Premium Support: A Primer

The following primer was presented on December 16, 2011 at the event Controlling Medicare Costs: Is Premium Support The Answer? At the same event, participants Judy Feder, Paul Van de Water and Henry Aaron presented commentary opposing premium support reform for Medicare.

The major cause of the federal budget crisis, which is still in its early stages, is the relentless growth of Medicare spending. The two biggest causes of Medicare growth are the retirement of the baby boom generation, thus increasing the number of people on the rolls, and the persistent increase in the per person cost of medical care. The retirement of the baby boom generation is just beginning and the per person growth of Medicare, even though it has moderated slightly in recent years, tends to be well above economic growth, the growth of wages, and overall inflation. Unless something is done, Medicare will continue to consume an increasing percentage of the federal budget. According to the Medicare Actuary, Medicare will grow from 3.6 percent of the nation’s GDP in 2010 to 10.4 percent by 2080. Moreover, the interest on the money borrowed to pay for our programs, one of the most rapidly growing of which is Medicare, will greatly exceed even our spending on Medicare. Unchecked, growth in spending on Medicare and interest on the federal debt will bankrupt the country.

A special feature of health care that makes it difficult to control is that many Americans think the entire population has a right to the best medical care available including sophisticated tests, quality routine care, the best medicines, and expensive surgical procedures. For most other categories of spending in the federal budget, policymakers can make cuts without necessarily incurring the wrath of the American people. Not so with Medicare. A recent Washington Post-ABC News poll found that nearly 80 percent of Americans oppose Medicare cuts. The politics of dealing rationally with Medicare are further complicated by the fact that both parties have accused the other of trying to undermine the Medicare program. Republican presidential candidates, for example, are strongly criticizing President Obama for taking money from Medicare to finance the Affordable Care Act (ACA). Similarly, in the pending 2012 elections, Democrats are planning to excoriate Republicans for trying to destroy Medicare by endorsing the version of premium support incorporated in the House budget for 2012 (see below).

If the reluctance of politicians to incur the wrath of voters can be overcome, and if the internecine fighting between the parties can be quelled, analysts and policymakers have developed two broad choices for constraining the growth of Medicare costs. The first is to call on health professionals and other experts to identify reforms that would contain costs by adopting measures such as reducing the use of redundant or unnecessary tests, reducing the use of treatments that evidence shows are not effective, increasing the use of generic drugs, and increasing the effectiveness and use of preventive care. Given that approximately 25 percent of Medicare spending occurs in the last year of life, there could be significant savings in end-of-life care as well. The repeated observation that there is little or no correlation between the cost of health care spending and quality of care in a geographical area within the United States and that the U.S. spends far more on health care than any other nation but scores relatively poorly as compared with many other countries on measures of health and of quality of care strongly suggest that we are spending too much money on health care. The ACA, passed in 2010, contains several mechanisms of top-down reforms to control health care costs, most notably the Independent Payment Advisory Board (IPAB) composed of health experts who will review current research and practice and then submit reform proposals to Congress, although Congress placed limits on the types of reforms the IPAB can recommend. The proposals would then be considered under special rules in which the legislation would be considered as enacted unless Congress amended the IPAB recommendation with legislation that achieved the same level of saving.

The second way to contain Medicare growth is to adopt policies that harness market forces to control costs. Although controversial, premium support is perhaps the most credible approach of this type developed so far. The purpose of this primer is to explain premium support, to present the best arguments for and against its use to control health care spending in general and Medicare spending in particular, and to outline a premium support plan that is responsive to most of the valid criticisms. The paper was written as a background document for the Brookings-Heritage Fiscal Seminar. This paper contains an initial section explaining what premium support is (written by Ron Haskins of Brookings), a section presenting arguments against premium support (written by Henry Aaron of Brookings), a section presenting arguments in favor of premium support (written by James Capretta of the Ethics and Public Policy Center), and a section outlining a specific premium support plan—the Domenici-Rivlin plan—that many (but not all) members of our Fiscal Seminar would endorse.

The primary audience for our premium support paper is policymakers who must soon take bold steps to contain Medicare costs, but we also hope this primer will promote understanding of premium support and the arguments for and against it by reporters, students, lobbyists, and the public.