It is argued that premium support will benefit Medicare participants by giving beneficiaries greater access to higher-quality private insurance plans at lower costs. Yet, it is still unclear whether Medicare recipients will benefit from premium support payments that enable them to purchase private health insurance on a Medicare exchange. Dr. Alice Rivlin, who proposed the program with the Bipartisan Policy Center’s Debt Reduction Task Force, believes that a private market would produce better care for Medicare beneficiaries at more sustainable growth rates, because “with competition among the plans on the exchange and improving information about plan outcomes, seniors can be expected to migrate to lower-cost and higher-quality plans.” Rivlin’s projection is in line with economic theory — increased competition will lead to increased efficiency and cost savings in a perfect market. However, in the real world of the U.S. health care marketplace, many economists do not agree that increased competition is a surefire way to lower prices.
The evidence regarding private insurers’ ability to offer lower prices in competitive markets is mixed. Private insurers have higher administrative costs and provider payment rates, which means that to offer lower bids they must achieve substantial cost efficiencies elsewhere — primarily through lower service utilization or lower provider payments. This has led the Congressional Budget Office (CBO) to conclude that private insurers will be most able to achieve sufficient cost savings, and thus offer lower prices, only in areas where the fee-for-service (FFS) average is high.
In addition, some economic research suggests that even with additional competition, private plans are more expensive. For example, Medicare Advantage (Part C) is a federal program that allows Medicare beneficiaries to choose to enroll in private plans. In 2007, the CBO analyzed the costs and benefits of Part C and found that, “Medicare’s payments for beneficiaries enrolled in [Part C] plans are higher, on average, than what the program would spend if those beneficiaries were in the FFS sector.”
This outcome is largely because of how Part C is designed. The government reimburses private insurers for plan bids that are lower than local benchmarks, but these benchmarks still almost always tend to be higher than the national FFS Medicare average, due to wide geographic variation in costs and utilization rates. Therefore, it is difficult to predict what will happen to prices on a competitive Medicare exchange, because it will largely depend on how the exchange is designed and whether it differs from the structure of Part C. Regardless, in a premium support system, even if costs do not decrease, the government will no longer be responsible for the higher costs, which means either beneficiaries or providers, or both, will be.
RELATED FAQs
What Is the Premium Support Option, and How Is it Different From Current Medicare?
How Would a Premium Support Payment System be Designed?
How Would Premium Support Contain Rising Health Care Costs?
How Would Premium Support Impact Provider Payments?
How Would Premium Support Impact Insurance Companies?
