Larger Issue: Financing Medical Research Out of the Trust Fund
research from the trust fund
- Costs of Clinical Research
The instructions I received for this paper were to prepare some
remarks on funding medical research through Medicare. The rationale
for such funding appears to be implicit in the second paragraph
of the statement on the Workshop's Goals and Objectives:
United States' recognition of medical research as a public good
and the sustained support it has enjoyed, this research still
relies on the annual decisions of congressional authorizers and
appropriators. Unfortunately, the scientific community cannot
always rely on federal support for medical research to consistently
parallel or provide for future scientific opportunities or, more
importantly, public health needs."
I translate this paragraph, it says the needs of the research community
are not well served by the vagaries of the appropriations process;
as a result, let those of us who are concerned about support for
medical research look to what are elsewhere in the meeting materials
termed "unconventional" sources for support. Following Willie Sutton's
principle of robbing those institutions where the money was, namely
banks, the organizers ask whether Medicare should pay for medical
I expect I will disappoint several of you by saying that I personally
do not agree with the general principle that Medicare should finance
medical research. I say this even if health services research were
included in the definition of health care research, as I believe
it should be, and thereby received increased funding. In the interest
of full disclosure, any increased funding for health services research
could benefit me personally. I do, however, favor a limited change
in policy that would permit Medicare to pay for experimental procedures
that are being tested in clinical research. I take these two issues
The Larger Issue: Financing
Medical Research Out of the Trust Fund
It would be tempting but wrong to say that the Medicare trust fund
only finances medical services for its beneficiaries and so it should
remain pure and not finance research. In other words, there is precedent
for using Medicare monies for purposes other than simply paying
for medical services. In particular, the Congress has authorized
payments from the Medicare Part A trust fund for graduate medical
education and for disproportionate share hospitals. Some of the
graduate medical education monies may well be used to cross-subsidize
clinical research, but I am excluding those monies from this discussion.
medical education Since its inception Medicare has paid
a share of salaries of residents and certain other costs of graduate
medical education such as the training director and overhead costs.
Because these costs were part of teaching hospital budgets and because
Medicare originally reimbursed hospitals for its share of costs,
it was natural for the original program to finance such costs, which
came to be called direct medical education costs.
1984 Medicare changed its method of reimbursing hospitals to prospective
payment, or a lump sum for each admission. Because teaching hospitals
had higher costs, they successfully argued that over and above the
payment of resident salaries they needed higher reimbursement to
be able to compete with non-teaching hospitals. As a result, the
Congress authorized additional payments for each Medicare case in
a teaching hospital, with the amount dependent on the hospital's
resident-to-bed ratio. This is known as payment for indirect medical
what accounts for the higher patient care costs at teaching hospitals
is not clear, but at least some of the cost may be attributable
to the cost of clinical research. Thus, as pointed out above, Medicare
could well be indirectly paying for some clinical research.
amounts paid for graduate medical education are non-trivial; the
direct and indirect payments together were $6.8 billion in 1997.
There is currently considerable debate about the structure of these
payments, and both the Bipartisan Commission on the Future of Medicare
and the Medicare Payment Advisory Commission are to report to the
Congress in 1999 regarding these payments.(2)
share payments Medicare also pays additional amounts
to certain hospitals under the Disproportionate Share program. These
monies are intended to preserve and enhance access to services for
poor Medicare beneficiaries and for low-income individuals more
generally by increasing the Medicare payment per case at hospitals
treating substantial numbers of Medicaid and dual eligible patients.
The original justification for this program was some evidence that
low-income Medicare beneficiaries were more costly to treat, but
subsequent research has suggested this is not the case, and the
monies are now seen as more generally promoting access to care for
low-income populations (Kominski and Long, 1997). These monies are
also non-trivial, amounting to $4.5 billion in 1997, and they go
disproportionately to teaching hospitals (Medicare Payment Advisory
Commission, March 1998).
short, because of graduate medical education and disproportionate
share payments, the Medicare program does more than simply finance
medical care for its elderly and disabled beneficiaries. Should
it therefore also finance medical research in an explicit fashion?
from the trust fund Although
as a researcher I can certainly understand and sympathize with a
desire to avoid the vagaries of the annual appropriation process,
and although I am sympathetic to the goal of increasing monies at
NIH and AHCPR for research, as well as at HCFA, I do not favor Medicare's
financing research (other than the HCFA supported research targeted
at the Medicare program itself) for one general and two more specific
- Most economists,
including myself, believe that public goods should be financed
through general revenues rather than through earmarked taxes unless
those taxes are targeted narrowly to the beneficiaries of the
program. This latter rationale, for example, would apply to the
taxes on gasoline that are earmarked to finance highway trust
funds; as a result, those using the highways will pay the costs
of the highways in some rough approximation to their use of them.
broader public programs, however, earmarks work against sensible
tradeoffs among public purposes. If we had, for example, earmarked
a trust fund for national defense, it would presumably have required
adjustment with the demise of the Soviet Union or with other changes
in the external threat. But if there is to be an annual review
of how much defense we should buy from the earmarked fund, that
begins to look like an appropriations process. Similarly, scientific
opportunities may appear that warrant additional funding through
general revenues, as seems to be happening now. But if there were
an annual review of scientific opportunities to see whether trust
fund monies should be adjusted, that too would begin to look like
an appropriations process - and one subject to annual vagaries.
