Ethics & Public Policy Center

Some Progress on Premium Support

Published in National Review Online on September 20, 2013


Remember Medicare premium support? That’s the serious entitlement-reform plan championed by Congressman Paul Ryan (and former Clinton budget director Alice Rivlin and, for a time, Democratic senator Ron Wyden too), various versions of which were included in the budget plans passed by House Republicans in 2011, 2012, and 2013.

It was also the main plank in President Obama’s campaign to demonize his opponents in the run-up to the 2012 election. Beginning in the spring of 2011, just after the first Ryan budget plan had been adopted in the House, the president and his allies engaged in a coordinated and demagogic campaign to pretend premium support meant the evisceration of the American safety net. In some of the most over-the-top partisan rhetoric of his time in office (which is saying something), the president repeatedly said, falsely, that premium support “would end Medicare as we know it.”

Unfortunately, the president and his allies were in part aided by very incomplete analyses of the premium-support concept coming from the nonpartisan Congressional Budget Office (CBO).

But now, with the election year over, the CBO has issued a new assessment of the premium-support concept that, despite coming too late to undo some of the damage done in 2011 and 2012, should permanently put to rest the notion that premium support would radically alter Medicare or undermine its protections of America’s senior citizens.

The CBO concedes in its new report that its previous estimates of premium support were based on analyses that simply did not address key features of the reform plan. Among other things, the CBO admits that previous estimates did not incorporate careful modeling of how the competitive environment of premium support would intensify financial incentives for insurers. Nor did they carefully model how beneficiaries would respond to the new incentives they would face under the reform. The result was analyses that, in the CBO’s own words, did not capture “the full effects of a competitive system on federal spending or payments by beneficiaries.” The whole point of premium support is to foster intense price competition in Medicare, improve value, and bring down cost escalation for the taxpayers and the beneficiaries, so the office’s original analyses were sorely lacking.

The CBO’s new analysis concludes that, depending on the specifics of the reform, it would indeed be possible to build a program that moderates federal costs and eases premiums for beneficiaries. For instance, under a premium-support model that used the average of premium bids by region (weighted by the size of the insurer’s beneficiary enrollment) to determine the government’s contribution, federal spending would drop by 4 percent relative to current law and beneficiary premiums would fall by 6 percent.

The key change in the CBO’s assessment: They forecast that intense price competition would cause the private insurance plans to submit bids that are 4 percent below the bids they would submit under today’s Medicare Advantage program. That’s a big difference, given that Medicare’s total per capita costs are expected to approach $12,500 in 2020. This assumed reduction in costs from private insurers would mean an even wider cost gap than the one that already exists between today’s Medicare Advantage plans and the traditional fee-for-service (FFS) program. CBO’s assessment leaves no doubt that private plans, properly run, can deliver Medicare benefits at far lower cost than the existing fee-for-service plans in most regions of the country.

The CBO also expects the premium-support model to moderate health-care cost inflation over the medium and long term by creating strong incentives for health plans and those delivering services to patients to become ever more productive each year. They would look for ways to use technological advancements to cut costs, reduce waste, and improve value for their enrollees.

These are important admissions from the CBO. For years, a debate has raged over whether or not strong marketplace competition could work to discipline costs, and the CBO more or less said in the past that it did not know the answer. This study very firmly comes down on the side that, yes, competition can work.

But, this being the CBO, the new assessment is still not what it should be. Among other things, it assumes that a sizeable segment of the beneficiary population will choose to pay higher premiums under the reform because they will resist migrating out of expensive FFS into lower-cost private options. Under a reform plan that uses the second-lowest-cost plan in a region (instead of the weighted average) to establish the government’s premium-support contribution, premiums in expensive FFS regions will be well above this “benchmark” plan. The CBO assumes that many beneficiaries will continue to pay these higher premiums instead of switching to lower-cost options. But it would be equally if not more valid to assume that the new environment created by premium support would increase the comfort level of most seniors with private-plan options.

At this point, there really should not be any doubt that premium support is the right answer for Medicare. It has been almost ten years since Congress created the prototype for the reform — the Medicare drug benefit. By every measure, that program has been a remarkable success. Costs are under control, the beneficiaries are very satisfied, and the benefit is improving the health of the Medicare population.

The drug benefit has all of the essential ingredients needed to make competition work in health care, especially a defined contribution from the government that does not increase when a beneficiary enrolls in a relatively expensive option. This is a powerful incentive for the beneficiaries to enroll in low-premium, high-value plans. The program’s track record speaks for itself, and the reason it is successful is straightforward too: Competition works.

Fortunately, CBO seems to be coming around to that conclusion too, if a bit belatedly.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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