Topics: Obamacare

Premium support could inject competitition into Medicare

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President Obama's 2012 election victory was perceived, at least by many on the left, as something of a referendum on health care. To the degree that this is accurate (and this is far from a given), conservatives may be wondering what platform, other than being "anti-Obamacare," they can take up.

In a recently released report, Medicare's payment advisory commission  MedPAC — offers an idea most conservatives can get behind: Medicare premium support. Conservatives and liberals alike have realized that traditional Medicare is not an efficient or cost-effective way to cover the care that the elderly and disabled will need in the coming years. It makes sense, then, to consider injecting some cost-controls through market-based competition into the program.

At its core, the premium support model would have private plans competing with Medicare fee-for-service (FFS) on a cost basis. Benefits would be pre-defined by law, and the Medicare program would provide vouchers (pegged to the second-cheapest plan in their region) that would be used to purchase Medicare-equivalent coverage. Any cost above the voucher would be borne by the beneficiary. In the end, whichever program could pay for the same benefits at lower costs would come out on top.

But the premium support model is nothing new — neither MedPAC nor House Budget Committee Chairman Paul Ryan, R-Wis., invented it. The idea has its roots in a 1995 proposal by Brookings Institution scholar Henry Aaron. It also received play in the bipartisan Domenici-Rivlin proposal to reduce the nation's debt.

More importantly, though, we've already seen competition in action in the Medicare program — Medicare Advantage (MA) for instance, offers seniors an alternative to traditional Medicare, in the form of private insurance plans. (MA plans tend to cost slightly more than traditional Medicare, but tend to have much better outcomes such as shorter hospital stays.) The major difference between premium support and MA, however, is that MA plans don't compete with traditional Medicare directly, and payments to plans are still administratively determined.

MedPAC goes a step further and imagines several variations on the traditional premium support model. The result (unsurprisingly) is that if plans are forced to compete directly, and reimbursement is tied to the plan that offers the most value, Medicare spending (measured as reimbursement to plans) will likely fall.

There are, of course, important considerations — for instance, competition would likely reduce spending in high-use areas, but it may not be as effective in low-use areas. Moreover, it is possible to allow some variation in benefits (as Medicare's Part D drug benefit does) while maintaining equivalent "actuarial values" across plans.

Yet, these are minute details that could be worked out through the legislative process. The beauty of competition is that it would allow us to address these potential problems, by understanding where private plans could operate more efficiently, and allowing them to do so.

Far from "pushing granny off a cliff," Medicare competition is a viable potential solution to what is otherwise a program plagued by high costs and uneven quality. If private plans can, indeed, offer significant benefits in high-use markets, competition-based Medicare reform should be on every policymaker's wish list. And if they can't, beneficiaries will be no worse for wear.

Yevgeniy Feyman is a Manhattan Institute research associate, a blogger for Medical Progress Today, and a contributor to numerous publications. He is the co-author of the recently released Manhattan Institute report: The Obamacare Evaluation Project: Access to Care and the Physician Shortage.

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