The Distributional Consequences of a Medicare Premium Support Proposal

This article analyzes the distributional consequences of enacting a particular premium support proposal known as Breaux-Frist I. Under the proposal, the federal government would contribute a certain amount toward the purchase of Medicare coverage, based on the premiums charged by different health plans. Beneficiaries could choose something akin to the traditional fee-for-service option or a privately sponsored health plan such as a health maintenance organization. The article simulates the expected distributional impacts in three areas: among beneficiaries who choose to retain fee-for-service coverage, between different geographic areas, and according to various beneficiary characteristics. We find that the legislation would result in increased premiums for beneficiaries remaining in the Medicare fee-for-service program as a result of unfavorable selection; lead to a geographic redistribution in premium payments, with those living in areas with high levels of Medicare expenditures paying more; and a much lower financial burden than is the case now for near-poor beneficiaries who do not have full Medicaid coverage. Finally, the article discusses how these results compare to those that may occur under the premium support demonstration project, beginning in 2010, established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.