The foregoing argument comes from what my colleague David Cutler
calls the "good government view;" public processes will rationally
allocate limited resources among competing ends in a way to maximize
public well being. Perhaps, however, those wishing to tap Medicare
funds to support research have a "bad government view." That is,
in the hurly-burly of the annual appropriations process, where
all sorts of mischief may slip in during the small hours of the
morning, Congress will not get research appropriations right -
or more specifically they will get them too low. The size of campaign
contributions might affect decisions, and senior legislators might
procure a disproportionate share of public funds for projects
in their districts or states. Indeed, legislators might even earmark
research funds in ways that do not correspond with scientific
merit. Therefore, something is needed to protect certain favored
activities such as research.
The problem, of course, is determining which activities should
be so favored. Every advocacy group would, no doubt, want its
program(s) in the favored category, and it is not obvious how
to select. To be sure, certain categories of spending are somewhat
removed from the appropriations process, for example interest
on the debt and the entitlement programs. Even these, however,
are not on automatic pilot, witness legislation to raise debt
ceilings and, more to the point of this discussion, the legislated
annual increase in Medicare hospital payments (subject to a default
value), and the Balanced Budget Act's reduction in payments for
graduate medical education. In short, even if there were a general
consensus that medical research should be treated like interest
on the debt -- and despite its current high reputation I do not
think it yet ranks with interest on the debt -- there would still
be an issue of setting the annual amount to be spent. Multi-year
appropriations could address the problem of year-to-year variability
in appropriations, but such a reform is getting well past the
idea of whether Medicare funds should be used to support research.
- In the specific
case of using Medicare to support research, financing could come
from the Part A trust fund or from Part B. Part B, however, is
financed 75 percent from general revenues, with the remainder
from beneficiary premiums. Thus, I assume the proposal to tap
Medicare funds for medical research envisions using the Part A
trust fund in a fashion similar to the Indirect Medical Education
or Disproportionate Share payments.(3)
The Part A trust fund, however, is already in danger of becoming
the engine that couldn't. Indeed, many would say it has already
achieved that status. Prior to the Balanced Budget Act of 1997
the Part A trust fund was scheduled to have a zero balance (or,
as the press puts it, "go broke") by 2001; by saving $115 billion,
the Congress in 1997 bought the fund another 7 years or so before
the day of reckoning arrives. For details see the report of the
Board of Trustees of the Federal Hospital Insurance Fund (1998).
The low rate of increase in Medicare spending in 1998 will likely
buy a few more years when CBO and OMB next update their estimates.
Any projections of future fund balances necessarily rely on projections
of how much medical costs will increase. As we all know, future
projections can be notoriously inaccurate; recall the 1970s predictions
of future energy costs. Although granting that future medical
costs are highly uncertain, in my view the Trustees have in anything
been overly optimistic in their projections (see Wilensky and
Newhouse 1999 for a discussion). Moreover, there is much less
uncertainty about the demographics; the Trustees project the ratio
of workers to beneficiaries will fall by almost half over the
next three decades. As a result, even if medical costs increases
stay down at their present low rate for several more years, there
is likely to be a problem keeping the trust fund solvent.(4)
In short, given reasonable projections of medical care costs and
of beneficiaries, the Part A Trust Fund already has more on its
plate than it can digest without adding still more obligations.
- The Part
A trust fund is financed from payroll taxes of 2.9 percent on
all earnings. The tax is nominally split between the employee
and employer, but virtually all economists believe the employer's
share is mostly shifted to wages; i.e., cash wages are lower by
most of the amount of the employer payment (Fuchs, Krueger, and
Poterba, 1998). As a result, who pays for medical research is
different if payments are made from the Part A trust fund rather
than general revenues. Specifically, whereas general revenue financing
is progressive, financing from the trust fund is proportional
to earned income. Although who should pay how much for medical
research is clearly a value judgment, a broader based tax that
accounts for non-earned income would seem preferable to payroll
of Clinical Research (5)
The Medicare program is by statute restricted to paying for services
that are reasonable and necessary for treating a clinical condition.
The Health Care Financing Administration interprets this to mean
that Medicare should cover only services that are "…safe and effective,
not experimental or investigational…" (Health Care Financing Administration,
In the case
of new services, a decision must be made as to whether the existing
evidence warrants a judgment that the treatment is safe and effective.
