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

Joseph Antos American Enterprise Institute

Part of the RWJF/AEI series: Preserving Medicare for Future Generations: Market-Based Approaches to Reform

APRIL 2013 2

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

edicare provides health coverage projected spending rising much faster than Mfor 50 million seniors and disabled revenues even after the economy recovers.2 people. The program is projected to spend The commission pointed to the need to slow nearly $600 billion in 2013, making it the down federal health spending as a key part third-largest category of federal spending of the plan to put the nation back on the after Social Security and defense. Over the path to fiscal health, observing that “federal next two decades, 76 million members of health care spending represents our single the baby boom generation will shift from largest fiscal challenge over the long-run.”3 working and paying the taxes that support Medicare to retiring and receiving benefits. Congress has adopted policies intended to That massive demographic shift, coupled slow Medicare spending. The Affordable with the continuing trend toward greater Care Act (ACA) includes substantial use of increasingly expensive medical reductions in Medicare’s payment rates for services, will put unprecedented strain on health care providers. Previous legislation the US ability to finance the program. imposed a 25 percent reduction in Medicare physician fees that is to take effect on Medicare has faced fiscal challenges almost January 1, 2014.4 from the program’s inception. As early as the 1970s, reports from the Medicare Even if those provisions are fully trustees warned that the program’s long- implemented, Medicare spending will term financing was in peril. Growing continue to grow more rapidly than pressure on the federal budget has led to other elements of the federal budget periodic legislative initiatives intended (including revenue), except for interest to slow Medicare spending. Despite such on the federal debt.5 Under this scenario, actions, the program continues to grow spending on the major health programs faster than the economy, both in the (Medicare, , and insurance aggregate and on a per capita basis.1 exchange subsidies) and Social Security will crowd out other policy priorities. But the recent recession and anemic The Congressional Budget Office (CBO) economic recovery have put new demands projects that spending for other programs on the federal budget and raised new will decline by 40 percent between 2012 concerns about the fiscal path of the and 2037. country. In 2010, the Bowles-Simpson Commission asserted that the country Congress is not likely to enforce the large had reached the moment of truth, with reductions in provider payment rates Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 3

that have already been enacted. It has total spending. That policy has promoted overridden much smaller cuts in physician the use of a higher volume and greater fees consistently since 2003, and few complexity of services, a key factor in doubt that Congress will override the 2014 the growth of Medicare spending. Under reduction as well.6 The Medicare actuary premium support, beneficiaries would projects that payment reductions under the receive a fixed subsidy to cover the cost ACA would result in financial losses for of enrolling in one of the health plans 15 percent of hospitals and other providers competing for their business. Combining by 2019, worsening in later years.7 Under market competition and a fixed federal those circumstances, action to moderate the subsidy is intended to reduce unnecessary payment cuts is virtually inevitable. For that program spending without restricting reason, the Bowles-Simpson report criticized beneficiaries’ ability to choose more the “phantom savings from scheduled expensive plans if they would like. Medicare reimbursement cuts that will never This report focuses on proposals for the materialize” as painting an overly optimistic market-based reform of Medicare based on picture of our fiscal future.8 premium support, explaining the need to This is the crux of the problem with align Medicare’s financial incentives with proposals to bend the Medicare cost the policy goals, summarizing the main curve through direct legislative controls. features of premium support proposals 70% Although policymakers face strong pressure and discussing other reforms necessary to to adopt deficit-reducing measures such as modernize Medicare’s traditional fee-for- An aging population service program. The final section assesses reductions in payment rates, they also have and the entry of the strong pressures to avoid implementing recent evidence on competitive bidding them. The policy challenge is finding a way and health plan efficiency, the ability of baby boom genera- to reform Medicare that does not require beneficiaries to make sound plan choices, tion into Medicare are unsustainable political discipline. and measures to control risk selection that could otherwise drive up program cost. expected to increase Many believe that Medicare reforms based program enrollment on the principle of defined contribution can provide the framework needed to INCENTIVES AND MEDICARE by about 70 percent slow program spending while preserving SPENDING by 2035. beneficiaries’ access to high-quality services and promoting continued medical Growth in Medicare spending is driven by innovation. A number of proposals broadly a variety of demographic, technological, referred to as “premium support” would and policy factors. An aging population and replace Medicare’s current defined-benefit the entry of the baby boom generation into system with a defined-contribution one. Medicare are expected to increase program enrollment by about 70 percent by 2035.9 Under the defined-benefit approach in use As new medical technologies and services for traditional Medicare, the program pays are developed and adopted, both the use of for all covered services without limiting services by Medicare beneficiaries and the Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 4

cost of those services are likely to increase. Controlling Prices in Traditional More beneficiaries will use more services Medicare. Medicare has relied primarily that are more effective in treating disease, on payment policy to slow the growth of which will lead to longer lives. But this program spending. That has meant limiting increasingly older population will likely the amount Medicare pays for services and require even more services. changing the way payments are made to discourage the unnecessary use of services Although the program’s total spending and promote lower-cost care. depends on both the prices paid and the volume and complexity of services used, Payment incentives are crucial in Medicare has avoided policies that directly determining how health care is delivered affect the use of services or that manage the and what it will cost. This is demonstrated care of patients. In establishing Medicare, by Medicare’s shift from cost reimbursement the Social Security Act prohibited federal to prospective payment, beginning with interference with the practice of medicine.10 the inpatient hospital prospective payment 12 The program has erred on the side of system (PPS) in 1983. paying for more services and covering Under cost reimbursement, Medicare greater costs if the physician’s clinical paid the cost charged by providers for decisions are consistent with the standards each specific service used in treating an of medical practice in the local community. individual patient. Additional services Initiatives focused on improving the quality resulted in additional payment. Under of care, such as Quality Improvement prospective payment, a fee is set in advance Organizations and case management for that covers the typical cost of caring for high-cost beneficiaries, appear not to have patients with a specific medical diagnosis. 11 slowed the growth of program spending. Providing an additional service directly related to that diagnosis would not generate The design of traditional Medicare, additional Medicare payments. which pays on a fee-for-service basis and offers an essentially uncapped subsidy, Changes in payment incentives can induce has fostered rapid expansion in the use of dramatic changes in medical practice. health care. Providers have an incentive to For example, inpatient lengths of stay offer additional services to increase their dropped significantly after hospital PPS was Medicare payments. Patients are not likely implemented. With a fixed payment based to object to, or even be aware of, the cost on the needs of a typical patient with a because most of their out-of-pocket costs are particular diagnosis, an additional inpatient covered by supplemental coverage through day would not produce additional revenue as Medigap, retiree plans, or Medicaid. Lack of it did under cost reimbursement. Changes in coordination among providers in traditional the management of inpatient care, including Medicare also contributes to duplication and shortening lengths of stay, reduced hospital waste that adds to program spending. cost and increased hospital margins. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 5

