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USC-Brookings Schaeffer on Health Policy

A partisan fight over Medicare? Maybe not.

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Five or six years ago, a bitter partisan fight over the future of Medicare appeared inevitable. The enormously successful health insurance program for the elderly and disabled, which turns 50 this year, needed shoring up as the huge boomer population reached Medicare eligibility, but the parties had radically different ideas about what to do.

Republicans, led by then Budget Chairman Paul Ryan, proposed converting Medicare to a “premium support” program giving seniors a fixed subsidy to purchase private insurance plans.  They counted on strict control of the subsidy’s growth to reduce future Medicare spending. Democrats said the Ryan plan would mean stingier benefits, exploding out-of-pocket costs for seniors, and an end to “Medicare as we know it.”  They produced a scary video of a Ryan-like figure dumping sweet-faced granny off a cliff. Democrats hunkered down to fight any reductions in Medicare benefits, proposing higher taxes on the wealthy instead. Party battle lines were drawn.

But the canons never roared. The Romney Ryan campaign barely mentioned Medicare except to attack Democrats for cutting Medicare to fund Obamacare. The budgetary “Grand Bargain,” which would have required decisions on the future of Medicare, dropped off the agenda of a gridlocked congress.

Meanwhile, rapid change is engulfing the whole health care system, including Medicare. The sharp partisan divide—Republicans for choice among private plans; Democrats for traditional Medicare—is eroding. Americans are getting used to choosing among private health plans. Millions of uninsured people, armed with government subsidies, are choosing plans on Obamacare’s exchanges. Part D of Medicare, which involves choice among private drug plans, is working well. Enrollment in Medicare Advantage, the part of Medicare that already funds choice among private plans, has grown to 30 per cent of beneficiaries, despite cuts its subsidies. At the same time traditional Medicare is changing. Paying doctors, hospitals, and other providers for each service rendered clearly results in a plethora of services—many of them duplicative or wasteful—and not necessarily to higher-quality care or better patient health. Not only Medicare, but private payers are introducing payment reforms (Accountable Care Organizations (ACOs), bundled payments, etc.) that reward groups of providers for working together to keep patients healthy and reduce cost. Even the gridlocked congress passed a bipartisan bill (the doc fix) that that paved the way for payment reforms in Medicare. 

An emerging scenario for the future of Medicare could involve convergence of parallel tracks. One track would build on the strengths of Medicare Advantage, using competitive bidding, improved quality measures and consumer choice on user- friendly exchanges to reduce costs and improve health outcomes in areas where MA plans can compete effectively without subsidies. The second track would use payment reforms to lower costs and improve health outcomes in traditional Medicare, including giving beneficiaries incentives to enroll in Accountable Care Organizations that accepted risk and received capitated payments. If both tracks were successful in improving health outcomes and the efficiency of delivery, they might eventually converge. Medicare beneficiaries—perhaps consumers of health care at all ages—would make well-informed choices among integrated health care organizations. Some of these would be run by insurers and others by provider groups that accepted insurance-like risk, but all would endeavor to keep their enrollees as healthy as possible in exchange for a periodic per capita payment.

In a paper titled, Could Improving Choice and Competition in Medicare Advantage be the Future of Medicare?, my former colleague, Willem Daniel and I explore how reforms in Medicare Advantage (MA) might advance this scenario. Currently, Medicare often pays MA plans more than it costs to deliver the Medicare benefit package and meet quality standards. If payments were set by competitive bidding on user-friendly exchanges that provided reliable information on quality and health outcomes, MA customers, as well as tax payers, could enjoy higher value than they do under the current system. Traditional Medicare would be there for those who preferred it. We call this Plan One.

Even Plan One would require resolving difficult policy issues. First, experience has shown that MA plans compete well in higher cost, mostly urban areas, but not in low-cost, mostly sparsely populated areas.  Without subsidies in the low-cost areas the benefits of competition would be largely confined to higher cost, more populous areas, while others would continue to rely on traditional Medicare. Alternatively, taxpayers could continue to subsidize MA plans in the low cost areas, as they do now, in order give those residents a wider choice of plans. Such subsidies are effective, but are they worth paying?

Another question is whether the expected benefits of competition would actually be realized in highly concentrated health insurance markets where firms have considerable market power. Market concentration threatens to deprive all health insurance customers of competitive benefits, including those enrolled in employer plans and the ACA, as well as MA. Failing to design a strategy to mitigate concentration in health insurance markets could prove detrimental to both taxpayers and customers.

We also explore the more ambitious step of bringing traditional Medicare into structured competition with MA plans (Plan Two). This plan would give beneficiaries a choice among health plans (including MA plans and traditional Medicare) on an exchange and could bring costs down substantially in areas where traditional Medicare is most expensive. It would be a form of premium support where the government contribution would be the competitively determined cost of delivering the Medicare benefit package in the area. We do not suggest an additional cap on the growth of the government contribution to Medicare—such as limited it to the growth of per capita GDP. If Medicare costs continue to rise slowly, as they have for the last several years, such a cap would be unnecessary. If health care cost growth accelerates again, an arbitrary cap on Medicare growth would be unsustainable.

Two other issues, in addition to the ones just mentioned, would have to be resolved before the benefits of Plan Two could be realized.  First risk adjustment would have to be improved to reflect the costs of sicker patients. MA plans have historically attracted healthier beneficiaries and those who switch from MA to traditional Medicare tend to be in poorer health than those who stay. Risk adjustment techniques are improving and may advance faster with as more timely and accurate individual health information becomes available. Without such improvement, however, competitive bidding that included both MA and traditional Medicare could result in traditional Medicare attracting the sickest and most expensive patients and becoming inaccessible to those with modest incomes.

The final policy issue is basic: what the does the guarantee of entitlement to Medicare mean?. Both Plans One and Two would guarantee seniors the package of Medicare benefits without additional premiums. But Plan Two would not guarantee that the Medicare benefit package would be available in a fee-for-service setting without paying extra. Competition among plans to reduce cost and attract beneficiaries often results in narrower networks. To stick with a particular provider or have access to a broader network in a Plan Two world would likely cost the beneficiary more.  However, if payment reforms in traditional Medicare also lead to narrower networks and capitated payments, beneficiaries may come to regard them as the new normal.

None of these issue policy issue are easy ones, but, if they can be resolved satisfactorily, well- designed competitive bidding could be part of a viable, well-funded Medicare that delivers quality care to the seniors of 2030. Payment reforms in traditional Medicare would complement the new competition. Achieving these results is worth a major bipartisan effort, since maintaining “Medicare as we know it” is not a viable option for strengthening this important program on which so many rely.

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