There are few bright lines here, although in the cases of drugs
and devices the FDA must have approved the product or cleared it
for marketing or Medicare will not cover the service.(7)
are part of clinical trials, there is by definition uncertainty
about the benefits of the treatment and so Medicare often does not
cover the cost of treatment in the experimental group. Typically
a drug manufacturer will cover the cost if a drug is involved, expecting
to recover the costs from profits made during the time the drug
is on patent.
But of course
there are many instances of surgical and medical procedures for
which there is no patented product, and hence no manufacturer to
pay the costs of treatment in the experimental arm of a clinical
trial. Because the trial is generating common knowledge, a public
good argument suggests that public funds should pay. It seems to
me, however, that these funds could be Medicare funds rather than
I believe Medicare should pay an amount for the experimental group
in an approved clinical trial in which no patentable product was
foreseen that would equal what it paid on average in the control
group. The argument for Medicare support is that its failure to
pay raises the price of clinical research and hence causes less
such research to be done. In those cases in which the research is
not done, not only do we lose the knowledge that would be generated
by the trial, but Medicare presumably pays the cost of the conventional
treatment in any event. Hence, Medicare is no worse off under this
new rule than it would be if the trial were not undertaken but meanwhile
knowledge has been gained from undertaking the trial.(8)
I have not
made a cost estimate for this proposal, and costs would clearly
depend upon how many trials there were. If payment was restricted
to NIH financed trials, however, it would seem as if the costs could
not be very large relative to Medicare program costs.
made two arguments:
- The Medicare
trust fund should not generally pay for medical research; as an
earmarked trust fund, it should be reserved for its original purposes
of financing the delivery of services to its beneficiaries, albeit
that principle has already been breached in the case of graduate
medical education and disproportionate share payments. Research
financed by public funds should be financed by general revenue.
Moreover, looking forward a few years the trust fund will be running
large deficits; this would not seem to be the time to speak of
additional taps on the trust fund.
should pay an amount equal to what it otherwise would have paid
for patients in the experimental arm of an approved trial where
no patentable product is expected to result.
Prepared for "How to Fund Science: The Future of Medical Research,"
AAAS Workshop at Wye River Conference Center, February 14-16, 1999.
Elementary economics would suggest that subsidies to hospitals for
additional residents would induce increases in the number of residents
or their salaries or both, there has in fact been a marked increase
in numbers (Medicare Payment Advisory Commission, July 1998, p.
148). The Balanced Budget Act capped the number of residents eligible
for payment at 1996 levels.
There is a small Part B trust fund but it is only for covering working
In fact, the trustees project the rate of medical cost increase
per beneficiary falling to approximately the rate of growth in the
economy. Even with that assumption, which I regard as highly optimistic,
the Medicare program (Parts A and B) is projected to grow from its
current 2.65 percent of GDP to 5.85 percent in 2030, and those costs
are being shared among a relatively much smaller workforce.
This section draws heavily on Physician Payment Review Commissionk,
1995, chapter 6.
It is not the case, however, that simply including a service in
a research study means lack of coverage, because effective services
may be used in studies.
The drugs in question are mostly inpatient, since Medicare covers
few outpatient drugs.
In those cases in which the research would have been done in any
event, the issue is which public source pays, payroll taxes (insofar
as there are Part A services) or general revenues. The consequences
for economic efficiency, however, seem second order compared with
the discouragement to research that the present non-neutral treatment
of costs in the experimental and control group poses.
Board of Trustees of the Federal Hospital Insurance
Trust Fund, "1998 Annual Report," available on the Internet at www.hcfa.gov/pubforms/tr/default.htm
Victor R., Alan B. Krueger, and James M. Poterba, "Economists' Views
about Parameters: Survey Results in Labor and Public Economics,"
Journal of Economic Literature, September 1998, 36(3):1387-1425.
Health Care Financing Administration, "Criteria and Procedures for
Making Medical Coverage Decisions that Relate to Health Care Technology,"
Federal Register, January 30, 1989, 54(18):4302-4318.
Gerald, and Stephen H. Long, "Medicare's Disproportionate Share
Adjustment and the Cost of Low-Income Patients," Journal of Health
Economics, April 1997, 16(2):177-190.
Payment Advisory Commission, Report to the Congress on Medicare
Policy, volume 1, chapter 6 and volume 2, chapter 5; March 1998.
Medicare Payment Advisory Commission, Chartbook, July 1998.
Payment Review Commission, 1995 Annual Report to Congress;
Washington: The Commission, 1995.
Gail R., and Joseph P. Newhouse, "Medicare: What's Right? What's
Wrong? What's Next?" Health Affairs, January/February 1999,
1999 American Association for the Advancement of Science