Premium support does not directly address the more important issue influencing the rise in health care spending — the persistent growth in the cost of health care per person. Confronting this underlying issue would require legislation that focuses on improving care quality, while keeping costs down. This is often referred to as “bending the cost curve,” alluding to the graph of rising per-person health care costs. If the government does not attempt to directly contain the increasing costs and complexity of health care, the price of health care will continue to grow at a rate that is faster than the gross domestic product (GDP), making health services more expensive for both beneficiaries and providers in the future.
Currently, there is no conclusive evidence that enrolling beneficiaries in private insurance plans reduces per-person costs. In fact, Congressional Budget Office (CBO) evaluations present evidence to the contrary: Private plans deliver the same Medicare benefits to enrollees at a cost that is between three and 11 percent higher than those of the traditional fee-for-service (FFS) program, primarily because of higher administrative costs and higher payment rates to providers. While private insurers may have more incentive to lower their prices when competing on a Medicare exchange marketplace, they will not set prices below marginal costs, which they may not be able to reduce much further if medical costs continue to rise. Thus, moving beneficiaries off government FFS insurance and into private insurance plans is not a direct way to reduce per-person health care costs.
In addition, neither premium support payments nor private insurance tackles one of Medicare’s most pressing and costly problems — a delivery process that is fragmented and uncoordinated. Such fragmentation often leads to unnecessary patient procedures that increase costs without improving outcomes. To address this issue, the government would have to implement better methods for improving coordination, avoiding service duplication, and eliminating extraneous costs. Health maintenance organizations (HMO’s) are able to do this using a variety of techniques, such as: contracting with low-cost providers; giving primary care physicians responsibility for coordinating care; requiring prior authorization for certain services; giving providers financial incentives that discourage excessive use of services; and educating providers on practice guidelines and offering feedback on their practice patterns. For the most part, private insurers have not adopted these methods, therefore there is no reason to believe that private plans’ participation in a premium support system would necessarily better contain per-person costs.
On the other hand, health care costs per person may begin to increase at a slower rate if beneficiaries begin paying more of their health care costs and thus start using fewer services. The current Medicare FFS structure largely insulates beneficiaries from the financial consequences of their treatment decisions, which leads to greater use of services and higher Medicare spending. Premium support would change this, by capping government contributions to health care insurance premiums, thus leaving any excess costs to be divided somehow among the insurance company, providers and beneficiaries. As beneficiaries come to bear more of the costs, they will most likely become more conscious of the volume of services they consume. In this way, premium support could reduce the number of unnecessary services consumed, and also incentivize more oversight of health care providers, who have been criticized for over-provision of services.
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 Impact Provider Payments?
How Would Premium Support Impact Insurance Companies?
How Would Premium Support Impact Medicare Beneficiaries?