Jeb Bush's Plan to Reform MedicareCommentary by John R. Graham
November 09, 2015
Jeb Bush's Medicare reform contains two proposals — premium support and Health Savings Accounts — that will have a significant, positive effect on seniors' access to care and Medicare's finances. In particular, the proposals will address four flaws in Medicare Advantage, an alternative to traditional Medicare in which seniors choose a plan from a private insurer.
Although Obamacare tried to cut seniors' access to private plans, the use of these plans continues to grow. Before Obama took office, one-quarter of beneficiaries chose Medicare Advantage plans. Today, about one-third do. But despite their popularity, private Medicare plans do not live up to their potential for cost-effectiveness.
The first major flaw of Medicare Advantage is that its costs are deliberately hidden from seniors. Their premiums pay a small share of costs, while federal taxpayers shoulder the rest behind the scenes. In Bush's premium-support plan, by contrast, all seniors are given a fixed amount of taxpayer money up front, which they can put toward a plan (including traditional Medicare if they desire). This means that seniors will know how much taxpayers are supporting them.
President Obama has mocked this as "some kind of voucher." However, disclosing Medicare's full costs to seniors when they make their coverage choices will help them understand how important it is to future generations that we get its costs under control.
Second, Medicare Advantage plans compete by submitting bids to Medicare, and if a bid is higher than a government-set benchmark for the area, enrollees must pay the difference. But incredibly, insurers are paid according to the benchmark, even if the typical bid is much lower. Abolishing the benchmark and setting premium support based on the average bids, as Bush's plan would do, will save taxpayers money without harming beneficiaries' access.
Private plans will not like this. However, Bush's proposal also addresses a third flaw that limits private plans' opportunities: Because he would set premium support based on private bids, and since seniors would get the same amount of support whether they chose a private plan or traditional Medicare, private plans would have an advantage in places where they provided better service at lower cost than the government-run alternative. In other words, private plans would genuinely compete with traditional Medicare, in which the government hires contractors to pay hospitals, doctors, and other providers according to Soviet-style, fixed-fee schedules.
Experts estimate that premium support will cut 4 percent to 6 percent from Medicare spending, and that this will compound over the years. Further, this is a campaign promise that is likely to be kept if Bush is elected. Paul Ryan, the newly elected speaker of the House of Representatives, has championed premium support for years, and it has the support of the House majority.
Bush's second proposal is to increase the use of Health Savings Accounts by seniors. HSAs are tax-free accounts that have existed for a decade and have proven to reduce the rate of growth of health spending. According to consultants at Devenir Health, 14 million people had HSAs last year, which had aggregate assets of $24 billion.
Medicare beneficiaries cannot contribute to HSAs, and Bush would change that. However, his proposal goes further, allowing health plans to fund beneficiaries' HSAs. This addresses Medicare Advantage's fourth flaw: Health plans are unable to enlist beneficiaries' interest in reducing Medicare's costs by rewarding them for doing so. Because Medicare Advantage plans cannot rebate money into seniors' HSAs, they compete to enroll members through enticements such as fitness-club memberships. This is not a good use of taxpayers' money.
Allowing health plans to put Medicare dollars under patients' direct control will cause costs to plummet. For example, Medicare has been paying over $4,000 for power wheelchairs. They can be purchased for around $3,000, or even less in some parts of the country. A senior with Medicare money in his HSA has an obvious interest in saving a thousand dollars or more on his power wheelchair. This reform will cut costs faster than does Medicare's current method, which relies on bureaucratic price fixing.
Bush also recognizes seniors are ready to take advantage of fast-growing innovation in health information technology, especially telehealth and mobile health. Most of these innovative services are not covered by Medicare. Bush would fix this, and seniors would be able to use their HSAs to choose lower-cost telehealth services instead of frequent office visits.
Kicking necessary Medicare reform down the road has been a tactic employed by too many politicians who are afraid of the challenge. Jeb Bush's Medicare-reform plan embraces changes that will protect and improve the program for current and future beneficiaries.
John R. Graham is a senior fellow at the Independent Institute and a senior fellow at the National Center for Policy Analysis.