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THE FUTURE OF MEDICARE:
CONVERTING TO PREMIUM SUPPORT OR
CONTINUING AS A GUARANTEED BENEFIT PROGRAM
Karen Davis
The Commonwealth Fund
One East 75th Street
New York, NY 10021
XXXXXXXXXX
http:
www.commonwealthfund.org
Invited Presentation
House of Representatives Democratic Steering and Policy Committee
Forum on Saving Medicare for Seniors Today and in the Future
October 2, 2012
This testimony benefitted from the work of Sara R. Collins and Stuart Guterman and the report by
Sara R. Collins, Stuart Guterman, Rachel Nuzum, Mark A. Zezza, Tracy Ga
er, and Jennie
Smith, Health Care in the 2012 Presidential Election: How the Obama and Romney Plans Stack
Up, The Commonwealth Fund, October 2012; the research assistance of Kristof Stremikis; and
the editorial assistance of Deborah Lo
er of The Commonwealth Fund. The views presented here
are those of the author and not necessarily those of The Commonwealth Fund or its directors,
officers, or staff.
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THE FUTURE OF MEDICARE:
CONVERTING TO PREMIUM SUPPORT OR
CONTINUING AS A GUARANTEED BENEFIT PROGRAM
Oral Statement
Today, Medicare works to provide access to care and financial protection for 50 million
seniors and disabled beneficiaries. These men and women contributed to the program
throughout their working lives and continue to contribute substantially to their own
medical expenses through premiums for supplemental coverage and out-of-pocket
expenses. Although Medicare covers people who are poorer, sicker, and more expensive
to care for than private insurance plans do, it is a better buy than private coverage.
Medical and administrative costs are lower than those in private coverage because of
administrative efficiencies and the leverage Medicare exercises as the largest purchaser
of health care in our country.
The Affordable Care Act is projected to achieve estimated Medicare savings of
$716 billion between 2013 and 2022. This will be achieved by phasing out the
overpayments to private Medicare Advantage plans, reducing provider payment
productivity updates (which has been accepted by the hospital industry in large part
ecause covering the uninsured will reduce hospitals’ bad debts), and various provider
payment changes and improvements. The Affordable Care Act’s major payment and
delivery system reforms are projected to slow Medicare spending per beneficiary to 3.1
percent annually over 2012–2021, extending the solvency of the Medicare Hospital
Insurance (Part A) Trust Fund to 2024.
A major concern, however, is that the retirement of the post-World War II
generation will increase the numbers of beneficiaries at the same time that the decline in
fertility rates in the 1970s and 1980s has lowered the number of active workers in the
labor force. As a result, expenses are projected to grow faster than payroll tax revenues.
To
ing the Trust Fund into balance, more revenues will be needed, spending
growth will need to be further restrained, or beneficiaries will need to pay more of their
own health care expenses either directly or through premiums.
Given this dilemma, a national debate on the future of Medicare, with careful
consideration of the consequences of alternative strategies, is appropriate. Converting
Medicare to a fixed sum of money capped at the growth of the economy, without
effective health care cost control, would shift costs to beneficiaries who already struggle
with out-of-pocket medical expenses and limited incomes. An alternative approach of
continuing guaranteed benefits and rewarding hospitals and physicians for providing
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high-quality care in an efficient manner has the potential to achieve needed budgetary
savings while reducing, not increasing, financial risk to beneficiaries.
Premium Support and Repeal of the Affordable Care Act
The philosophy behind premium support holds that patients are best positioned to
eliminate overuse of services, shop for lower-cost care, and pick lower-cost health plans.
Rather than guaranteeing that Medicare will pay the cost of a defined set of benefits,
under the most recent Medicare premium proposal advanced by vice presidential
candidate Rep. Paul Ryan, chair of the House budget committee, beneficiaries would
eceive an allowance based on their age, health status, and income to be applied toward
the purchase of a health plan. Over time, the dollar allowance would be capped at the rate
of gross domestic product (GDP) growth per person plus 0.5 percent.
Governor Mitt Romney endorses this Medicare premium support strategy.
Because the federal government would cap future allowances by the rate of economic
growth rather than the rising costs of health insurance premiums or medical care cost, this
approach would result in the federal government spending less over time as beneficiaries
spent more, assuming health care costs continued to rise at cu
ent rates. The value of the
allowance or defined contribution for private insurance would erode over time, resulting
in higher premiums for beneficiaries and/or reductions in benefits.
The Congressional Budget Office (CBO), in fact, estimated that the latest Ryan
premium support proposal, which shaped the 2012 House Budget Resolution, will raise
costs for beneficiaries, with beneficiary cost rising over time. Our estimate is that average
private health insurance premiums would exceed the allowance by $4,250 in 2030.
It is also important to weigh the merits of choosing among competing private
plans. As previously noted, private health insurance is more costly than public coverage
given its larger administrative costs, higher provider payments, and less-efficient risk
pooling. CBO estimates that utilizing private coverage for a set of benefits similar to
what is cu
ently covered by traditional Medicare would be 12 percent more expensive
than traditional Medicare in 2022. By 2030, private coverage of the same benefits would
e about 40 percent more expensive than traditional Medicare.
The nation’s experience with the Medicare Advantage program suggests that
eneficiaries would be less satisfied and more likely to experience access problems when
opting for a private plan. Thirty-two percent of Medicare Advantage beneficiaries report
at least one access problem because of cost, compared with 23 percent of those with
traditional coverage.
