Reducing Costs through a Medicare Premium Support System

Within the context of reducing federal debt and deficit, suggestions calling for the transformation of Medicare from its current structure to one known as premium support have been raised from time to time. Those advocating a premium support structure contend the system will reduce the growth in Medicare spending and create greater reliance on a competitive marketplace.

There are variations of proposals for premium support, but the basic tenet is for the federal government to make a predetermined contribution on behalf of each person on Medicare that would be applied toward the premium for a health insurance plan. Under the current Medicare structure, Medicare beneficiaries are entitled to a defined set of benefits, with the federal government contributing to the cost of these services via either the traditional fee-for-service program or Medicare Advantage plans.

One of the most frequently cited approaches to premium support gives beneficiaries the option to select from a variety of health plans available in their area. The government would make a payment to that plan on behalf of the beneficiary. If the beneficiary opts for a low-cost plan, the premium would be the same or less than under the current system. If the beneficiary opts for a higher-cost plan, either a private plan or traditional Medicare, the premium would be higher than under the current system.

The Henry J. Kaiser Family Foundation recently released a report titled Transforming Medicare into a Premium Support System: Implications for Beneficiary Premiums. The report examines the possible implications of such a system on Medicare premiums, the extent to which such a system would vary by state and by county, and factors that could drive variations in premiums under a premium support system.

The Kaiser report analyzed an approach to premium support tying federal payments to the second lowest cost plan offered in an area or traditional Medicare, whichever is lower. This approach is similar to the proposal included in Paul Ryan’s (R-WI) budget proposal for fiscal year 2013. The Kaiser analysis layers a premium support proposal onto the current system to facilitate an understanding of the possible effects for beneficiaries if a premium support system had been fully implemented in 2010.

If a premium support system had been in place in 2012, 59% of Medicare beneficiaries who remained in their plan would be expected to pay higher premiums than under the current program, while 41% would pay the same amount or less. If as many as 25% of beneficiaries enrolled in the benchmark plan, then the share of beneficiaries paying higher premiums would drop to 35%.

Among those in traditional Medicare, 53% would pay higher premiums for coverage under the traditional Medicare program. On average, those beneficiaries would pay an additional $60 per month. Among those enrolled in private plans, 88% would pay higher premiums unless they switched to a benchmark plan. The average monthly increase would be $87 per month.

The Kaiser report noted the premium support system would result in wide variations in Medicare premiums across the country. The variations would be created by variations in Medicare spending nationwide, variations in private plan bids relative to traditional Medicare costs, and variations in the share of beneficiaries enrolled in traditional Medicare versus Medicare Advantage plans.

Fewer than 2% of beneficiaries in Alaska and the District of Columbia would be subject to higher premiums if they remained in their same plan versus >90% of beneficiaries in Connecticut, Florida, Massachusetts, and New Jersey.

In 29 states and the District of Columbia, <15% of beneficiaries would pay ≥$100 in monthly Medicare premiums; however, >45% of beneficiaries in California, Connecticut, Florida, New Jersey, and Nevada would pay at least $100 more, unless they switched to a benchmark plan. In addition, ≥50% of beneficiaries in Florida (77%), Nevada (50%), and New Jersey (57%) would be subject to additional premiums of ≥$100 if they remained in the same plan.

There would also be significant variations across states and counties for traditional Medicare premiums, which would be a significant departure from the current program. If a premium support system were to be fully implemented, the average increase in premiums for beneficiaries enrolled in traditional Medicare would be $60 per month.

In 4 states (Arkansas, Delaware, Hawaii, and Wyoming) and the District of Columbia, there would be no increase in premiums for traditional Medicare; however, for those in California, Florida, Missouri, New Jersey, Nevada, and New York, the increase would be $100 per month ($200 per month in Florida).

There would also be variations by county, even within a given state. For example, in California, premiums for traditional Medicare would be unchanged in Sacramento and San Francisco counties, but would increase by >$200 per month in Los Angeles and San Diego counties.

In conclusion, the report’s authors stated, “Given a lack of specificity about some of the key policy elements and questions about the likely response of the insurance industry and beneficiaries, there remains great uncertainty about the expected effects of this approach for elderly and disabled Americans in the future.”