However, the prospective payment incentive One feature common to Medicare to reduce unnecessary hospital cost also prospective payment systems is the annual provided an incentive to shift patient care update factor, which adjusts the payment to postacute facilities outside the hospital— rate for year-to-year increases in the and, crucially, to facilities that receive their cost of providing services. Lowering the own payment separately from the hospital’s annual update reduces the prices paid for payment. Shorter inpatient hospital stays services, which generates savings for the led to greater spending for skilled nursing federal budget but does not lead to system and home health care. The efficiency improvements or greater efficiency. improvements and cost savings by changing The use of this updating mechanism also the payment incentive for hospitals were does not necessarily yield actual savings, offset to some extent by expanded use of as illustrated by the ongoing controversy services by providers who did not face the over Medicare fees paid to physicians. The same incentives for efficiency. sustainable growth rate formula is supposed Broader payment bundles that include to limit the growth in those fees, but more services typically associated with Congress has overridden the reductions it the full course of treatment for a patient calls for every year since 2003. The forgone would reduce this tendency to shift costs savings are added to future reductions in the to other providers. Bundled payments can update, with the result that the 4.4 percent align financial incentives across different reduction that was not taken a decade ago providers to promote better coordination has ballooned into a 25 percent cut for 2014.15 There is virtually no chance that in patient care.13 With a broader bundle of such large fee reductions will be enforced. services covered by a single payment, there is a better chance of reducing duplication Choice and Competition in Medicare and providing fewer low-value services. Advantage. Traditional Medicare depends on the judgment of policymakers to Although prospective payment systems determine the price level for specific services used in traditional Medicare are a that will balance the availability of care major improvement over cost-based against the program’s cost. The alternative reimbursement, they pay on a fee-for-service to this regulatory process is competitive basis that rewards the provision of more bidding, which relies on information from services (or bundles of services). Moreover, the market to determine prices. A well- Medicare’s payment depends on the severity designed bidding process offers a strong of the patient’s illness, which relies in part incentive for health plans to increase their on which services are used in treatment. share of the market by undercutting their Using more complex services is likely to competitors’ prices. increase the patient’s severity for payment purposes (a process called upcoding), which Competitive bidding is used to set prices can lead to unnecessary expense.14 for health plans participating in Medicare Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 6

Advantage (MA) and for standalone MA plans receive the federal subsidy in prescription drug plans under Medicare the form of a capitation payment, but Part D. Beneficiaries may choose to enroll they remain free to compensate individual in private MA plans as an alternative to providers using any payment system traditional Medicare, and those plans (including fee-for-service, quality-based cover at least the basic Medicare Part A payment, salary, and other contractual and Part B benefits. Beneficiaries who methods). Medicare’s payments to the plans choose traditional Medicare may add do not depend on those arrangements. prescription drug coverage by enrolling in private Part D plans. Medicare Advantage offers a variety of competing private health plans, including In both cases, the federal subsidy is set health maintenance organizations (HMOs), at a fixed amount (known as a capitation preferred provider organizations, and rate), and the beneficiary is responsible for private fee-for-service plans. MA plans paying any additional premium charged by cover the basic Medicare benefit, but they the chosen plan. Unlike the fee-for-service are allowed to restructure that benefit in system, MA plans that find ways to improve sensible ways. care coordination among providers and reduce unnecessary service use can profit. For example, instead of charging separate deductibles for hospital and other Capitation is the ultimate payment bundle institutional services (under Part A) and in the sense that the amount paid to the physician and other outpatient services health plan for a specific patient does not (under Part B), MA plans typically have a depend on the volume of services delivered. single combined deductible. Instead of a Limiting the growth of the capitation rate complex cost-sharing structure that exposes can directly limit the growth of program beneficiaries to potentially high costs, MA spending. In contrast, limiting fees in plans typically offer a simplified structure traditional Medicare does not limit spending for cost-sharing above the deductible and if the volume and intensity of services used protection against catastrophic costs. MA by beneficiaries continue to rise. plans often provide additional benefits, such as coverage for dental and vision services, However, Medicare Advantage and its beyond what Medicare requires. Enrollees predecessor programs that offered private in MA plans do not purchase additional plans have not used that degree of spending Medigap coverage to fill in coverage gaps, control. Instead of holding growth in the unlike beneficiaries in traditional Medicare. federal subsidy to some fiscal target, private plan payments have been tied to growth in A major criticism of Medicare Advantage the cost of traditional Medicare. Initially, is that the plans have been paid more than private plans were paid 95 percent of the cost the cost of traditional Medicare to provide of traditional Medicare. MA plan payments standard program benefits. In 2010, for remain tied to benchmarks based on example, MA plans received payments on spending levels in the traditional program. average 9 percent higher than the cost of Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 7

the traditional fee-for-service program, even The program provides an extra incentive though plan bids on average equaled fee-for- for plans to bid aggressively. “Benchmark” service, and HMO plans bid an average of plans offer the drug benefit for a premium 3 percent less than fee-for-service.16 no higher than the extra federal subsidy offered to low-income enrollees.18 The The high payments are the result of a policy Centers for Medicare and Medicaid decision to ensure that beneficiaries in Services automatically assigns low-income sparsely populated areas would have access beneficiaries who are eligible for full to a private plan alternative.17 The 1997 benefits under Medicare and Medicaid to Balanced Budget Act imposed tight limits benchmark plans if they have not already on the annual increases in federal subsidies selected a specific prescription drug plan.19 for private plans under what was then This auto-enrollment process reduces the known as Medicare+Choice, which caused drug plan’s administrative costs associated the number of plans participating in the with attracting new members. Because program to drop sharply. Higher payments beneficiaries receiving the low-income succeeded in expanding multiple private subsidy account for about 40 percent of plan options to even the most remote Part D enrollees and about 56 percent of counties and gave many beneficiaries Part D spending, a strong incentive exists 20 access to additional benefits not covered by to bid low. traditional Medicare but added to the cost Part D’s cost experience has been far better of the program. than initially anticipated.21 At the start of the program, the CBO estimated that the Choice and Competition in Part D. prescription drug program would cost $509 In contrast to Medicare Advantage, the billion between 2006 and 2011 and $768 bidding process in Medicare Part D has billion by 2013.22 In contrast, the Medicare been more effective in holding down trustees report that federal outlays for Part program costs. Because a comparable D totaled $336.4 billion through 2011.23 benefit did not exist prior to the creation By 2013, the program will have spent of Part D, all prescription drug plans $485 billion—37 percent less than the compete on an equal basis without tying CBO estimate. payment to traditional Medicare. Part of this difference is undoubtedly Premiums and subsidies are based on the the result of faulty assumptions in the national average of plan bids, which reflect original estimate. Enrollment in Part D each plan’s expected benefit payments has been lower than expected, and the and administrative costs. No cap limits slower introduction of new drugs, coupled the allowable growth in federal subsidy with the movement of branded drugs to amounts from year to year. Instead, the cost off-patent status, contributed to the slower of Part D depends solely on the strength of cost growth.24 But we also saw seniors plan competition and the responsiveness of exhibit considerable price sensitivity and consumers to changes in their costs. pharmaceutical manufacturers discount Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 8

