PROPOSED CHANGES TO MEDICARE ProposedIN THEChanges “PATH to Medicare TO inPROS the “PathPERITY” to Prosperity” Overview and Key Questions OVERVIEW AND KEY QUESTIONS APRIL 2011 On April 5, 2011, Representative Paul Ryan (R-WI), chairman of the House Budget Committee, released a budget proposal, entitled The Path to Prosperity: Restoring America’s Promise, which reduces federal spending over the long term.1 The proposal is projected to achieve a federal budget surplus by 2040, and would substantially reduce federal spending on major health programs, including Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and Exchange subsidies by 2022.2 With Medicare spending now representing 15 percent of the federal budget, reducing federal Medicare spending is a key component of Chairman Ryan’s proposal. The proposal would reduce the growth in Medicare spending by capping the growth in expenditures per enrollee, converting Medicare from a defined benefit plan to a system of defined “premium support” payments, and by gradually raising the age of Medicare eligibility from 65 to 67, beginning in 2022. The proposal would also repeal specified provisions of the 2010 health reform law.3 It would repeal the Independent Payment Advisory Board (IPAB) and provisions to close the Medicare Part D prescription drug coverage gap (the “doughnut hole”) by 2020. This policy brief focuses only on the provisions of the proposal that would directly affect Medicare, and the elderly and disabled people covered by the program. The proposal includes other changes that could also affect seniors and people with disabilities, most notably through the Medicaid program. The description is based on information in The Path to Prosperity, the letter dated April 5, 2011 from the Congressional Budget Office (CBO) which provides greater detail on the specific provisions in the plan, and subsequent information provided by the CBO on April 8, 2011.4 Proposal Would Convert Medicare into a “Premium Support” Program How Would the Proposal Change the Structure of the Medicare Program? The proposal would gradually transform Medicare into what is described as a “premium support system.” Beginning in 2022, all newly-eligible Medicare beneficiaries (i.e., individuals turning 65 as well as younger, disabled individuals becoming eligible for Medicare) would only have access to health coverage through private insurance plans, rather than through the current government-run Medicare program (i.e., traditional Medicare), or under a Medicare Advantage plan. Under the new premium support system, Medicare beneficiaries would be entitled to a payment from the federal government to help defray premiums and other health care costs under the plan. The government would make payments directly to private health plans on behalf of Medicare- eligible enrollees, rather than pay hospitals, physicians, and other medical providers directly for the services provided to their Medicare-eligible patients, as is currently the case. If the government payments to plans on behalf of enrollees were insufficient to cover premiums and/or other costs, beneficiaries would be responsible for additional costs. In other words, Medicare would no longer provide coverage for medical care, but instead provide a “subsidy” toward the purchase of a private health insurance plan. THE KAISER FAMILY FOUNDATION PROGRAM ON MEDICARE POLICY Under the premium support system, beneficiaries would be able to choose among competing private plans offered in their area through a new Medicare Exchange. Plans offered through the Medicare Exchange would be required to enroll any Medicare beneficiary who wishes to enroll, without regard to health status or income. It is not clear whether beneficiaries could apply their government contribution to a private plan offered outside the Medicare Exchange. Elderly and disabled people who are entitled to Medicare before 2022 (generally individuals currently ages 55 and older or those with disabilities covered by Medicare before 2022) could choose to either remain in the traditional fee-for-service Medicare program, or enroll in a private plan. While the average costs for beneficiaries in traditional Medicare would increase if the younger, healthier beneficiaries enroll in private plans, the proposal would protect the older, sicker beneficiaries in the traditional Medicare program from the higher premiums that would otherwise result from higher average costs. What Benefits Would Be Offered by Private Plans to Medicare Beneficiaries? The proposal would require private plans in the new Medicare Exchanges to comply with “a standard for benefits” that would be approved by the Office of Personnel Management (OPM), which oversees the benefits for the Federal Employees Health Benefits