaranteed benefits to the entire population (under certain circumstances, such as old age or unemployment), benefits which are financed in significant part through universal taxes. In effect, Medicare is a mechanism by which the state takes a portion of its citizens' resources to guarantee health and financial security to its citizens in old age or in case of disability, helping them cope with the enormous, unpredictable cost of health care. In its universality, Medicare differs substantially from private insurers, which must make decisions about whom to cover and what benefits to offer in order to manage their risk pools and guarantee that costs do not exceed premiums.
Because the federal government is legally obligated to provide Medicare benefits to older and disabled Americans, it cannot cut costs by restricting eligibility or benefits, except by going through a difficult legislative process. Although cutting costs by cutting benefits is difficult, the program can also achieve substantial economies of scale in terms of the prices it pays for health care and administrative expenses and, as a result, private insurers’ costs have grown almost 60% more than Medicare’s since 1970. Medicare’s cost growth is now the same as GDP growth and expected to stay well below private insurance’s for the next decade.
Because Medicare offers statutorily determined benefits, its coverage policies and payment rates are publicly known, and all enrollees are entitled to the same coverage. In the private insurance market, plans can be tailored to offer different benefits to different customers, enabling individuals to reduce coverage costs while assuming risks that they will not need care that is not covered. But insurers have far fewer disclosure requirements than Medicare, and studies show that customers in the private sector can face major difficulties determining what care is covered and at what cost. Moreover, since Medicare collects data about utilization and costs for its enrollees – data which private insurers treat as trade secrets - it provides researchers with key information about the performance of the health care system.
Medicare also has an important role driving changes in the entire health care system. Because Medicare pays for a huge share of health care in every region of the country, it has a great deal of power to set delivery and payment policies. For example, Medicare promoted the adaptation of prospective payments based on DRG’s, which prevents unscrupulous providers from setting their own exorbitant prices. Meanwhile, the ACA has given Medicare the mandate to promote cost-containment throughout the health care system, for example, by promoting the creation of accountable care organizations or by replacing fee-for-service payments with bundled payments.
Read more about this topic: Medicare (United States)
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