aggressively as plans fine-tuned their contribution means the subsidy is set at a formularies and steered patients toward fixed amount for each beneficiary. Medicare lower-cost drugs. The section in this report beneficiaries would be able to enroll in any on Medicare Beneficiaries and Plan Choice plan but would be responsible for paying points out that seniors participating in the full difference between the government’s Part D have shown that they are active subsidy and the plan’s premium. consumers, changing plans once they realize that an alternative offers a benefit that Premium support reform proposals for meets their needs at lower cost.25 Medicare are not new, with roots dating back to Enthoven’s managed competition US spending on prescription drugs slowed proposal in the 1970s and proposals by relative to other health spending during Dowd and colleagues and by Aaron and the late 2000s, with the greatest slowdown Reischauer in the 1990s.28 Recent legislative occurring in Medicare. Federal cost per proposals have given the idea new saliency, Part D enrollee grew 1.0 percent a year and that has aroused great controversy. between 2006 and 2010, while spending Proponents of premium support argue that for Medicare Parts A and B grew 3.8 the reform will save Medicare for future percent. The comparable figures for the generations, while opponents argue that country also show a lower drug trend: 2.8 premium support will “end Medicare as percent growth for prescription drugs versus we know it.”29 3.9 percent for national health spending excluding pharmaceuticals (both on a per capita basis).26 Proposals to convert Medicare to premium support rely Medicare’s better cost performance did on the concepts of competition, choice, and a defined not come at the expense of the consumer. contribution subsidy. High-cost individuals have ready access to prescription drug coverage rather than being turned away, and consumer satisfaction with Part D is high.27 Proponents believe that premium support offers several advantages for Medicare. MEDICARE PREMIUM SUPPORT First, program spending could be restrained, depending on how the federal Proposals to convert Medicare to premium subsidy is determined. Second, plans would support rely on the concepts of competition, have a new incentive to engage in price choice, and a defined contribution subsidy. competition while maintaining access Health plans would compete for enrollees and quality of care. Third, beneficiaries by offering lower prices and better benefits. could select plans that best meet their The federal subsidy would no longer be needs within a realistic program budget open-ended, as it is under Medicare’s current that is affordable for current and future defined-benefit approach. Adopting a defined generations of taxpayers. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 9

Opponents say that premium support program, a fully developed plan to convert would eliminate Medicare’s guaranteed Medicare to premium support includes benefit and shift health care costs from numerous provisions that affect how well the government to beneficiaries. Moreover, the reform will work. Most recent proposals opponents question whether competition do not provide detailed specifications, would, in fact, reduce costs of care. That focusing heavily on slowing the growth of could result in reduced access to care federal expenditures and providing only that would most seriously affect poor and limited information on other aspects of frail elderly. Tighter limits on Medicare the reform.32 Instead of reviewing those payments to providers are the best proposals, I will focus on several issues approach, according to these critics. in designing a specific reform based on premium support.33 But that approach is not free of risk. The ACA includes provisions that would lower The key elements of such a reform include: Medicare payment rates to Medicaid levels or below without changing underlying fee- • Competitive bidding. Health plans for-service incentives. The Medicare actuary would submit bids to the federal observes that the ACA’s across-the-board government establishing their cost of reductions will cause 15 percent of hospitals covering a defined set of services for an and other providers of Part A services to average beneficiary in each local market. 25% lose money on their Medicare patients in • Comprehensive coverage. Competing 2019, growing to 25 percent in 2030.30 plans would offer at least the basic The ACA’s across- Implementing those cuts would endanger Medicare benefit, which could be patient access to care. If they are not, then the-board reductions structured like the current Medicare Medicare becomes an even bigger burden Part A and Part B benefit or modified will cause 15 percent than it is already on the budget and on to better balance health needs and cost. of hospitals and current and future taxpayers.31 Plans could offer additional benefits as other providers of A more nuanced approach is needed if they currently do in Medicare Advantage. we hope to slow Medicare spending and Part A services to • Defined contribution. The federal maintain appropriate access to quality lose money on their subsidy would be determined solely care. New ways of paying providers in based on plan bids, with no additional Medicare patients in traditional Medicare can promote higher- payments made to plans in particular value care. However, even with better 2019, growing to markets or for other reasons. The payment methods, traditional Medicare 25 percent in 2030. subsidy could be set to ensure that all would remain a fee-for-service system with an open-ended subsidy that continues to beneficiaries have access to at least two promote greater use of services (even if they plans that do not charge extra premiums, are better defined). such as the second lowest bid in an area. The individual’s subsidy would Key Design Elements. As with any be adjusted to the health risk of the proposal to restructure a major federal beneficiary, with higher subsidies for Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 10

those with greater likely need for care. sensible arrangement could be retained Additional subsidies would be provided under a reformed Medicare program. to low-income beneficiaries. With premium support, the bids provide • Traditional Medicare. Beneficiaries a basis for determining how much the would have a choice of private plans government will subsidize the average or traditional Medicare, with further beneficiary. Recent proposals have set the reforms of that program to modernize subsidy equal to the second lowest bid and simplify the benefit. in each county as a way of ensuring that beneficiaries would have a choice of at • Spending cap. The federal subsidy could least two plans that would not require an be capped to increase annually at a rate additional premium. Other formulations predetermined by a formula, such as could be designed, including setting the the growth in GDP plus 0.5 percent, or subsidy at a weighted average of the low spending growth could be tied to growth bids. Higher subsidies promote greater plan in the bids themselves. participation (as we have seen with MA’s • Regulation. A restructured Medicare experience) but reduce the potential for remains a federal program with an program savings. obligation to protect the interests of Tying the level of the subsidy in a beneficiaries and taxpayers without also predictable way to the plan bids also ties stifling competition and appropriate plan the rate of growth of per capita program initiatives to lower cost. spending to developments in the market. The following sections discuss the bidding If the subsidy is set to the cost of the process and whether to impose an explicit second-lowest bid or some combination of limit on growth in program spending, why bids, then program spending per beneficiary traditional Medicare should be retained as a would grow with year-to-year changes in plan option, and other changes necessary to the bid amounts. In a competitive market, implement a comprehensive reform. that growth rate would be consistent with the annual change in the cost of providing Bidding and the Subsidy. The current services in an efficient manner. bidding process for Medicare Advantage requires all plans to cover at least the However, because of the pressure to advance benefits covered by traditional Medicare but legislation that the Congressional Budget allows plans to set their own cost-sharing Office would score as yielding substantial rules, establish panels of providers, set their budget savings, recent proposals include a own payment rates to those providers, and separate cap on the year-to-year growth in make other changes intended to reduce plan program spending. CBO estimates generally cost and maintain or improve the quality of do not assume that competitive premium care. The bid does not include any additional support incentives would yield substantial benefits that may be offered, and the federal reductions in health plan costs. They subsidy does not cover such benefits. That do assume that more direct government Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 11