Program (FEHBP).5 If FEHBP is the model for this approach, OPM would generally require plans to include benefits to cover certain costs, and would review proposed changes in benefits from one year to the next, but would be unlikely to require a uniform or specified defined set of benefits.6 This approach differs from current law, which entitles beneficiaries to a defined set of benefits, or to benefits that are at least actuarially equivalent if offered by a Medicare Advantage plan. Because payments to plans incorporate costs associated with Part D, the stand-alone Medicare Part D marketplace presumably would no longer exist. How Would the Proposal Set Government Payments to Private Plans? Under the proposal, the payment made on behalf of Medicare beneficiaries to private plans would be based on projected average per capita Medicare spending in 2022 that would be adjusted for health status, age, and income. According to the CBO, this approach would result in higher costs for beneficiaries than they would otherwise incur under the traditional Medicare program. Net federal premium support payments for a typical 65-year old in 2022 would be $8,000, or 39 percent of Medicare spending per enrollee.7 Government contributions to plans would be risk-adjusted and thus higher for beneficiaries who are older and/or in poorer health. Government contributions would be lower for higher-income Medicare beneficiaries: payments to plans would be reduced by 70 percent for beneficiaries in the top 2 percent of the Medicare population income distribution, and by 50 percent for those in the next 6 percent of the income distribution. Thus, government payments on behalf of enrollees would be lower for Medicare beneficiaries with relatively high incomes, resulting in these beneficiaries paying higher premiums. The proposal does not specify whether government contributions would be adjusted for geographic variation in costs. Given well-documented variations in Medicare costs by geography, the absence of a geographic adjustment could have significant implications for high-cost areas of the country, such as Miami or Los Angeles. Page 2 Proposed Changes to Medicare in the “Path to Prosperity” How Would the Federal Premium Support Payment Increase Each Year? The government contribution would increase annually, based on the Consumer Price Index for all urban consumers (CPI-U). This differs from other proposals, such as the Rivlin-Ryan plan, released in November 2010, that proposed to increase federal Medicare costs by the growth in per capita Gross Domestic Product plus one percent (GDP+1%), which allows for a somewhat higher rate of annual growth than inflation.8 These growth rates are lower than historical growth in Medicare spending. For example, the average annual growth rate in Medicare per capita spending surpassed the average annual growth rate in the GDP and inflation between 1985 and 2009 (6.7% vs. 2.9%), and is projected to grow faster than inflation through 2021 (nearly 3% vs. 2%).9 By constraining the growth in Medicare payments per enrollee at inflation and by keeping growth below projected Medicare expenditures per person, the proposal limits the financial exposure of the federal government and achieves savings over the long term, but is projected to expose beneficiaries to increasingly larger out-of-pocket costs and risk over time. How Would the Proposal Affect Beneficiaries’ Costs? Beneficiaries enrolled in private plans would be expected to pay premiums and other costs in excess of the federal premium support payment made to the plan on behalf of the Medicare enrollee. According to the CBO analysis, the total cost of providing health care benefits (premium and other costs) to a typical 65-year old in a private plan would be about $20,500 in 2022 (Figure 1).10 The government would contribute $8,000 or 39 percent toward the total cost, and the remaining $12,500 would be paid by the beneficiary. The CBO projects that out-of-pocket costs for the typical 65-year old would be more than twice as large under the proposal than under traditional Medicare ($5,630) in 2022, because the cost of providing benefits is greater under private 11 plans than under traditional Medicare. FIGURE 1 Federal and Medicare Beneficiary Contributions to Total Health Care Spending for a Typical 65-Year-Old, 2022 Current Medicare vs. “Path to Prosperity” Proposal Total: $20,500 Total: $14,760 Total: $13,530 $12,500 Beneficiary’s $6,260 Share of Spending $5,630 (premiums and other out-of-pocket costs) Government’s $7,900 $8,500 $8,000 Share of Spending Current Medicare Current Medicare "Path to Prosperity" (Extended Baseline) (Alternative Fiscal Proposal Scenario) NOTE: Numbers are rounded. SOURCE: Kaiser Family Foundation analysis. Beneficiary health