• Premium support proposal and critique: Intro

    This is a FAQ entry. See the main FAQ index for others. See also the related entry on competitive bidding.

    I’ve written a lot about Medicare premium support and a particular “competitive bidding” version of it. However, I recognize that it would be hard for anyone not closely following the blog to put together all the pieces from my posts (though, there is this FAQ, which should help some). Recently, I wrote something for an email correspondent that pulls together a lot of the concepts. I’m going to reproduce that here, in several posts. Then I’m going to write a bunch more posts that critique the ideas.

    Here’s how it’ll work. I want you to understand. To make it easier, I will write about a specific premium support proposal in my next post in this series. You won’t find that entire proposal anywhere else, but it draws from several other sources, notably the ideas of Coulam, Feldman and Dowd and the Domenici-Rivlin plan. I’m going to deliver this proposal as if I think it’s how the world should be. But don’t be fooled, because then, as I said, I’m going to critique what I wrote and tell you what the key issues are. Maybe the world shouldn’t be that way after all!

    As I do this, feel free to ask questions and make your own criticisms in the comments. I’ll answer questions in the third post and then turn to critiques. The ones I think have the most merit and/or are the most interesting, I will include in my critique posts. One more preliminary remark before I begin: There are a lot of variations on what I’m going to describe. “Premium support” is not one thing. For simplicity I will describe just one thing. Just keep in mind that it can be tweaked in many dimensions. Maybe some of those will come up in the critiques.

    Part 1 is about the problems I think premium support is supposed to solve and the goals for the proposal I will make. An index to subsequent posts appears at the end (hyperlinks to be added as the posts go live).


    Traditional Medicare’s (TM’s) benefits are uniform, but limited. It is natural for beneficiaries to want coverage beyond that available through TM today. For the program to provide greater benefits (e.g. lower cost sharing or coverage for additional services like dental or long-term care) invites two problems. The first is cost and the second, not unrelated, is politics. Cost itself has two components: the per person cost of the benefit enhancement and the number of beneficiaries covered. If the expansion is to occur through TM, all beneficiaries are covered (potentially crowding out coverage provided by other means: supplements and current Medicare Advantage (MA) plans), maximizing that component of cost.

    In some sense this is just silly accounting. If benefits are provided by other means but at higher per person cost (though they may not be), then moving them to TM, bringing them onto the federal budget, is actually cheaper overall. But then there’s the politics of the federal budget, including the debate over taxes and redistribution, which are severe. That cannot be denied. They generally preclude substantial enhancement of the Medicare benefit, particularly one that would require higher taxes to remain budget neutral. (The 2003 addition of a drug program, implemented in 2006, is the only major exception in the program’s history.)

    The other political reality is that Medicare has been a public-private hybrid program for decades. The degree of private plan participation is driven, in part, by the level of payment those plans receive, which is itself driven by the political winds. One may wish to drive private plans from the program, but it seems unlikely that will ever be fully accomplished. One may wish that TM “wither on the vine.” That too seems politically unlikely. The political equilibrium is somewhere in between. And, as stated above, private plans actually provide some things beneficiaries want that they cannot obtain through TM. There are reasons to maintain TM too.

    Let’s take all that seriously. Just because the TM benefit cannot be enhanced does not mean beneficiaries do not want additional coverage. Many do. Today, 25% of them obtain it through MA, which is largely taxpayer financed. MA has been notoriously overfunded through an arbitrary, Byzantine, administrative, and politically distorted system. There are good reasons to change how MA plans are paid. However, it cannot be denied that paying MA plans less will reduce benefits for beneficiaries that enroll in such plans. For many of them, there is no good substitute that does not cost more (e.g. Medigap). Thus, reducing public payment to MA plans is a cost shift to the beneficiaries enrolled or who would be enrolled in those plans.

    MA plans are subsidized, and so is TM, but according to a different system. Part D drug plans are on yet another subsidy system and I will leave them out, for simplicity, if not for other reasons. In this sense, a version of premium support (public assistance in covering plan premiums) exists today, it’s just not one anybody is likely to design for sound policy reasons. It largely serves political purposes. It’s natural to consider reform.

    The question becomes, how can Medicare move away from its current, arbitrary system of public and private plan subsidization and make efficient use of taxpayer funds and beneficiary premiums while respecting concerns of stakeholders and the following three (stylized [1] ) constraints? (1) TM’s benefits cannot be enhanced; (2) Medicare is a public-private hybrid; (3) Beneficiaries have heterogeneous preferences in coverage, including for benefits different from those offered by TM.

    One answer is to be found in a version of premium support, but one that satisfies many additional criteria beyond those articulated by many engaged in the current policy debate. Those criteria derive from respecting the legitimate concerns expressed in that debate. I will describe them in subsequent posts (see index below). Note that there is no goal inherent in the version of premium support I will sketch other than those expressed in the preceding paragraph. It is not a way of privatizing Medicare any more than it is already privatized. Instead, it’s a way of making Medicare more efficient while respecting its constraints and the interests of stakeholders. That alone distinguishes it from versions of premium support offered by others.

    If I succeed in convincing the reader that a version of premium support can satisfy the goals set forth above, then I will have revealed that many who claim that Medicare can either be a market-based system or one governed by government payment structures, such as those in the ACA, have offered a false choice. If my proposal has merit, then Medicare can be efficiently both. As promised, I will critique my own proposal. So I may succeed in convincing you and then unconvincing you. I may convince and unconvince myself. So be it.

    Start cranking out your questions and concerns.

    Index to posts in this series

    [1] By “stylized” I mean these aren’t hard and fast constraints. It’s not logically impossible for them to be violated. It is just historically and politically very unlikely.


    • I think you have set up a false set of constraints which help lead to your desired conclusion.
      – 1. TMs benefits cannot be enhanced.
      Why? There is broad popular support for more benefits. There are large areas of waste in the current system. There is even room for more taxes to support additional funding if you ignore the tea party/corporate wing of our politicians.
      – 2. Medicare is a public private hybrid.
      True but all of the private part is a mess. MA costs more than TM, cherry picks clients and wastes resources. It is a failure. The Medigap private policies are a confusing mess of overpriced and underperforming insurance plans. (I speak from direct painful experience just having spent several days with my brain exploding trying to figure out my Moms Medigap options.)
      – 3. Beneficiaries have heterogeneous preferences for coverage…
      Everyone wants coverage for their particular health needs and they want this coverage to include whatever future needs they may have. So in one view, yes, each person has different coverage preferences. But in a broader view, everyone has the same coverage preferences… everyone wants their health needs covered.
      Any attempt to divide coverage to tailor to an individual just introduces inefficiencies and moral hazard into the market.

      If you accept your constraints, you will end up designing ever more complex private health insurance schemes which will have the effect of confusing patients (costing them more) and enriching the health industry (which will be able to exploit the confusion and divided purchasing power).

    • Austin, thanks for tackling this topic and trying to seperate it from the political agendas of so many who propose premium support. I am not sure why you assume benefits cannot be expanded? I think that is only a fair assumption if you assume no new revenues — and there is no economic reason to assume that. On a related note, I also wonder whether extending program solvency shouldn’t also be a criteria?

    • Do you know if Congressman Ryan’s version of premium support eliminates the taxpayer subsidy for Medicare Advantage? Will your discussion eliminate this $14 billion (and growing) subsidy? If some form of premium support is initiated and the MA subsidy continues, then the unfairness in benefit features to recipients of regular Medicare and the extra cost to taxpayers continues.

      I look forward to reading your entire series.