Premium Support: Coming Soon to a Medicare Plan Near You?

Unnoticed by most of the media, the Congressional Budget Office recently released a report that could profoundly change American seniors’ healthcare coverage.

The report updates a 2013 CBO analysis of the potential impact of switching Medicare to a premium support system. Under such a system private plans would compete with the traditional fee-for-service plan much like today, but with a big difference. Whereas now, for most beneficiaries, Part A is free and Part B requires a modest premium, under premium support the government would pay only up to regional benchmark amounts for Parts A and B together. Seniors choosing a plan (or the FFS option) priced above the benchmark would pay the difference.

The concept isn’t new. Over the past twenty years, various versions have been proposed by bipartisan commissions and—more recently—by Republican budgeters in Congress. What is new is the projected magnitude of the federal budget savings.

Both CBO analyses looked at two options for setting the benchmarks, either as the average of all bids (including the projected FFS cost) for a region, or as the lower of the FFS cost and the second lowest private plan bid. The differences between the projections in the two analyses, four years apart—and the numbers themselves—are huge.

The 2013 analysis estimated that (assuming most beneficiaries would be switched to premium support at implementation) the federal savings for 2018-2023 would be $69 billion for the average-bid option, and $275 billion for the second-lowest-bid option. In startling contrast, the 2017 report estimates savings for 2022-2026 of $184 billion for the average-bid option and $419 billion for the second-lowest-bid option. In fact, these numbers underestimate the increase in potential savings. If the 2017 analysis had covered six years, like the 2013 report, savings for the average-bid estimate would have been close to $240 billion, and for the second-lowest-bid option would have been more than a half trillion dollars. (Estimated savings would have been greater still if the CBO had included dual eligibles in their analyses.)

Both the 2013 and 2017 analyses also considered the effect on savings that would result from “grandfathering,” allowing beneficiaries at the date of implementation to keep their coverage with no additional premium required. The estimates for this option assumed that most seniors would prefer to stay in their current plans and so are much lower, all in the $10 billion to $50 billion range.

What are the implications for seniors of a switch to premium support?

According to the new CBO analysis, under the average-bid option, without grandfathering, the average beneficiary’s premium would be about 5 percent lower than under current law. Under the second-lowest-bid option, it would be 18 percent higher.  The premium for choosing the FFS alternative under the average-bid option would be 57 percent more, on average, than the projected current-law premium, while under the second-lowest-bid option it would be twice the projected current-law premium. These are overall averages; individual seniors could face very different situations. Most seniors choosing plans below the benchmarks would see reductions in their premiums, but those choosing traditional FFS under the second-lowest-bid option in a region in which FFS costs are high could face premiums three times those under current law.

Why are the estimated savings in the 2017 report so much greater than four years earlier? The main reason is that private plan bids are now much lower relative to FFS costs than expected in 2013. In the earlier analysis, CBO expected that the ratio of private plan bids to FFS costs would increase from the then 92 percent. In fact, it decreased, primarily due to legislation increasing physician payments (and thus FFS costs), and to private plans gaining greater risk payments than expected (allowing them to lower their base bids). (In the new CBO analysis it is assumed that Congress will limit such risk “bonuses.”) In addition to these factors is the obvious one: Medicare has grown and costs have inflated over the past four years.

So, is Medicare premium support a good idea?

It would be much more equitable than Medicare today. There is inherent unfairness in a system that pays far more for some coverage options than others. From a taxpayer viewpoint, savings in the hundreds of billions of dollars provide a persuasive argument for change. Even if savings are maximized, the design of the various options means that beneficiaries will always be able to select coverage with no added premium. Many seniors, however, would be faced with a painful choice: pay an additional (possibly unaffordable) premium or be forced to switch physicians and other providers, something that could be especially difficult for the oldest and sickest beneficiaries—and something that could lead to considerable resistance from seniors’ groups.

Is it likely to happen? There are some recent clues.

First, CMS administrator Seema Verma recently declared that Medicare was facing a fiscal crisis and that it was necessary to give consumers “incentives to be cost-conscious.” Second, the probability grew of tax bill enactment that will substantially increase the federal deficit—and potentially lead to efforts to find compensating savings. Third, as in some prior years, the House of Representatives 2018 budget resolution assumed a move to premium support by 2024.

If these clues indicate serious administration intent, we may see attempts in the next few months—prior to the November 2018 elections—to introduce some version, probably with grandfathering (to minimize seniors’ protests), and possibly taking a middle course between the average-bid and second-lowest-bid options (to achieve spending neutrality for the average beneficiary). Stay tuned!

Roger Collier was previously CEO of a national healthcare consulting firm.

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