controls over the subsidy would be enforced Possibilities include setting the target at and would yield savings. per capita growth in the cost of care for the under-65 population or using a blend of Thus the House budget resolution advanced the under-65 and over-65 growth rates.37 by Rep. (R-WI) limits spending Although the level of spending for the growth under premium support to no more Medicare population is substantially higher than GDP plus 0.5 percent, measured on than that for younger people because of 34 a per capita basis. That is the same fiscal greater incidence of acute and chronic target President Obama proposed in his disease in an older population, growth fiscal year 2013 budget for the Independent rates may be less subject to this age bias. Payment Advisory Board, which would A blended rate might discourage providers impose fee reductions when necessary to from responding to limits on Medicare 35 limit Medicare spending. spending by shifting more of their practices to private pay patients. Although such a provision produces a good CBO budget score, it poses a policy Any fiscal target would have to be dilemma. The formula-based growth rate evaluated periodically to judge whether might be too tight, in the sense that it may it is reasonable given changes in medical be below the spending growth that would technology, disease incidence, and other occur in a competitive system without a factors. In addition, Congress should review spending target.36 That produces budget the appropriateness of Medicare’s fiscal savings that are ultimately unsustainable target in the context of the overall federal without a reduction in access to services for budget and broader policy priorities.38 Medicare beneficiaries, but only if the limit is enforced. As we have seen with other Setting an external limit on the growth attempts to drive down program spending, of Medicare spending is an important the threat of a tight limit on spending political message to the health sector that creates backlash from beneficiary and may provide some fiscal discipline, but it is provider groups that could cause Congress not a way to achieve long-term savings. The to override the target. fundamental issue is how effective premium support would be in changing the way Alternatively, the fiscal target might be services are delivered. Better incentives, not too loose. That would allow plans to fiscal targets, are the source of appropriate offer enrollees more benefits rather than reductions in the cost of health care. keeping bids low, which can be an effective marketing strategy but results in higher A premium support system does not program spending. eliminate the need for policymakers to make explicit budget decisions about the Nonetheless, having some sort of fiscal overall level of subsidy provided through target could provide a useful signal to the Medicare compared with subsidies for other health sector that Medicare will no longer domestic and international programs. underwrite unlimited spending increases. If spending growth must be slowed below Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 12

the rate achieved through plan competition Medicare would no longer be a plan option and changed financial incentives, premium under premium support for people who support does not make the political decision are newly eligible for benefits.40 Even in easier. Premium support does give the that case, the number of enrollees in health sector greater flexibility than more traditional Medicare would initially be traditional targeted fee cuts to modify how in the tens of millions, and a significant that reduction in spending is implemented, number of them likely would choose to and it gives beneficiaries greater flexibility remain in the program for decades unless in deciding which plan option offers the it became unaffordable. best value. As a result, traditional Medicare will Role of Traditional Medicare. One of continue to be a major force in the health the most difficult questions that premium care market and cannot be ignored. support proposals must address is how Moreover, traditional Medicare would to create vigorous competition among likely be the low bidder in markets where health plans when the government plan— competition is limited, such as rural traditional Medicare—dominates the senior markets and small cities dominated by a few market. The concern is that traditional health care providers. Lack of competition Medicare could use its regulatory power to among providers in such areas gives less set below-market payment rates to hospitals, room for private plans to negotiate lower physicians and other providers—lower than costs than traditional Medicare or offer private plans could negotiate because they better deals to beneficiaries. cannot simply dictate to providers what their payments will be.39 Two studies show that traditional Medicare would remain the low-cost option in many The challenge is to ensure a level playing areas under premium support, at least field that does not favor one type of plan initially. Coulam, Feldman, and Dowd over another. Most premium support found that setting the federal subsidy equal proposals assume that traditional Medicare to the 25th percentile of plan bids would would remain an option for all beneficiaries. have reduced federal Medicare outlays This is a pragmatic choice that allows by 5.6 percent in 2009, assuming that all beneficiaries to decide for themselves of the ACA provisions had been in place whether they prefer the traditional program then.41 About half of Medicare beneficiaries or a private plan alternative. would have faced lower premiums in traditional Medicare than in private plans Traditional Medicare currently has 37 under that scenario.42 million enrollees, and that number is likely to rise over time as the baby boom Song, Cutler, and Chernew found similar generation reaches Medicare’s eligibility results based on bidding data from MA age, at least until premium support is plans between 2006 and 2009.43 Their implemented. The House budget resolution analysis used the bidding approach for fiscal year 2012 assumed that traditional proposed in the 2013 House budget Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 13

resolution, which tied the federal subsidy Traditional Medicare’s complex benefit to either the second-lowest private plan bid structure should be streamlined to reflect or traditional Medicare cost, whichever is approaches that have long proven effective lowest. With that rule, federal subsidies in private insurance markets. The program’s would be reduced from 9 to 13 percent cost-sharing requirements should be below the cost of traditional Medicare. changed to be more understandable to Traditional Medicare was the low bid for patients, starting with a single deductible 68 percent of beneficiaries enrolled in that for Part A and Part B and a standard program in 2009. copayment requirement for all services.44 Catastrophic coverage could be offered, and Retaining traditional Medicare as a plan Medigap rules could be changed to make option also offers beneficiaries a safety beneficiaries more aware of the cost and valve. Although there is plenty of room to value of the services they are offered. improve efficiency in health care, private plans may fail to find those efficiencies. These and other reforms that have been If that turns out to be the case, then proposed to improve the operation of traditional Medicare would be the low-cost traditional Medicare are not new ideas. plan in most markets, and beneficiaries Bundled payment, for example, is the same would shift back to that program when the concept as hospital prospective payment cost differences became apparent. expanded to a larger set of services. Catastrophic coverage was long recognized Implementing Premium Support. Many as a critical gap in insurance protection, discussions of premium support focus on yet Medicare still does not offer it to the shift from defined-benefit financing to beneficiaries. defined-contribution without considering other aspects of Medicare that must be reformed. Even before premium support can be fully implemented, other policy changes can promote greater efficiency Even before premium support can be fully implemented, by providers and smarter purchasing by other policy changes can promote greater efficiency by consumers. providers and smarter purchasing by consumers. The ongoing physician payment crisis caused by the sustainable growth rate formula must be resolved as new payment systems are developed. Better ways to pay The traditional program has adopted for services within a fee-for-service context, new methods, but only sporadically. In a such as expanding the payment bundle to tightening fiscal climate, the program needs cover a broader array of related services, greater ability to take advantage of new would help reduce inappropriate incentives ways to pay for and deliver care. That calls that result in fragmented care and an for Congress to delegate greater authority increased use of services. to modify the program in exchange for Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 14

greater accountability by national and WILL PREMIUM SUPPORT regional administrators. WORK?

