On Reforming Medicare

Policy Backgrounders | Health

No. 151
Friday, February 04, 2000
by John Hoff


The Breaux-Frist Proposal: A Competitive Premium System

These problems and different perspectives on what reform means came to a head in the deliberations of the National Bipartisan Commission on the Future of Medicare. The commission's organizational statute required that 11 of its 17 members agree on any recommendation. No proposal received that supermajority support, and the commission did not issue a recommendation. However, Sens. Breaux and Frist developed legislation (S.1895) that incorporates the fundamental principles established in the commission's proposal. S.1895 addresses both benefit expansion and system reform in the same package, illustrates the types of change necessary and demonstrates the scope of the problems that Medicare faces even with reform.

"The core recommendation: restructure Medicare along the lines of the federal employees health plan."

The core recommendation of the commission, carried forward by S.1895, is to restructure Medicare, using as a model the Federal Employees Health Benefits Program (FEHBP). The FEHBP covers nine million federal employees, retirees and their families, including members of Congress. Under S.1895, beneficiaries would be subsidized by the federal government (as they are today) for participation in any of the competing private or government-sponsored plans offered under Medicare, including the current Medicare fee-for-service program. Depending on the plan chosen, beneficiaries could pay as little as nothing up to the current Part B premium ($45.50) for all Medicare benefits and would have the option to pay slightly higher premiums for drug coverage and/or additional benefits not offered by Medicare today.

The contribution amount would be based on the national average - weighted by plan enrollment and adjusted for risk and geography - of the premiums for standard benefits. The standard benefit package would be "all services guaranteed under the existing Medicare statute."6 Plans could offer additional benefits, but a Medicare Board would be required to approve variations to ensure that the "overall value of the package would be consistent with statutory objectives and would not lead to adverse or unfavorable risk selection problems."7

Breaux-Frist would peg the overall Medicare contribution to 88 percent of the national average of the cost of the standard benefit package. This is more than the government is forecast to provide in 2015 under current law (86 percent).

"Medicare would pay for a standard benefit package."

By contrast, under Breaux-Frist the amount of Medicare's contribution would be guaranteed. However, the contribution would be calculated based on the standard benefit package and would be calculated so that the subsidy decreases the more expensive the plan becomes. Beneficiaries would not pay more than they do today in Part B premiums for a plan that represented the national weighted average, but could receive 100 percent subsidy for a plan that is less than 85 percent of the national weighted average.

In rural areas, where managed care and competition among plans is unlikely, beneficiaries would be protected from paying premiums that are higher than the current Part B premiums (or 12 percent of total spending on Medicare).

Establishing a Medicare Board. The new Medicare Board proposed to administer the Competitive Premium System would oversee competition among private and government-sponsored (the continuing HCFA-run fee-for-service) plans. The board is viewed as the Medicare equivalent of the Office of Personnel Management, which manages the federal government's health insurance for its employees. It would, among other tasks, compute payments to plans, manage an open-enrollment period, provide comparative information, enforce financial and quality standards, review and approve benefit packages and service areas to preclude adverse selection and, most importantly, negotiate health plan premiums.

"The Medicare Board would have to be designed carefully so it could not become a new, expanded HCFA."

The board would have strong purchasing power as well as regulatory authority. It would exercise its authority by regulation and negotiation with plans rather than by regulating providers directly as HCFA now does. Because there is potential to structure a board based on increased regulation, the board would have to be designed carefully so it could not become a new, expanded HCFA.

Further, to preserve a private market, S.1895 lets plans decide what benefits, above the minimum, they would offer, and at what price. And it would have to leave the purchasing decision to the beneficiaries.

Providing a mechanism for outpatient drug coverage. Under the Breaux-Frist proposal, all health plans offering Medicare coverage, including HCFA, would have to offer a standard plan that includes all current Medicare benefits as well as a high-option plan that includes current benefits, prescription drug coverage and stop-loss protection. Thus, beneficiaries would have the option to choose a plan that best suits their individual health care needs. At the same time, S.1895 would provide prescription drug coverage at no premium cost to beneficiaries with incomes less than 135 percent of the federal poverty level. S.1895 would also subsidize the cost of drug coverage for all beneficiaries with a premium "discount" based on a sliding scale for those with incomes between 135 percent and 150 percent of poverty and a guaranteed 25 percent discount off premiums for beneficiaries with incomes above 150 percent of poverty.

Combining the Part A and B Trust Funds. With Part A and Part B combined into a single trust fund, the Medicare Board would report on the extent to which Medicare was funded through general revenues. If general revenue funding exceeded 40 percent, Medicare would be considered "programmatically insolvent." The automatic appropriation would not be effective for amounts above this level, but instead Congress would have to approve any additional expenditures from general revenues, thereby creating a responsible mechanism in which to determine the financial viability of the program.


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