Christopher Hildebrand contributed to this post.
Dr. Alice Rivlin, co-chair of the Bipartisan Policy Center’s Debt Reduction Task Force, testified last week before the House Budget Committee to recommend gradually transitioning Medicare to a premium support or defined-contribution system. In her testimony, she explained that the new program would “incent efficient delivery while controlling the rate of growth of total Medicare costs.”
Currently, Medicare operates as a fee-for-service system, which, as Rivlin described, means that “the government is obligated to pay the bills presented for specified services to eligible beneficiaries.” The problem with this model is that it supplies relatively few incentives for the providers of care to reduce costs, thus leaving the federal government with no way to effectively control expenditures. The Affordable Care Act (ACA) took some steps to move toward rewarding quality over quantity of care, but more still needs to be done.
Premium support should do just that; it sets up a defined-contribution program, where the creation of a national, well-managed health care exchange will allow beneficiaries to choose among competing plans (while still maintaining traditional fee-for-service Medicare as the default option). This system is designed to create competition-based incentives for the efficient provision of services that will, in turn, help to control the rate of growth for total Medicare costs. In response to questioning from Representative Allyson Schwartz (D-PA), Rivlin made clear that the new federal Medicare Exchange “has to be an organized exchange in which consumers have clear choices.”
While Medicare currently informs beneficiaries of available Medicare Advantage plan choices and plan performance through a web site and other means, one-on-one marketing by Medicare’s private plans is the dominant model for enrollment. A more formal Exchange could greatly simplify the process for beneficiaries, allowing them to view head-to-head comparisons of those plans available to them. The Exchange could also reduce the sales and marketing costs of the plans, and create better value for enrollees.
Furthermore, an added benefit over Medicare Advantage would be the incentive for plans to develop products that will save beneficiaries money. Today, if a Medicare Advantage plan has very low costs, it cannot pay a rebate to enrollees; instead, it must increase benefits. Under the proposed Medicare Exchange, plans could offer beneficiaries relief from rising Medicare premiums, creating additional market incentives for efficiency.
Additionally, the threat of being removed from the Exchange if an insurer performs poorly in a variety of metrics, as under the ACA, would further incentivize insurers to provide quality, cost-efficient care.
Medicare’s history, on the other hand, shows that the government is very slow to update its benefit structure. For example, prescription drug coverage was widely adopted by private insurance companies during the 1970s, but was not included in Medicare until 2006, when a separate program (Part D) was implemented. Medicare also has not reflected trends in private insurance, such as protection against the costs of catastrophic illness and increased patient cost sharing.
Asking beneficiaries to pay more for their Medicare coverage (or shift to a lower-cost plan) therefore mirrors what has happened in private insurance over the past decade: insurers have increased patient cost sharing to keep the growth of employees’ contributions to premiums from exceeding income growth by too large a margin. This helps to keep employees enrolled and encourages more judicious use of health services.
Along with her recommendations to transition Medicare to a “premium support” model and other cost control efforts for Medicare, Rivlin also offered prescriptions for reforming Medicaid and guaranteeing the sustainability of Social Security. To conclude her remarks, Rivlin urged lawmakers to “be bold” when developing a budget resolution for fiscal year 2012.
As Debt Reduction Task Force Member Donald Marron wrote yesterday in a column, our leaders have the option to step above the political fray and improve the nation’s dire fiscal outlook now with a reasoned, bipartisan, and comprehensive agreement. Or, they can continue to kick the can down the road until the market forces a much more painful adjustment. We must hope that “boldness” wins the day over political posturing before that can hits the wall.
Click here for video of the complete hearing.