The expanded waiver authority the ACA Market-based reform of Medicare based grants to the Center for Medicare and on premium support would change the Medicaid Innovation is a step in that financial incentives that have been the direction. Subdividing the program into main drivers of program spending. Under regional fee-for-service plans with greater this model, beneficiaries would receive a autonomy to respond to local conditions in government contribution enabling them to a timely fashion is another approach that purchase coverage from any of the plans could allow needed midcourse corrections competing for their business. Beneficiaries without a lengthy and uncertain political could choose more expensive plans, but and regulatory process. they would be responsible for any extra The transition to Medicare premium premium. Because the subsidy would no support would span a number of years. longer be open-ended, plans would compete Although several proposals would make by offering attractive features at affordable the reform effective in a decade, a more prices. That would necessitate finding new ambitious timeline should be possible. One ways to deliver care cost-effectively. option would convert to premium support The success of such a sweeping reform of in five years while implementing other Medicare depends on many unpredictable reforms of traditional Medicare on a more factors. Numerous policy decisions expedited basis. must be made and the resulting policies However, even with rapid implementation, implemented, and the health sector must the budget impact of such a reform is respond to those changes. The reform likely to be modest at first as the health process would begin with legislation, but sector adopts new practices that could its impact would be determined by the help reduce costs. Legislation that calls for future actions and reactions of millions of immediate, large budget savings would consumers, providers, and health plans. create vigorous opposition from provider and patient groups, who would argue with There is a growing body of evidence on some justification that such reductions in the likely impact of premium support on Medicare outlays would be unsustainable. Medicare beneficiaries, the health sector, A phased-in approach, allowing time to and the budget. The following addresses gauge the success of various initiatives and several significant issues, including what make necessary midcourse corrections, the Medicare Advantage experience tells us would be preferable. about the impact of competitive bidding, Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 15

whether beneficiaries will be able to make service costs. In counties in the top quartile sound choices of health plans, and whether of fee-for-service costs, such as Dade policy measures can control favorable County (Florida) and Orange County selection (in which private plans attract (California), the benchmark will be 95 healthier, lower-cost patients) and reduce percent of fee-for-service costs per enrollee.46 unnecessary spending. In counties in the lowest quartile, such as Boise (Idaho), the benchmark will be 115 Medicare Advantage and Competition. percent of fee-for-service costs per enrollee. A recent analysis from the Urban Institute compares the bids made by MA plans with That might reduce federal payments, the average per capita costs of traditional but it does not change the perverse Medicare and concludes that traditional incentives this bidding system creates. Medicare is generally more efficient than If we expect plan competition to produce private plans.45 Counties where plan bids lower costs, we cannot tie private plan are below traditional Medicare’s cost also payments to traditional unmanaged fee- tend to be counties where the cost of for-service Medicare. traditional Medicare is highest—that is, where traditional Medicare is least efficient, Even with the constraints on effective making it easier for private plans to offer competition that now exist, private MA low prices. MA bids tend to be higher than plans can provide Medicare benefits at a traditional Medicare where the cost of lower cost than the traditional program. traditional Medicare is low. This has long been evident in annual reports from the Medicare Payment Advisory Given the structure of Medicare’s bidding Commission (MedPAC), which consistently process, these patterns may not be show HMOs bidding at or below fee-for- surprising. Congress set benchmarks higher service cost.47 than the cost of traditional Medicare as a way of promoting plan participation HMOs typically offer a limited provider and consumer choice rather than as a network and some ability to manage the way to slow program spending. Setting a cost of care. That business model is likely benchmark essentially tells the bidders what to be more efficient than unlimited fee- Medicare is willing to pay. That is not a for-service, but it is also less attractive to sensible way to induce the plans to reveal beneficiaries. For both reasons, HMO bids the lowest price they are willing to take. are likely to be below those of other plans. The data bear this out. In 2010, HMO bids Simply lowering the benchmarks does came in at 100 percent of fee-for-service not resolve this inherent defect in the MA cost, or 4 percentage points less than the bidding process, although it does reduce the average MA plan bid and 16 percentage amount paid to MA plans. The ACA lowers points below the payment benchmark. the average benchmark and reallocates payments, with higher benchmarks in In contrast, plans that most resemble markets that have lower average fee-for- traditional fee-for-service Medicare tend Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 16

to bid the highest amounts. Private fee- more of the cost (and the premium the for-service plans offer unlimited access to beneficiary pays) to the standard benefit Medicare providers and do not attempt to may give the plan a marketing advantage, manage patient care. In 2010, their average allowing it to claim that additional benefits bid was 16 percent higher than fee-for- are low-cost or even “free.” If so, then MA service cost—but 2 percentage points less plan bids may not be good indicators of than the benchmark.48 health plan efficiency.

Comparing MA bids with the cost of Medicare Beneficiaries and Plan traditional Medicare tells us more about Choice. Can Medicare beneficiaries the bidding system than about the ability make economically sound decisions of a better-designed competitive process to about their choice of health plan? That promote efficient delivery of health care and requires beneficiaries to weigh the reduce cost. Moreover, the single-minded premium against other aspects of health pursuit of lower spending is not a winning insurance—including likely out-of-pocket strategy for many health plans. costs, availability of extra benefits, access to providers, and other factors that are Medicare beneficiaries are well aware not easy to reduce to a single number. The that traditional Medicare does not cover lowest-premium plan may not be the best services (such as hearing aids, eyeglasses, choice for an individual, but premium is the and dental coverage) that they would like one parameter that can easily be compared and leaves them exposed to potentially across health plans. high out-of-pocket costs for services that are covered. Rather than cobbling together One indication that many seniors are more complete coverage by combining actively choosing their health plans is current traditional Medicare with a Medigap enrollment in MA plans. In 2012, about plan costing $1,500 a year or more—and 27 percent of Medicare beneficiaries were still having to pay for noncovered services enrolled in MA plans. That figure has held out of pocket—a comprehensive MA fairly steady over the past five or six years, plan can make financial sense even at a once plan participation rose following 2003 high premium.49 legislation to increase their payments.50 Those individuals have made a conscious It may not be possible to interpret the bids decision not to enroll in traditional Medicare submitted to the Centers for Medicare despite the additional effort necessary to and Medicaid Services (CMS) as solely become familiar with plan options outside reflecting the cost of providing standard the traditional program. Medicare benefits. A high bid results in the plan having to charge beneficiaries an Because of the many dimensions of extra premium. Since money is fungible, plan value that cannot be measured, it beneficiary premiums offset the plan’s is extremely difficult to assess whether general operating cost regardless of how beneficiaries’ MA plan choices are the premium amount is set. Allocating economically sound in the sense of Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 17

offering the best benefits for the lowest cost. cheapest alternative—declined by an It is equally difficult to assess whether the average of $298. The primary source of decision to enroll in traditional Medicare improvement was switching plans. Not (or traditional Medicare combined with surprisingly, those who switched plans Medigap) is economically sound for those or who had overspent the most in 2006 who select that option. experienced the greatest savings.

