Academic journal article AEI Paper & Studies

Plan Competition and Consumer Choice in Medicare: The Case for Premium Support

Academic journal article AEI Paper & Studies

Plan Competition and Consumer Choice in Medicare: The Case for Premium Support

Article excerpt

Medicare provides health coverage for 50 million seniors and disabled people. The program is projected to spend nearly $600 billion in 2013, making it the third-largest category of federal spending after Social Security and defense. Over the next two decades, 76 million members of the baby boom generation will shift from working and paying the taxes that support Medicare to retiring and receiving benefits. That massive demographic shift, coupled with the continuing trend toward greater use of increasingly expensive medical services, will put unprecedented strain on the US ability to finance the program.

Medicare has faced fiscal challenges almost from the program's inception. As early as the 1970s, reports from the Medicare trustees warned that the program's long-term financing was in peril. Growing pressure on the federal budget has led to periodic legislative initiatives intended to slow Medicare spending. Despite such actions, the program continues to grow faster than the economy, both in the aggregate and on a per capita basis. (1)

But the recent recession and anemic economic recovery have put new demands on the federal budget and raised new concerns about the fiscal path of the country. In 2010, the Bowles-Simpson Commission asserted that the country had reached the moment of truth, with projected spending rising much faster than revenues even after the economy recovers. (2) The commission pointed to the need to slow down federal health spending as a key part of the plan to put the nation back on the path to fiscal health, observing that "federal health care spending represents our single largest fiscal challenge over the long-run." (3)

Congress has adopted policies intended to slow Medicare spending. The Affordable Care Act (ACA) includes substantial reductions in Medicare's payment rates for health care providers. Previous legislation imposed a 25 percent reduction in Medicare physician fees that is to take effect on January 1, 2014. (4)

Even if those provisions are fully implemented, Medicare spending will continue to grow more rapidly than other elements of the federal budget (including revenue), except for interest on the federal debt. (5) Under this scenario, spending on the major health programs (Medicare, Medicaid, and insurance exchange subsidies) and Social Security will crowd out other policy priorities. The Congressional Budget Office (CBO) projects that spending for other programs will decline by 40 percent between 2012 and 2037.

Congress is not likely to enforce the large reductions in provider payment rates that have already been enacted. It has overridden much smaller cuts in physician fees consistently since 2003, and few doubt that Congress will override the 2014 reduction as well. (6) The Medicare actuary projects that payment reductions under the ACA would result in financial losses for 15 percent of hospitals and other providers by 2019, worsening in later years. (7) Under those circumstances, action to moderate the payment cuts is virtually inevitable. For that reason, the Bowles-Simpson report criticized the "phantom savings from scheduled Medicare reimbursement cuts that will never materialize" as painting an overly optimistic picture of our fiscal future. (8)

This is the crux of the problem with proposals to bend the Medicare cost curve through direct legislative controls. Although policymakers face strong pressure to adopt deficit-reducing measures such as reductions in payment rates, they also have strong pressures to avoid implementing them. The policy challenge is finding a way to reform Medicare that does not require unsustainable political discipline.

Many believe that Medicare reforms based on the principle of defined contribution can provide the framework needed to slow program spending while preserving beneficiaries' access to high-quality services and promoting continued medical innovation. A number of proposals broadly referred to as "premium support" would replace Medicare's current defined-benefit system with a defined-contribution one. …

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