Health Law Daily Federal savings from converting Medicare to a premium support system examined
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Friday, October 6, 2017

Federal savings from converting Medicare to a premium support system examined

By Harold Bishop, J.D.

Policymakers have long proposed converting Medicare to a premium support system as a way to reduce federal spending. A Medicare premium support system proposal was actually part of a Republican health care reform plan in 2016. Under a Medicare premium support system, beneficiaries would choose health insurance from a list of competing private plans, and the federal government would share the cost of their premiums. An October 2017 Congressional Budget Office (CBO) report updates the agency’s work on the topic, presents new estimates of the budgetary effects of those proposals, and examines the reasons for the changes in the estimates, including changes in law that have affected the Medicare program (CBO Report, October, 2017).

Premium support system as part of ACA repeal plans. On June 22, 2016, the House Republicans included in their health care reform plan to repeal and replace the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), a proposal (A Better Way) to gradually transform Medicare into a system of premium supports. The proposal never made it into the Republican’s failed repeal bills, but the Kaiser Family Foundation discussed the Republican proposal and warned that despite federal savings, out-of-pocket costs for beneficiaries could either rise or fall under the proposed plan, depending on various factors (see Premium supported Medicare proposal spawns many questions, no solid answers, July 27, 2016).

Options analyzed by CBO. In the premium support system options analyzed, the federal government’s contribution would be determined from insurers’ bids, and Medicare’s traditional fee-for-service (FFS) program would be included as a competing plan. The CBO examined two approaches for determining the federal contribution: (1) one would set the contribution on the basis of the second-lowest bid in each region; and (2) the other would use the region’s average bid.

CBO also examined the effects of grandfathering, which would keep beneficiaries in the current Medicare program if they were eligible for Medicare before the premium support system took effect instead of requiring them to enter the premium support system. According to the CBO, federal savings would be much smaller if the options included a grandfathering provision because only a small portion of the Medicare population would be covered by the new system initially, but that portion would increase gradually.

New CBO Estimates. The CBO currently estimates that without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $419 billion between 2022 and 2026, while the region’s average-bid option would reduce spending by $184 billion during the same time period.

With grandfathering, the CBO estimates that the second-lowest-bid option would reduce net federal spending for Medicare by $50 billion between 2022 and 2026, while the region’s average-bid option would reduce such spending by $21 billion during the same time period.

The CBO believes that these savings would occur because private insurers’ bids would generally be lower than Medicare FFS costs per capita and would substantially influence the federal contribution.

The CBO also estimates that, on average, Medicare beneficiaries’ total payments for Medicare premiums and cost sharing (i.e., out-of-pocket spending on copayments, coinsurance, and deductibles) would be higher under the second-lowest-bid option, but lower under the average-bid option, than under current Medicare law.

Comparison to earlier CBO estimates. The CBO’s current estimates of the federal savings from the premium support options without grandfathering are much higher than its earlier estimates. In a November 2013 report, Options for Reducing the Deficit: 2014 to 2023(pp. 204–210), the CBO estimated that if a premium support system was implemented without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $275 billion between 2018 and 2023 and the average-bid option would reduce net federal spending over that period by $69 billion.

The CBO concludes that the savings estimates increased from 2013 to 2017 mainly because the CBO’s 2017 projections of the bids that Medicare Advantage plans would submit under current law are lower relative to Medicare FFS spending per capita than the projections used in its 2013 analysis.

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