Attention has focused on plan choice in The study found that the learning effect Part D, which is a less complex decision improved the plan choices of even the oldest than the choice of a comprehensive health consumers and those taking medications for plan. The main business of prescription Alzheimer’s disease, whose cost experience drug–only plans is to deliver a product improved by more than the average. That (the prescription drug) to the consumer. suggests that younger family members, Part D plans offer walk-in service at local their physicians, and other community pharmacies, but the service components institutions assist these individuals in of this benefit are minimal compared with choosing plans and medications. It also plans that cover the services of physicians confirms the importance of providing and hospitals. decision support that extends beyond websites and 1-800 telephone numbers. Medicare Part D provides a test of whether seniors can successfully select a health plan when faced with a large number of complex choices. The average senior was A well-organized market with clear choices and appropri- offered dozens of different plan options characterized by varying combinations of ate regulatory safeguards is essential for ensuring that deductibles, coinsurance, drug formularies, Medicare beneficiaries are able to navigate the system. and distribution channels (including local retail pharmacies and mail order). Initial studies of Part D indicated that beneficiaries did not select the lowest-cost options.51 However, those studies did not take into This evidence shows that Medicare account the learning process necessary to beneficiaries do respond to differences navigate a complicated new system. in the cost of competing prescription drug plans once they have had sufficient A recent analysis published in the American experience with their initial plan to Economic Review reports that seniors found recognize that other options might be ways to reduce their costs over time as they better. A similar learning process can be 52 gained experience with Part D. Between expected for beneficiaries choosing among 2006 and 2007, overspending—measured full-service health plans. as the difference between the beneficiary’s actual out-of-pocket costs (including the A well-organized market with clear choices insurance premium) and the cost of the and appropriate regulatory safeguards Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 18

is essential for ensuring that Medicare improved Centers for Medicare and beneficiaries are able to navigate the Medicaid Services Hierarchical Condition system. Medicare could draw lessons from Categories (CMS-HCC) system. CMS- the Federal Employees Health Benefit HCC can explain 11 percent of that Program, which has been operating such spending variation compared with 1 percent a marketplace for more than four decades, for the previous system.55 and from the work now being done to create health insurance exchanges under To further reduce the extent of risk the .53 If properly selection, in 2006 Medicare began implemented, the effort to change plans to require that enrollees in MA plans after initial enrollment would be reduced, remain with their plan for the entire year. making consumers more likely to reconsider Previously, beneficiaries could change plans their options periodically to determine every month, which made it easier for whether a new plan would be more suitable. private plans to attract healthier enrollees and left traditional Medicare with a more Risk Adjustment and Cherry-Picking. expensive group of beneficiaries. Any system that offers beneficiaries a choice of health plans could be exposed to A recent Health Affairs study shows that risk selection, with some plans attracting the improved risk adjustment formula and a healthier group of enrollees than other prohibition on monthly disenrollment plans. Unless the subsidies are adjusted to by beneficiaries have largely succeeded in account for risk selection, that drives up the reducing favorable selection in Medicare 56 total cost of coverage. Advantage. Between 2004 and 2008, favorable selection had dropped by a factor This has long been an issue with Medicare’s of three, a marked decline that minimizes private plan option.54 Beneficiaries less likely its disruptive influence. to use health services have been attracted to MA plans, while those with more costs Even if favorable selection is largely than average have remained in traditional controlled, MA plans may be geared to a Medicare. Payments did not account healthier population and thus might not for the difference in cost between MA deliver adequate services to all of their and traditional Medicare. Consequently, enrollees. A companion Health Affairs favorable selection during the 1990s meant article finds that use rates for major that Medicare spent more per beneficiary service categories (including emergency who enrolled in MA than if the beneficiary departments and ambulatory surgery) had remained in traditional Medicare. were 20 to 30 percent lower in MA health maintenance organizations than in Risk adjustment systems are used to reduce traditional Medicare.57 The findings suggest the extent of under- and overpayment, but that Medicare Advantage HMO enrollees much of the variation in health spending might in general use fewer but more across individuals is not predictable. appropriate services than beneficiaries in In 2004, Medicare transitioned to the traditional Medicare. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 19

CONCLUSION that the country is on an unsustainable path.58 Medicare spending has grown twice Medicare has fueled the expansion of the as fast as the economy over the past decade, American health system, spurring medical even before millions of baby boomers enter innovation and improving lives. However, the market as new beneficiaries. There is the program remains wedded to the basic broad agreement that our future depends structure that it started with in 1965—a on slowing the growth of Medicare nearly 50-year-old political compromise spending while ensuring seniors’ access to rather than a modern health plan. Congress appropriate care. has made infrequent changes to the program, more often in response to crisis Premium support is the core of a market- than to opportunity, without attempting based reform of Medicare financing. a comprehensive reform that could make By shifting from defined benefits to Medicare a better value for seniors, defined contributions, premium support taxpayers, and health care providers. As a dramatically alters the economic incentives result, Medicare remains a patchwork that that drive program spending rather than is unprepared for the massive expansion program value, and it makes consumers an that will occur as the baby boom generation active part of the solution. The political and ages into the program. technical challenges of instituting market- The single most-discussed challenge based reforms cannot be overstated, but the facing Medicare is financing. A host of alternative approach of centralized decision commissions and expert groups, ranging making and cost control is less appealing. from the President’s National Commission The power of premium support is in plan on Fiscal Responsibility and Reform to the competition and consumer choice, not in Heritage Foundation, have argued spending limits that cannot be enforced.

About the Author Joseph Antos ([email protected]) is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

Acknowledgments This paper was developed with support from the Robert Wood Johnson Foundation. The author is responsible for its content. Henry Aaron and Gail Wilensky provided helpful comments. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 20

