Reforming Medicare: Options, Tradeoffs, and Opportunities

5. Premium Support

Beginning in the mid-1990s, policy analysts developed and some elected officials endorsed an alternative to traditional Medicare called premium support.1 This term has since been applied to several proposals built around the principle that health care services should be financed by the government but managed by private insurance plans competing on premiums and services. The government would pay for a core set of services . This payment—or “capitation”—would be adjusted on the basis of enrollees’ characteristics to reflect differences in expected use of health care. The payment adjustments would reduce insurers’ incentives to “cherry-pick”—that is, to seek enrollees with low expected medical use. The Medicare Modernization Act (MMA) adopted this approach for the drug benefit added to Medicare in 2003. Premium support is the principle underlying the Medicare Advantage program. The MMA also authorized a premium support demonstration to begin in 2010. Proponents of premium support claim that plans will respond to enrollees’ preferences more quickly if people can switch plans rather than be forced to remain in one that may or may not respond to pressure for change. Private insurers, unencumbered by government red tape, would be the administrative “hare” to Medicare’s bureaucratic “tortoise,” introducing inno73 Premium Support 5 74 Premium Support vative administrative procedures and goading providers to adopt costreducing and quality-improving therapies. Medicare’s use of private plans would extend to retirement years the kind of insurance most people had encountered during their working years. In addition, premium support would give Congress greater capacity to limit spending than traditional Medicare does. One premium support model suitable for Medicare is similar to what is being used in parts of Medicare Advantage today. Plans would offer an integrated set of benefits with some degree of standardization. Medicare would base its payments to such plans on regional “benchmarks,” or averages of plan bids for standard coverage. Plan premiums would be increased or decreased by the difference between the plan bid and the benchmark (if the bid was above the benchmark, the enrollee would pay the difference; if below, the enrollee would receive the difference). This version, one of a variety of possible premium support proposals, is explored in this chapter. Origins Premium support evolved from “managed competition,” a term coined by Stanford Business School economist Alain Enthoven.2 The idea is to control health care spending not by regulating price or imposing explicit coverage limits, but by exposing health care users to the full incremental cost of insurance above a core plan and allowing insurance plans themselves to compete for enrollees by innovating, cutting costs, and improving quality. Heightened price sensitivity on the demand side and intensified competition on the supply side would result, it is claimed, in more care per dollar. At the same time, premium support would mandate certain broad benefit categories and include rules to ensure access to coverage. In addition, government subsidies would be linked to increases in general health costs rather than to an index that is independent of health care. This last feature distinguishes managed competition from voucher plans, which link spending per person to non-health indicators such as income or economic growth. Managed competition was the inspiration for the Health Security Act, President Clinton’s failed 1994 health reform plan, which proposed to insure most nonelderly Americans through private plans in regional alliances.3 In 1999 premium support graduated from minor-league policy analysis to a major-league policymaking debate when the National Bipartisan Commission on the Future of Medicare laid out a detailed premium support proposal. Although a majority of commission members supported the Premium Support 75 proposal, which included other policies such as a low-income drug bene- fit, it failed to garner the supermajority required under commission rules to make recommendations to Congress. Several months later, the Clinton administration put forward a “competitive defined-benefit” model that had elements of premium support but did not include traditional Medicare in its capitated payment system. Introduced just before the 2000 elections , the Democratic-sponsored proposal went nowhere in the Republican-led Congress. Four years later, a Republican-controlled White House and Congress revived managed competition in three parts of the MMA. The newly enacted drug benefit was to be delivered only through competing private drug plans paid a flat, per enrollee, risk-adjusted federal fee.4 If the cost of providing benefits exceeds this fee, enrollees...