One of the main issues in a premium support system is how the government would determine the amount of the insurance premium payment to beneficiaries. Depending upon how the government calculates its contribution amount, the payment could significantly reduce federal spending on Medicare. Many reform proposals calculate the initial premium support payment amount based on estimates of how much a government-specified package of health care services should cost. The payment would then grow yearly at a rate determined by the government, and would most likely be indexed to either the growth of the Gross Domestic Product (GDP) plus one percent or the growth of the consumer price index plus one percent. However, this growth rate is lower than the Congressional Budget Office’s (CBO) projection for the growth in per-person Medicare costs, which estimates that Medicare’s excess cost growth rate (its increase in spending per person relative to the growth of the GDP per person) will be around 1.7 percent for the next 75 years. By setting a premium support payment growth rate that is approximately 0.7 percentage points below the real health care growth rate, the government would save an enormous of money over time -- more than $35 billion in just the first year, based on current expenditures, and much more as the savings compounded over time.
The other way that the government’s premium support contribution could be determined would be based on competitive bids. Private insurance plans, as well as traditional fee-for-service (FFS) Medicare, would submit bids indicating the payment amount per person that they would be willing to provide for Medicare benefits. The government would then compute benchmarks based on those bids and would contribute to plans’ premiums, up to the benchmark. The key choice then becomes the mechanism for setting the benchmark. For example, the benchmark could be set to equal the lowest bid, the second-lowest bid or a national average of all the bids — each of which has a different payment impact. Any premium support reform proposal must address this design question, as well as determine the premiums that beneficiaries would be expected to pay. It must also address whether payments would be adjusted to account for differences in enrollees’ income and health status, as well as potential geographic adjustments to bid benchmarks and premium support payments. (In the current system, for instance, some hospitals on the edge of big cities vie for rural status because of the positive reimbursement impact.)
When designing a premium support system, the government would also have to determine which benefits the private plans mustprovide. Currently, the benefit package is standardized, because Medicare covers all seniors older than age 65. If an elderly person wants additional coverage, then they have the option to purchase supplemental benefit packages. Under a premium support system, with many different private plans competing on a Medicare exchange, the government would have to decide whether all plans must offer standardized benefit packages with specified cost-sharing requirements, or whether flexible plans can be offered that are actuarially equivalent to the standardized packages.
A standardized benefits package has numerous advantages. First, it would ensure the fairness of the bidding process (if a bidding process is adopted as the mechanism for setting contribution benchmarks). It would also benefit consumers by making it easier for beneficiaries to compare plans, ensure that plans provide adequate coverage, and prevent private insurers from structuring their plans to deter higher-risk beneficiaries. On the other hand, more flexibility in benefit and cost-sharing packages could lead to greater innovation and more efficient care delivery. Finally, if the government’s contribution to the plan is fixed, regardless of the benefit package and bidding mechanism, then it might be best for the government to determine only the minimum coverage requirements and let private plans determine their own supplemental benefit packages.
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