ENDNOTES 2006, www.iom.edu/Reports/2006/Medicares-Quality- Improvement-Organization-Program-Maximizing- 1 Congressional Budget Office (CBO), The 2012 Long- Potential.aspx; Elizabeth H. Bradley et al., “From Term Budget Outlook, June 2012, 53, www.cbo.gov/ Adversary to Partner: Have Quality Improvement publication/43288. Organizations Made the Transition?” Health Services Research 40, no. 2 (April 2005): 459–76, www.ncbi.nlm. 2 National Commission on Fiscal Responsibility and nih.gov/pmc/articles/PMC1361151/. Reform, The Moment of Truth, December 1, 2010, 12 www.fiscalcommission.gov/news/moment-truth-report- Rick Mayes and Robert A. Berenson, Medicare national-commission-fiscal-responsibility-and-reform. Prospective Payment and the Shaping of U.S. Health Care, (Baltimore: The Johns Hopkins University Press, 2006). 3 Ibid., 36. 13 CMS, “Bundled Payments for Care Improvement,” 4 Centers for Medicare and Medicaid Services (CMS), www.innovations.cms.gov/initiatives/bundled-payments/ Final Rule: Medicare Program; Revisions to Payment Policies index.html (accessed March 1, 2013). under the Physician Fee Schedule, DME Face-to-Face 14 Encounters, Elimination of the Requirement for Termination Fred Schulte, “Center Investigation Suggests Costs from of Non-Random Prepayment Complex Medical Review and Upcoding and Other Abuses Likely Top $11 Billion,” Other Revisions to Part B for CY 2013, October 25, 2012, Center for Public Integrity, September 15, 2012, www.beckersasc.com/media/CMSFinalRule2013MPFS. www.publicintegrity.org/2012/09/15/10810/ pdf. how-doctors-and-hospitals-have-collected-billions- questionable-medicare-fees. 5 Author’s calculation of growth between 2015 (after 15 implementation of the Affordable Care Act) and 2037 for Jim Hahn and Janemarie Mulvey, Medicare Physician major budget categories using CBO’s extended baseline Payment Updates and the Sustainable Growth Rate (SGR) scenario. See CBO, The 2012 Long-Term Budget Outlook, System, Congressional Research Service, August 2, 2012, Supplemental Data, www.cbo.gov/publication/43288. http://usbudgetalert.com/CRS_SGR_Aug%202012.pdf; CMS, Final Rule: Medicare Program. 6 See Rep. Bill Cassidy et al., Letter to CMS Acting 16 Administrator Marilyn Tavenner on the 45 Day Notice Medicare Payment Advisory Commission (MedPAC), and Draft Call Letter, March 15, 2013, www.ahipcoverage. Report to the Congress: Medicare Payment Policy, March com/wp-content/uploads/2013/03/Scan001.pdf. 2010, table 4-3, www.medpac.gov/documents/Mar10_ EntireReport.pdf. 7 John D. Shatto and M. Kent Clemens, Projected Medicare 17 Expenditures under Illustrative Scenarios with Alternative Gerald Riley and Carlos Zarabozo, “Trends in the Payment Updates to Medicare Providers, Centers for Health Status of Medicare Risk Contract Enrollees,” Medicare and Medicaid Services, May 18, 2012, www. Health Care Financing Review 28, no. 2 (Winter 2006– cms.gov/Research-Statistics-Data-and-Systems/Statistics- 2007): 81–95, www.cms.gov/Research-Statistics-Data- Trends-and-Reports/ReportsTrustFunds/Downloads/2012 and-Systems/Research/HealthCareFinancingReview/ TRAlternativeScenario.pdf. downloads/06-07Winpg81.pdf.

18 8 National Commission on Fiscal Responsibility and Kaiser Family Foundation, “The Medicare Prescription Reform, The Moment of Truth, 15. Drug Benefit,” Fact Sheet, November 2011, www.kff.org/ medicare/upload/7044-12.pdf. 9 Boards of Trustees, Federal Hospital Insurance and 19 Federal Supplementary Medical Insurance Trust Funds, Benchmark plans are required to offer coverage for 2012 Annual Report, table V.B3, April 23, 2012, www. prescription drugs commonly used by dual eligibles. The cms.gov/Research-Statistics-Data-and-Systems/Statistics- inspector general of Health and Human Services found Trends-and-Reports/ReportsTrustFunds/Downloads/ that Part D plan formularies include 96 percent of the TR2012.pdf. 191 drugs commonly used by this population. See Stuart Wright, “Memorandum Report: Part D Plans Generally 10 See Social Security Act, Public Law 74-271 (1935), Include Drugs Commonly Used by Dual Eligibles,” HHS Sec. 1801. Office of the Inspector General, OEI-05-12-00060, June 7, 2012, http://oig.hhs.gov/oei/reports/oei-05-12-00060.pdf. 11 Jennifer L. Schore, Randall S. Brown, and Valerie A. Cheh, “Case Management for High-Cost Medicare 20 Congressional Budget Office, Reducing the Deficit: Beneficiaries,” Health Care Financing Review 20, Spending and Revenue Options (Washington, DC: no. 4 (Summer 1999): 87–101, www.cms.gov/ Congressional Budget Office, 2011), 54, www.cbo.gov/ Research-Statistics-Data-and-Systems/Research/ sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10- HealthCareFinancingReview/downloads/99summerpg87. reducingthedeficit.pdf. pdf; Lisa Sprague, “Contracting for Quality: Medicare’s 21 Quality Improvement Organizations,” National Health Douglas Holtz-Eakin, Estimating the Cost of the Policy Forum Issue Brief, no. 774 (June 3, 2002), https:// Medicare Modernization Act, Testimony before the House ahqa.org/pub/uploads/NHPF_Backgrndr_020606.pdf; Committee on Ways and Means, 108th Cong., 2nd sess. Institute of Medicine, Medicare’s Quality Improvement (March 24, 2004), www.cbo.gov/sites/default/files/cbofiles/ Organization Program: Maximizing Potential, March 9, ftpdocs/52xx/doc5252/03-24-medicare.pdf. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 21

22 Douglas Holtz-Eakin (Congressional Budget Office), 32 Kaiser Family Foundation, Comparison of Medicare Letter to Hon. Don Nickles providing additional Premium Support Proposals, July 26, 2012, www.kff.org/ information about the CBO’s cost estimate for the medicare/8284.cfm. conference agreement on H.R. 1, November 20, 2003, 33 See also Congressional Budget Office, Designing a www.cbo.gov/sites/default/files/cbofiles/ftpdocs/48xx/ Premium Support System for Medicare, December 2006, doc4814/11-20-medicareletter2.pdf. Estimate includes www.cbo.gov/publication/18258; and Beth Fuchs and Lisa outlays for benefits and insurance load, alternative subsidy Potetz, The Nuts and Bolts of Medicare Premium Support to employers and unions, and low-income subsidy. Proposals, Kaiser Family Foundation, June 2011, www.kff. 23 Boards of Trustees, Federal Hospital Insurance and org/medicare/8191.cfm. Federal Supplementary Medical Insurance Trust Funds, 34 House Budget Committee, The Path to Prosperity: A 2012 Annual Report, table III.D3. Responsible, Balanced Budget, Fiscal Year 2014 Budget 24 Joseph Antos, “What Does Medicare Part D Say about Resolution, March 12, 2013, http://budget.house.gov/ the Ryan Plan?” RealClearMarkets.com, June 15, 2011, uploadedfiles/fy14budget.pdf. www.realclearmarkets.com/articles/2011/06/15/what_ 35 Office of Management and Budget, Budget of the United does_medicare_part_d_say_about_the_ryan_plan_99074. States Government, Fiscal Year 2013, February 13, 2012, html. www.whitehouse.gov/omb/budget/Overview. 25 Jonathan D. Ketcham et al., “Sinking, Swimming, or 36 Even without a spending target, a well-functioning Learning to Swim in Medicare Part D,” American Economic competitive bidding system only approximates efficient Review 102, no. 6 (November 2012): 2639–73, www. pricing. Medicare’s substantial subsidy can be used only for aeaweb.org/articles.php?doi=10.1257/aer.102.6.2639. health services. That drives up demand for those services 26 Centers for Medicare and Medicaid Services, “National beyond the level obtained if the same amount of subsidy Health Expenditures Aggregate, Per Capita Amounts, was provided to beneficiaries as an unrestricted lump-sum Percent Distribution, and Average Annual Percent Change: cash payment. Selected Calendar Years 1960–2010” (tables 1 and 2), 37 Limiting growth in the Medicare subsidy to growth in January 9, 2013, www.cms.gov/Research-Statistics- spending for the under-65 population was proposed in Data-and-Systems/Statistics-Trends-and-Reports/ Aaron and Reischauer, “The Medicare Debate.” NationalHealthExpendData/Downloads/tables.pdf. 38 Joseph Antos et al., Taking Back Our Fiscal Future 27 A recent survey shows that 84 percent of enrollees are (Washington, DC: Brookings Institution and Heritage satisfied with their Part D plan. See Peter Pitts, “Part D Foundation, April 2008), http://s3.amazonaws.com/ gets an A While Chuck Schumer Gets a D,” Drugwonks. thf_media/2008/pdf/wp0408.pdf. com, June 13, 2011, http://drugwonks.com/blog/part- d-gets-an-a-while-chuck-schumer-gets-a-d; and KRC 39 Critics of premium support argue that private plans Research, Seniors’ Opinions about Medicare Rx: Fifth Year would attract the healthiest beneficiaries, leaving Update, September 2010, www.krcresearch.com/pdfs/ traditional Medicare with the higher cost of less healthy KRC_MedicareTodaySurveyofSeniorsMedicareRx.pdf. enrollees. See David Cutler, Topher Spiro, and Maura Calsyn, “Romney U: Increased Costs during Retirement 28 Alain Enthoven, “Consumer Choice Health Plan,” under the Romney-Ryan Medicare Plan,” Center for New England Journal of Medicine 298 (1978): 650– 58, American Progress Action Fund, August 24, 2012, 709–20; Bryan Dowd et al., “Issues Regarding Health www.americanprogressaction.org/issues/healthcare/ Plan Payments under Medicare and Recommendations for report/2012/08/24/33915/increased-costs-during- Reform,” Milbank Quarterly 70 (1992): 423–53; and Henry retirement-under-the-romney-ryan-medicare-plan/. As Aaron and Robert Reischauer, “The Medicare Debate: discussed below, recent studies show that “cherry-picking” What Is the Next Step?” Health Affairs 14 (1995): 8–30. can be successfully controlled through risk-adjusted 29 Angie Drobnic Holan, “Did Republicans Vote to End subsidies and enrollment rules. Medicare ‘As We Know It’?,” Politifact.com, August 25, 40 House Budget Committee, The Path to Prosperity: 2012, www..com/truth-o-meter/article/2012/ Restoring America’s Promise, Fiscal Year 2012 Budget aug/23/did-republicans-vote-end-medicare-we-know-it/. Resolution, April 5, 2011, http://budget.house.gov/ 30 Shatto and Clemens, Projected Medicare Expenditures. uploadedfiles/pathtoprosperityfy2012.pdf.

