Transforming Medicare via Premium Support

Tomorrow’s election promises two starkly different views on Medicare reform. The Republican option, premium support, might reduce costs to the federal treasury at the expense of the majority of senior citizens.

As an example for reforming the current Medicare program, proposals involving “premium support” have been recommended for reducing the growth of Medicare spending and adopting a more competitive marketplace for the program’s services.  In general, the federal government would make contributions on behalf of each Medicare enrollee that would be applied to the premium for that enrollee’s chosen health insurance plan.  Currently, Medicare pays some private plans a capitated amount per enrollee to provide all Medicare Part A and Part B benefits, after a bidding process. This is known as Medicare Advantage.  Traditional Medicare instead ties the payments to the services actually used by the beneficiaries.

Under the premium support approach, the federal government would provide a payment equal to the second least costly plan or the traditional Medicare plan, whichever is the lower (the “benchmark”).  If the enrollee chooses a higher cost plan, he or she would pay a higher premium.  In one approach, such contributions would be determined based on different geographic areas (county level) and therefore premiums would vary in a given area.  By providing such financial incentives to choose lower-cost plans, the system should create a more competitive marketplace. This approach was adopted into for FY 2013, though implementation would not begin until 2023, exempting people who are ages 55 and older in the present day.

This analysis specifically looked at the impact of premium support on beneficiaries’ premiums.  The authors were unable to consider the out-of-pocket expenses such premium changes might impact, the cost of supplemental insurance, or the potential savings to the federal government.  The analysis reflects current plan choices by beneficiaries.

Fifty-nine percent of all Medicare beneficiaries would be expected to pay a higher Medicare premium than they do now under their current plan; 27 percent of beneficiaries would be expected to pay at least $100 per month.  Of those currently in the traditional Medicare program, 53 percent would be expected to pay higher Medicare premiums – those beneficiaries live in counties where the traditional Medicare costs are higher than the benchmark.  Among beneficiaries enrolled in private plans, 88 percent would pay higher premiums, on account of plan costs being higher than the benchmark.  These geographic variations were wide, with states including California, Florida, New Jersey, and Nevada having significant increases in premiums for both enrollees in private plans and traditional Medicare.  Significant county variation within individual states was noted as well.

The authors conclude that the system indeed introduces a competitive marketplace, but that the difficulty for a system with such incentives would be plan switching for enrollees.  Beneficiaries would opt to enroll in the low-cost plan to avoid these premium increases, unless they preferred another plan and were willing to pay higher premiums.  However, there are implications for those beneficiaries who cannot afford another plan.  There are also other legitimate factors that influence the choice of plan, including long-standing relationships with individual doctors, quality ratings, long term stability, and sheer capacity within a health plan.  Finally, though the overall expenses and cost savings for the federal government would be more predictable, over time individual Medicare beneficiaries would experience the increased costs and financial risks.