The widespread use of competing private plans under a premium support scenario
has the potential to undermine the stability and effectiveness of Medicare by fragmenting
the risk pool. Even if Medicare beneficiaries retained a choice of enrolling in traditional
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Medicare as called for in the latest Ryan proposal, physicians and hospitals could receive
substantially higher payment from private plans and would be likely to opt out of
participation in traditional Medicare, nullifying it as a genuine choice for beneficiaries.
Dividing Medicare beneficiaries across multiple private plans would undermine the
leverage the program cu
ently has to drive efficiency among providers and widespread
change across the entire U.S. health system.
Moreover, while the premium support proposal contained in the latest House
udget resolution included some protections against risk selection (or “cream-
skimming”) by private insurance companies, officials would need to be particularly
vigilant about plans covering a relatively low number of beneficiaries with complex
health care needs.
Along with premium support, Governor Romney endorses increasing the age of
eligibility for Medicare by two months per year starting in 2022 until it reached 67 in
2033. Romney also calls for the full repeal of the Affordable Care Act, including the
coverage and Medicare benefit improvement provisions as well as repeal of the Medicare
savings provisions. Repeal of the ACA would increase the federal budget deficit by $109
illion over the next decade and shorten the time until the Medicare Part A Trust Fund
ecomes insolvent from 2024 to 2016. Romney would also replace Medicaid with a block
grant to states, which could put long-term care benefits for Medicare and Medicaid
eneficiaries at risk, and sharply restrict the growth in the federal budgetary commitment
to Medicare and Medicaid over time.
Continuing Medicare as an Essential Benefit by Building on the Affordable Care Act
A different approach to preserve Medicare’s guaranteed benefits would be to retain and
uild on the innovations in the Affordable Care Act. Instead of shifting financial costs
onto beneficiaries, this approach would hold health care providers accountable for
achieving high-quality care, excellent outcomes for patients, and ensuring that the total
cost of health care is in line with what the nation can afford. It puts the accountability in
the hands of those directly responsible for providing care.
The Affordable Care Act permits physician-led accountable care organizations to
share in savings if they hold costs below a target rate of growth. The Center for Medicare
and Medicaid Innovation is testing a variety of pilot payment innovations to reward
providers for lowering cost while improving quality. It also gives the Secretary of Health
and Human Services authority to spread successful innovation throughout the Medicare
program if innovations lower cost, improve quality, or both, without being to the
detriment of either.
President Obama, in continuing to implement the Affordable Care Act, would
expand Medicare beneficiaries’ access to preventive care, reduce the cost of prescription
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drugs, provide more help for low-income beneficiaries, provide better information for
eneficiaries to make more informed health care choices, and encourage more
coordinated care. The Affordable Care Act also places payments to private Medicare
Advantage plans on an equal footing with traditional Medicare, slows the increase in
provider charges, and raises premiums for high-income beneficiaries, extending the
solvency of the Medicare Hospital Insurance Trust Fund.
President Obama’s continued implementation of the Affordable Care Act would
change how care is organized, delivered, and paid for. Many of the law’s provisions are
focused on Medicare, as well as Medicaid and the Children’s Health Insurance Program,
ut it encourages the participation of multipayer initiatives that include both the public
and private sectors. Models that emphasize the role of primary care and the need to
coordinate care across providers and settings, like the patient-centered medical home and
the accountable care organization, are being developed to improve care and stabilize
costs.
The Affordable Care Act would give physicians, hospitals, and other health care
providers an incentive to reduce the rate of growth in Medicare outlays by creating
opportunities for them to share in savings. President Obama has further stated that
through these reforms he would attempt to hold the rate of growth in health care spending
to GDP plus 0.5 percent, the same goal as under the premium support proposal. However,
under the premium support strategy, the beneficiary is at financial risk when private
insurance premiums exceed the Medicare spending target (Exhibit ES-1). Under the
shared savings strategy, providers have the opportunity to reap benefits when costs are
elow the target for Medicare spending. Beneficiaries also gain from lower Medicare
costs, as their premiums and out-of-pocket expenses are reduced by the slower growth in
Medicare spending.
As policymakers and the nation confront the urgent need to control health
spending while continuing to improve the quality and efficiency of care delivered, these
activities provide a foundation on which to build, with the potential to control health
spending while moving toward a high performance health system.
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Exhibit ES-1. Medicare Spending per Beneficiary Under
Premium Support and Shared Savings Scenarios, 2012–2050
Source: Commonwealth Fund calculations based on Congressional Budget Office, The Long-Term Budgetary Impact of Paths
for Federal Revenues and Spending Specified by Chairman Ryan, (Washington: Congressional Budget Office, March 2012), and
Congressional Budget Office, The 2012 Long-Term Budget Outlook (Washington, D.C.: Congressional Budget Office, June 2012).
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Private Insurance
Medicare Spending Goal of GDP
per capita + 0.5%
Shared savings
opportunity for
providers
Beneficiary at
financial risk under
premium support
$4,250
Nominal $
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THE FUTURE OF MEDICARE:
CONVERTING TO PREMIUM SUPPORT OR
CONTINUING AS A GUARANTEED BENEFIT PROGRAM
Karen Davis
For almost 50 years, Medicare has provided access to health care and protection against
uinous medical bills to millions of elderly and disabled beneficiaries. Medicare was
enacted in 1965 because half of seniors lost their private insurance when they retired at
age 65. Middle-class families were at great financial risk when an elderly parent needed
life-saving care. Guaranteeing that Medicare continues to meet its basic goal of providing
health and economic security to 50 million cu
ent beneficiaries, as well as the post-
World War II generation as it reaches retirement, is an essential priority for the nation.
Starkly different choices have been proposed for the future of the program: namely,
converting it to a fixed dollar premium support