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What’s the Matter With Medicare?

Behind the GOP’s 2017 Medicare reform plans.

By Dwyer Gunn


Paul Ryan leaves after a news briefing on December 1st, 2016, in Washington, D.C. (Photo: Alex Wong/Getty Images)

In 2017, the GOP will control the White House and both houses of Congress. Not surprisingly, reports are already emerging that Speaker Paul Ryan and his Republican cohorts (including, perhaps, the newly nominated secretary of Health and Human Services, Tom Price) intend to pursue Medicare reform. Though the president-elect vowed to leave Medicare unchanged during much of the 2016 campaign, his transition website now includes a promise to “[m]odernize Medicare so that it will be ready for the challenges with the coming retirement of the Baby Boom generation — and beyond.”

The financial challenges Medicare faces aren’t new. Policymakers have known for years that Medicare Hospital Insurance (HI) Part A trust fund (which covers hospital, nursing home, and hospice care, as well as in-home health services) was going to face serious financial pressures once the Baby Boomer generation began to age.

“Clearly, the pressure on Medicare in the long run is very much in the up direction,” explains Alice Rivlin, an economist at the Brookings Institution who served as the director of the Office of Management and Budget during the first Clinton administration. “We’re going to spend more for Medicare because there are so many seniors, and the Baby Boom generation is retiring and eventually moving into the high spending years of their 80s and 90s.”

Of course, the fact that the HI trust fund is now expected to last a few more years doesn’t mean the program’s financial challenges don’t need to be addressed. Ryan and the GOP haven’t released any specifics on the reforms they’re envisioning, but analysts are turning for clues to the health-care reform blueprint that Ryan released last June. The document calls for a number of reforms, but the most significant, and perhaps most controversial, is the proposal to transform “the benefit into a fully competitive market-based model — known as premium support.” Here’s what Ryan proposed:

Beginning in 2024, Medicare beneficiaries would be given a choice of private plans competing alongside the traditional FFS Medicare program on a newly created Medicare Exchange. Our plan would ensure no disruptions in the Medicare FFS program for those in or near retirement, while also allowing these grandfathered individuals the choice to enroll in the new premium support program. Medicare would provide a premium support payment either to pay for or offset the premium of the plan chosen by the beneficiary, depending on the plan’s cost.

In other words, the government would provide a subsidy to seniors, which seniors could then use to purchase either a private health insurance plan or the traditional Medicare plan. The Ryan blueprint promises that subsidies would be larger for sicker people and lower-income seniors, while “wealthier seniors would assume responsibility for a greater share of their premium.”

Conservatives like the premium support model both for philosophical reasons — it offers individuals more “choice” over their health-care options — and financial ones. The hope is that, in a robust, competitive health insurance marketplace, consumers will shop around for the best-value plan, which would force insurers to compete on both price and quality, and to work harder to control health-care spending.

Opponents of premium support worry the government subsidies will be inadequate, leaving poorer seniors unable to afford high-quality health insurance and vulnerable to debilitating medical bills. They also worry about adverse selection and a Medicare “death spiral”: If private plans are less expensive than traditional, fee-for-service Medicare plans, and if government subsidies aren’t generous enough to cover a traditional Medicare plan, only the sickest people will opt for traditional Medicare, worsening the quality of the Medicare risk pool and further driving up Medicare premiums.

Many Democrats, no doubt well aware of the fact that Medicare is a hugely popular program, are already vowing to fight the so-called “privatization” or “voucherization” of Medicare. But political rhetoric aside, experts say the actual effects of a shift to a premium support model depend largely on as-yet-unknown policy decisions about details like the generosity of the subsidies, how the subsidy amounts are calculated, plan benefit requirements, and so forth.

“Details really do matter, and it will depend on lots of different undecided factors,” explains Tricia Neuman, director of the program on Medicare policy at the non-partisan Kaiser Family Foundation. “So, for example, under one of the proposals, that sets payments based on weighted average, some people would pay more, some people would pay less depending on their coverage preferences. And in high-cost areas, people who prefer traditional Medicare would be expected to face higher premiums for choosing that source of coverage. But, in some low-cost areas, people could end up paying more for their private plan than they would if they switched to traditional Medicare.”

Alice Rivlin, who collaborated with Ryan on a Medicare reform proposal in 2010, believes it’s possible to design a premium support model that both provides sufficient coverage and curbs health-care spending and points out that the current Medicare Advantage program can serve as both a model and starting point. “The place I would start is to make Medicare Advantage more competitive,” Rivlin says. “So that Medicare Advantage plans compete on an exchange, and actually compete on price and quality. And then if that’s working well, you could add in a traditional Medicare plan to compete alongside the others. There’s some difficulties in doing that — you would have to have a more sophisticated risk adjustment mechanism, for example, but I think it can work.”

Regardless of how Medicare reform plays out in 2017, any changes will apply only to future retirees, not those currently in or near retirement, both for logistical reasons and because most politicians don’t wish to commit career suicide.

“One of the ways in which proponents of premium support have sold the idea is to say ‘Well, we’re really going to leave grandma alone.’ So the idea is a little more palatable for their public,” Neuman says. “But it does raise the question of what happens to the health and retirement security of people who are now in their 40s and early 50s who will one day retire and may be living on modest incomes. For them, the details of Medicare will matter.”