NCPA - Policy Report 261 - Reforming Medicare

NATIONAL CENTER FOR POLICY ANALYSIS
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Reforming Medicare

Recent Reforms and Proposals

Clearly, we are on an unsustainable path. That is one reason for the current interest in Medicare reform. Recent changes in Medicare are relevant to the prospects for reform, and some interesting ideas are being proposed. The following is a brief review.

"The House Democrats' proposal was twice as expensive as the Republican proposal."

Recent Legal Changes. Prior to the passage of the Balanced Budget Act (BBA) of 1997, the Hospital Insurance Trust Fund was quickly approaching exhaustion. By shifting some of the costs of home health care from the HI program - Medicare Part A - to the Supplemental Insurance (SMI) program - Medicare Part B - along with other reforms, the BBA postponed the Trust Fund's exhaustion. While this did not reduce Medicare's total burden on taxpayers, constraints on payments to providers and a more complete plan to risk-adjust payments to private insurers promised to affect costs.

The payment constraints were short-term solutions, and some were relaxed in 1999 by the Balanced Budget Refinement Act. The risk-adjusted payment mechanism was to be developed for Medicare's payments to newly established Medicare+Choice providers. Until 1997, payments to these HMOs were based on county cost factors, such demographic characteristics as the age and sex of their beneficiaries and whether the beneficiaries participated in Medicaid or the Disability Insurance program. Since 1997, the Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration, has developed a more comprehensive way to risk-adjust payments.

Beginning in January 2004, a new risk-adjustment model, the Hierarchical Condition Category (HCC), will calculate a prospective payment for each Medicare enrollee based on age, sex and whether the enrollee has experienced a "selected significant disease." The preliminary version of the HCC model uses 61 significant disease categories to predict an enrollee's expected spending in the following year. In 2004, 30 percent of payments to Medicare+Choice providers are scheduled to be risk adjusted.11

National Bipartisan Commission on the Future of Medicare. The 1997 Balanced Budget Act established the National Bipartisan Commission on the Future of Medicare to develop reforms in anticipation of the baby boomers' retirement. The commission's product, the Breaux-Thomas proposal, did not receive the needed 11 of 17 commission member votes to be recommended to Congress. However, Breaux-Thomas had many features that are relevant to the current debate.

"The Breaux-Thomas proposal would allow beneficiaries to choose their health plans."

The distinguishing component of Breaux-Thomas was a premium support system that would allow beneficiaries to choose from a menu of health plans. The health plans would compete against one another in providing a standard benefit package. Plans could offer more benefits and could set their own deductibles and copays. Private plans and the government fee-for-service plan would offer optional prescription drug coverage. Lower-income beneficiaries would be guaranteed access to the plans offering prescription drugs. Beneficiary premium payments would cover, on average, 12 percent of the standard package's cost.

Breaux-Thomas also recommended combining Parts A and B, lowering deductibles and copays, and providing prescription drug benefits to lower-income retirees as the premium support system was phased in. It further recommended raising the eligibility age to follow Social Security's schedule.

The proposal expected the premium support system to reduce Medicare's growth rate by 1 to 1.5 percentage points below the projected growth at that time. Even so, the commission recognized that the Medicare burden would grow.12

The Bush Administration Proposal. The president's strategy for reforming Medicare includes giving beneficiaries the choice of remaining in traditional Medicare or moving either to a privately run health care plan (similar to the Bipartisan Commission's plans) or to managed care plans (such as Medicare+Choice).

Those remaining in traditional Medicare would receive a discount card, expected to reduce their prescription drug spending by up to 25 percent. Those choosing the traditional Medicare option also would receive coverage against high out-of-pocket spending on prescription drugs.

The second option, "Enhanced Medicare," would give Medicare enrollees choices similar to those in the Federal Employees Health Benefit program. All plans would offer a standard prescription drug benefit at least as generous as that of traditional Medicare, would cover preventive care, and would close the catastrophic gaps in traditional Medicare - at no additional cost to beneficiaries.

A new agency, the Medicare Center for Beneficiary Choices (MCBC), would administer Enhanced Medicare. Plans interested in participating in the new program would compete for patients by submitting bids to the MCBC. Participants would not be constrained in their choice of doctors. It is not clear whether payments to participating insurers would be adjusted for the risks associated with the pool of beneficiaries who choose their plan.

The third option, Medicare Advantage, is a continuation of Medicare+Choice, a managed care program. This option would bid to provide the same expanded services as Enhanced Medicare. Managed care plans limit patients' choices of doctors, but in exchange offer expanded coverage or lower cost sharing.

"The president's proposed reforms would cost $400 billion over the next 10 years."

The president's 2004 budget projects the added costs of his proposed reforms at $400 billion over the next 10 years. By comparison, the prescription drug bill passed by the House of Representatives last summer was projected to add $389 billion to Medicare's costs. Because the House bill would have relieved some of the burden now borne by Medicaid, the net impact on the federal budget was projected to be $337 billion over 2003 to 2012.

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