Competition with Constraints: Challenges Facing Medicare Reform
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Marilyn Moon, Editor Competition with Constraints Challenges Facing Medicare Reform ABOUT THIS REPORT THE RETIREMENT PROJECT IS A MULTIYEAR RESEARCH effort that addresses the challenges and opportunities facing private and public retirement polices in the twenty-first centu- ry. As the number of elderly Americans grows more rapidly, Urban Institute researchers are examining this population’s needs. The project assesses how current retirement policies, demographic trends, and private-sector practice influence the well-being of older individuals, the economy, and government budgets. Analysis focuses on both the public and private sec- tors and integrates income and health needs. Researchers are also evaluating the advantages and disadvantages of proposed policy options. Drawing on the Urban Institute’s expertise in health and retirement policy, the project provides objective, nonpartisan information for policymakers and the public as they face the challenges of an aging population. All Retirement Project publications can found on the Urban Institute’s Web site, at http://www.urban.org/retirement. The project is made possible by a generous grant from the Andrew W. Mellon Foundation. Copyright © January 2000. The Urban Institute. All rights reserved. Permission is granted for reproduction of this docu- ment, with attribution to the Urban Institute. The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Contents Introduction 1 by Marilyn Moon Part I: A Framework for Comparing Incremental and Premium Support Approaches by Beth C. Fuchs and Lisa Potetz Overview 7 The Options 15 Analyzing the Options: Plan Benefits 18 Analyzing the Options: Structure of the Program 32 Analyzing the Options: Structuring the Competition 46 Analyzing the Options: Quality of Care 59 Analyzing the Options: Treatment of Vulnerable Populations and Areas of Limited Competition 62 Analyzing the Options: Medicare’s Other Missions 69 Analyzing the Options: Transition Issues 70 Financing and Fiscal Viability 72 Notes 74 Part II: Perspectives on Premium Support Administration of a Medicare Premium Support Program 83 by Mark Merlis How Much Authority Should the Administrator Have? 84 What Kind of Entity Should the Administrator Be? 90 Due Process 93 Conclusion 94 Notes 95 Health Plan Issues 97 by Peter D. Fox Reasons for Private Health Plans Wanting to Contract with Medicare 97 What Health Plans Seek in Entering into a Contract with Medicare 98 Public Policy Concerns 100 Conclusion 103 Competitive Pricing by Medicare’s Private Health Plans: Be Careful What You Wish For 105 by Len M. Nichols Motivation 106 Major Design Choices 108 Long-Run Issues 116 Notes 118 Risk Adjustment in a Competitive Medicare System with Premium Support 119 by Stuart Guterman Why Risk Adjustment Is Important 120 Risk Adjustment in Medicare 122 Risk Adjustment in the Context of a Competitive Medicare System 123 Are Currently Available Risk-Adjustment Methods Good Enough? 126 How Might Risk Adjustment Actually Work in a Competitive Medicare System? 128 Conclusions 130 Notes 131 Price Sensitivity of Medicare Beneficiaries in a Premium Support Setting 135 by Thomas C. Buchmueller The University of California Health Benefits Program 136 How Representative Are UC Retirees? 137 The Effect of Price on Plan Choice and Switching Behavior 138 The Incidence of Premium Contributions 144 The Effect of Plan Switching on Risk Selection among Plans 145 Discussion 148 Notes 149 Appendix: The Breaux-Thomas Proposal 155 by Beth C. Fuchs and Lisa Potetz Overview 155 Eligibility and Benefits 156 Structure of the Program 159 Cost Containment 160 Structuring the Competition 161 Medicare’s Other Missions 166 Financing and Fiscal Viability 167 Transition Issues 168 Notes 169 References 171 About the Editor 181 About the Authors 183 Introduction Marilyn Moon Projected increases in Medicare’s spending because of the high costs of health care and growing numbers of persons eligible for the program will create substantial challenges for taking Medicare into the twenty-first cen- tury. As a consequence, a number of proposals have been offered to reform Medicare with the goal of achieving substantial reductions in spending growth. Much of this debate over Medicare’s future thus far has centered on whether or not to substantially restructure the program or to seek more limited reforms. The National Bipartisan Commission on the Future of Medicare (here- after referred to as the “Commission”) was created as part of the Balanced Budget Act of 1997 to address issues of long-term reforms for Medicare and to come up with a bipartisan approach. The Commission held numer- ous hearings and meetings, and although a proposal emerged that obtained support from a majority of Commission members, it did not achieve sup- port from the “super majority” required to make a formal recommendation. Nonetheless, the proposal presented by the cochairmen, Senator John Breaux (D−La.) and Representative Bill Thomas (R−Calif.), offered a vision of a comprehensive overhaul to the Medicare program that has become the major framework for discussing structural reform. Termed “premium support,” this approach uses as a model the Federal Employees Health Benefits Program (FEHBP). Like FEHBP, Medicare beneficiaries would choose from a range of insurance plans—in this case, both private plans and traditional Medicare. The government would pay part of the premium, with the contribution established as a share of the national aver- age premium price. Individuals who choose more expensive plans would pay a substantially higher premium than those choosing less expensive plans. The goal would be to give beneficiaries a financial incentive to opt for less expensive plans while offering them a choice among a variety of 1 Competition with Constraints: Challenges Facing Medicare Reform options. (See the Appendix at the end of this volume for a more complete description.) The intellectual origins for premium support can be found in the work of Alain Enthoven (1993) and more recently of Henry Aaron and Robert Reischauer (1995). Some of the practical issues surrounding such a restructuring have been analyzed by the National Academy of Social Insurance (1998). But neither this study nor the staff work of the Commission explored the full range of practical issues that arise in con- templating implementation of such a major restructuring of Medicare. Filling in some of the gaps in thinking about how such a competition Filling in some of approach to Medicare would work in practice was the goal of a conference the gaps in think- held at the Urban Institute in the spring of 1999. The goal was not to pass ing about how judgment on the “worthiness” of the approach, but rather to tackle the such a competition practical issues that would need to be addressed to determine the feasibil- approach to ity of such a reform. Attendance was limited to a small number of policy Medicare would analysts, Clinton administration and Hill staff, and others knowledgeable work in practice about the issues. was the goal of a conference held at To set the stage, we commissioned a paper from Beth Fuchs and Lisa the Urban Institute Potetz to raise issues about premium support and to contrast these issues in the spring of with concerns arising over more incremental reforms. A draft of the paper 1999. was shared with the participants before the meeting. The final version of the paper appears here as part I of this volume. The goal of this paper was to provide a balanced and comprehensive look at the practical considera- tions. In addition, we asked several researchers to consider in more detail some of the important issues facing premium support and to lead the dis- cussion on those issues at the conference. Those papers constitute the five essays in part II. They are intended to be a bit more provocative concern- ing the feasibility of premium support than the Fuchs/Potetz paper, cap- turing the views of the specific authors. This portion of the volume begins with an analysis of the administrative issues key to making premium sup- port work. Mark Merlis examines a range of these issues, including the question of whether a separate administrative body is needed to manage the program rather than the Health Care Financing Administration, how much flexibility is desirable, and what protections are needed for benefici- aries. The goal of relying on an independent board is usually to keep pol- itics out of the administration of the program, but skeptics question both 2 Introduction the feasibility of such a goal and how to establish alternative means for ensuring accountability of a program that would cover nearly 40 million people. The second essay, by Peter Fox, examines what private plans would require before they would be willing to participate in such a restructured Medicare program. Competition will only work if there are health plans willing to serve Medicare beneficiaries. In addition to the important ques- tion of whether plans could make profits under such a structure, what other arrangements would they likely demand? Fox suggests that stability and a perception of a level playing field with the traditional Medicare program are also key factors that private plans would assess before participating. Two key issues Two key issues that will affect the success of the program from the that will affect the perspective of both government and beneficiaries are whether a viable success of the pro- framework for establishing premiums in each area can be developed and gram from the whether a mechanism for adjusting for differing health status of enrollees perspective of both government and is possible. Without these two technical factors, competition is unlikely to beneficiaries are be effective. Len Nichols, who has served as a member of the committee whether a viable trying to mount a Medicare demonstration on competitive bidding, took on framework for the task of discussing how premiums should be established.