31 Failure to implement previously-legislated reductions 41 Robert F. Coulam, Roger Feldman, and Bryan E. Dowd, in Medicare payment rates would increase spending over “Competitive Bidding Can Help Solve Medicare’s Fiscal current projections, which places additional demands on Crisis,” AEI Health Policy Outlook (February 2012), www. general tax revenue. aei.org/outlook/health/healthcare-reform/competitive- bidding-can-help-solve-medicares-fiscal-crisis/. Plan Competition and Consumer Choice in Medicare: The Case for Premium Support 22

42 Personal communication from Roger Feldman, Part D Program.” American Economic Review 101, no. June 25, 2012. 4 (June 2010): 1180–210, www.aeaweb.org/articles. php?doi=10.1257/aer.101.4.1180; Jonathan Gruber, 43 Zirui Song, David M. Cutler, and Michael E. Chernew, Choosing a Medicare Part D Plan: Are Medicare Beneficiaries “Potential Consequences of Reforming Medicare Choosing Low-Cost Plans?, Kaiser Family Foundation, into a Competitive Bidding System,” Journal of the March 2009, www.kff.org/medicare/upload/7864.pdf; American Medical Association 308, no. 5 (August 1, and Jack Hoadley, “Medicare Part D Spending Trends: 2012): 459–60, http://jama.jamanetwork.com/article. Understanding Key Drivers and the Role of Competition,” aspx?articleid=1273025. KFF Issue Brief, May 2012, www.kff.org/medicare/ 44 More-complex cost-sharing structures, such as value- upload/8308.pdf. based insurance designs, could be developed to give 52 Ketcham et al., “Sinking, Swimming, or Learning to beneficiaries stronger incentives to use appropriate services Swim in Medicare Part D.” in an efficient manner. For example, the cost-sharing requirement could be waived for the frequent blood tests 53 Walton Francis, Putting Medicare Consumers in Charge: needed by diabetic patients. Lessons from the FEHBP (Washington, DC: AEI Press, 2009), www.aei.org/book/health/entitlements/putting- 45 Judy Feder et al., Why Premium Support? Restructure medicare-consumers-in-charge/. Medicare Advantage, Not Medicare, Urban Institute, September 2012, www.urban.org/health_policy/url. 54 Heidi H. Whitmore, “Policy Implications of Risk cfm?ID=412662. Selection in Medicare HMOs: Is the Federal Payment Rate Too High?” Center for Studying Health System Change, 46 Kaiser Family Foundation, “Explaining Health Reform: Issue Brief 4, November 1996, www.hschange.com/ Key Changes in the Medicare Advantage Program,” Focus CONTENT/77/. on Health Reform (May 2010), www.kff.org/healthreform/ upload/8071.pdf. 55 Joseph P. Newhouse et al., “Steps to Reduce Favorable Risk Selection in Medicare Advantage Largely Succeeded, 47 See, for example, MedPAC, Report to the Congress. Boding Well for Health Insurance Exchanges,” Health 48 Ibid. Affairs 31 (December 2012): 2618–28.

49 Steven Sheingold, Adele Shartzer, and Dan Ly, 56 Ibid. Variation and Trends in Medigap Premiums, Office of 57 Bruce E. Landon et al., “Analysis of Medicare Advantage the Assistant Secretary for Planning and Evaluation, HMOs Compared with Traditional Medicare Shows Lower December 2011, http://aspe.hhs.gov/health/reports/2011/ Use of Many Services during 2003–09,” Health Affairs 31 MedigapPremiums/. (December 2012): 2609–17. 50 Boards of Trustees, Federal Hospital Insurance and 58 National Commission on Fiscal Responsibility and Federal Supplementary Medical Insurance Trust Funds, Reform, The Moment of Truth; Stuart M. Butler, Alison 2012 Annual Report, table V.B3 Acosta Fraser, William W. Beach (eds.), Saving the 51 Florian Heiss, Daniel McFadden, and Joachim Winter, American Dream: The Heritage Plan to Fix the Debt, Cut “Regulation of Private Health Insurance Markets: Lessons Spending, and Restore Prosperity, Heritage Foundation, from Enrollment, Plan Type Choice, and Adverse Selection 2011, http://savingthedream.org/about-the-plan/plan- in Medicare Part D,” National Bureau of Economic details/SavAmerDream.pdf. Research Working Paper 15392, October 2009, www. nber.org/papers/w15392.pdf; Jason T. Abaluck and Jonathan Gruber. “Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare