“Premium support” or voucher proposals for Medicare are a mainstay of conservative health policy. They have been defeated for over three decades, starting with President Reagan’s FY 1981 budget proposal. They are a key feature of “managed competition”-type reform proposals. Although President Clinton embraced managed competition in his ill-fated health reform bill, he vetoed the 1995 Balanced Budget Act which would have turned Medicare into a voucher program. Premium support proposals were defeated again in 1997 and 2003.
Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee and candidate for vice president on the presumptive GOP ticket with Mitt Romney, resurrected the idea of a premium support proposal for Medicare in April 2011 with his “Path to Prosperity” budget proposal. Seniors would receive a fixed federal contribution or “defined contribution” to apply towards the cost of a private plan, and traditional Medicare, with its guaranteed coverage, or “defined benefits,” would be eliminated. The plan also called for increasing the age of Medicare eligibility from 65 to 67.
A so-called bipartisan variant of this scheme was proposed by Ryan in November 2011, with Sen. Ron Wyden (D-Ore.); in this version traditional Medicare would continue to be an option alongside private plans, and subsidy levels would be set at the cost of the next-to-cheapest plan, as determined by competitive bidding rather than be set by CMS. Medicare growth would be capped at GDP + 1 percent.
The latest version of “premium support” promoted by Rep. Ryan is the virtually the same as this more recent proposal with one major change; it sets the cap on Medicare growth lower, at GDP + ½ percent.
With the exception of the choice of traditional Medicare, the scheme is similar to the Affordable Care Act’s exchanges.
At the heart of all premium support proposals – and indeed the Affordable Care Act itself – are a number of myths:
1. Myth: Private health insurance is more efficient than Medicare. Fact: Medicare has controlled costs better than private insurance and has much lower administrative overhead. According to CMS, Medicare spending rose by an average of 4.3 percent each year between 1997 and 2009, while private insurance premiums grew at a rate of 6.5 percent each year. The CBO has estimated that the private insurance equivalent of Medicare would cost almost 40 percent more in 2022 for a typical 65-year-old. Administrative costs in Medicare are less than 2 percent of expenditures, compared to 17 percent of revenues for private insurers.
2. Myth: Expanding private plans in Medicare will reduce Medicare’s costs. Fact: Private Medicare Advantage plans have raised Medicare costs. Private insurers profit by selectively enrolling the healthy and shunning the sick, as documented in a New England Journal of Medicine article subtitled “The healthy go in and the sick go out.” Hence, they collect premiums paid by the Medicare program, and provide little care. As a result, the Congressional Budget Office estimates that Medicare Advantage plans cost Medicare 12 percent more per enrollee than the traditional program. New research from the National Bureau of Economic Research indicates that the true cost of private plans to Medicare may be much higher than the CBO estimate. Since Medicare launched a new risk adjustment scheme based on 70 diagnostic codes in 2004, overpayments to private plans have increased dramatically and accounted for an estimated $15 billion in excess spending, or 4 percent of total Medicare spending, in 2006 alone. Since then the overpayments have likely risen as the proportion of Medicare recipients in private plans has jumped from 16 percent to 24 percent.
3. Myth: Premium support will reduce Medicare’s costs. Fact: Premium support plans don’t reduce costs, they shift them onto the patient. The rising cost of premiums will quickly outstrip the value of the fixed federal contribution, and seniors will have to pay more in either premiums or out-of-pocket payments for care. The Congressional Budget Office estimates that Ryan’s original Medicare proposal would raise out-of-pocket costs for the typical 65-year-old Medicare beneficiary in 2022 by $6,240. They haven’t estimated the cost of the latest plan yet.
4. Myth: Competition among private plans will control costs. Fact: Private plans profit by competing to enroll the healthy and shun the sick. The industry is so consolidated that there is no effective competition in most regions of the country.
5. Myth: Paying private plans in Medicare via “competitive bidding” will lower costs. Fact: There’s no evidence for this. Private plans compete by selectively enrolling healthier beneficiaries. Private insurers have been competing on price in the under 65 market for decades, yet costs and premiums have skyrocketed even as benefits and choices have been reduced.
6. Myth: Premium support will increase choice for seniors: Fact: Premium support will decrease choice for seniors. Private plans with limited networks dictate which physicians seniors may see and which hospitals they may use. Medicare gives beneficiaries completely free choice of physician and hospital.
7. Myth: Competition among private insurers will reduce administrative costs. Fact: Premium support will likely boost administrative costs since patients will move from the low-overhead traditional Medicare program to private plans with far higher overhead.
8. Myth: There are no alternatives to reduce Medicare spending besides premium support. False: There are many better options for reducing Medicare spending, including the 9 listed below. Ultimately, the only way to preserve Medicare is to replace it with a single payer program with comprehensive benefits and effective cost controls. Currently Medicare is only one payer among thousands of different plans. Only a true single payer covering the entire population can slash administrative costs and control costs with budgets, negotiated fee schedules and drug prices, and health planning. Separate budgets for hospital operating costs and capital investment will permit the real health planning needed to reduce the costly and dangerous proliferation of expensive high-tech facilities.
Nine ways to reduce Medicare costs now –
9. Myth: Medicare is already a single payer system. Fact: Currently Medicare is only one payer among thousands of different plans. Only a true single payer covering the entire population can slash administrative costs, implement effective cost-control methods like globally budgeting hospitals, negotiating fees, and doing real health planning with teeth to reduce the costly and dangerous proliferation of expensive high-tech facilities.
10. Myth: Premium support will provide all seniors with the security that quality, affordable coverage will always be there. False: Premium support eliminates traditional Medicare with its defined benefits and substitutes a fixed contribution that, over time, will cover less care. Only a single payer plan can control costs while eliminating financial barriers to care for all. Ultimately, the only way to preserve Medicare is to replace it with a single payer program with comprehensive benefits and effective cost controls.
Outline of Rep. Ryan’s proposal for Medicare and Medicaid reform
Physicians for a National Health Program's blog serves to facilitate communication among physicians and the public. The views presented on this blog are those of the individual authors and do not necessarily represent the views of PNHP.
PNHP Chapters and Activists are invited to post news of their recent speaking engagements, events, Congressional visits and other activities on PNHP’s blog in the “News from Activists” section.