Report finds flaws in proposals for premium support programs in Medicare

The Urban Institute issued a report titled “Restructuring Medicare: The False Promise of Premium Support,” in which the authors attempt to point out the potential flaws in the proposed premium support program in Medicare. The report states that the proposals attempt to model the program off of the arguably successful Medicare Advantage (MA) program, but fail to account for the features of MA that actually make it work. According to the Urban Institute, the proposals also ultimately shift the burden of the rising cost of the Medicare program to the beneficiaries, who are not in a position to shoulder the increased costs.

The proposal

Current Medicare beneficiaries can choose between traditional Medicare, where they have defined benefits covered by specified providers, or MA, where the beneficiary picks from a selection of private plans that have been approved by Medicare and charge close to traditional Medicare costs. A premium support program would allow beneficiaries a fixed-dollar contribution that they could take and apply to the insurance plan they choose in a health insurance marketplace. Beneficiaries could choose a plan that costs more than their Medicare contribution amount, but they would be responsible for paying the difference out of their own pocket. Supporters of this proposed program argue that setting a fixed cost for each beneficiary would reduce government spending and the marketplace would create competition, which would in turn drive down prices.

Burden shifting

Proponents of the premium support plan argue that without the plan, the Medicare program will run out of money, noting that the “CBO projects that between 2017 and 2047, Medicare spending will grow from 3.1 percent to 6.7 percent of GDP.” However, the report argues that the proponents of are focusing on the wrong problem. The aging-in of the baby boom generation is expected to increase Medicare enrollment by about 50 percent by 2030. By focusing on the cost of premiums and restructuring the program to force more beneficiaries to pay more out of pocket, they are shifting the burden of the increase in incoming enrollees to the beneficiaries. Medicare beneficiaries reported an annual median income of about $25,000 in 2012. “Medicare households spent nearly three times as much of their household budgets on out-of-pocket spending as non-Medicare households did” in 2012. A premium support plan could potentially increase the financial burden on those low-income beneficiaries, and force them into plans that they wouldn’t choose otherwise just to alleviate some of that financial burden.

Competitive markets

Proponents argue that forcing insurance plans to submit bids to participate similar to the way MA does would create competition and lead to lower premiums. The government contribution would then be set based on a weighted average of all of the bids for each region. However, premiums can drastically vary within a region and if premiums are higher in an area than the benchmark government contribution for the region, beneficiaries would be forced to pay the difference. The difference between earlier versions of the premium support plan and the current proposals show that the proponents have noted that there would not be an even playing field in all areas and they have attempted to come up with different ways to set the government contribution amount and increase it annually based on different factors. The MA program has an administratively set benchmark government contribution that is based on traditional Medicare spending in each area, which varies significantly compared to the bids.

Providers who bid to participate in MA are aware that there is a billing limit and they will be paid Medicare rates. The premium support plan does not take into account the impact this has on who submits bids and at what rate. In 2013, “CBO found that commercial insurance rates for inpatient hospital services were 89 percent higher than traditional Medicare rates, but Medicare Advantage plan rates for inpatient services were roughly equal to traditional Medicare’s rates.” Private insurers competing with one another in the bidding process are not likely to drop their prices down to Medicare level rates unless limits are placed on the billing of Medicare beneficiaries, similar to the limits in the MA programs. This leaves Medicare beneficiaries effectively priced out of these competing private insurance plans.

ACA changes contributed to slow in health care expenditures, study finds

Despite conventional wisdom that the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) has done little to address high growth in health care costs, national health expenditures have grown at historically low rates in recent years, according to a brief by the Urban Institute and Robert Wood Johnson Foundation. The slower growth is related in part to the recession and slow economic recovery, but changes associated with the ACA also seem to have contributed. Analysts predict that these factors will likely cause the slower growth rates to persist into the future.

In February 2017 CMS estimated that national health expenditures grew 4.3 percent annually from 2010 to 2015, lower than its original forecast of 6.5 percent (see CMS actuary releases 2016-2025 health care expenditure projections, Health Law Daily, February 16, 2017). Current estimates of growth in each component of spending for 2010 to 2015 are lower than the original forecast—from 5.8 percent to 4.5 percent for Medicare, from 9.9 percent to 6.5 percent for Medicaid, and from 6.6 percent to 4.4 percent for private insurance.

The report attributed the slower growth to the 2007 to 2009 economic recession and slow recovery, unexpectedly low inflation, increased employer offerings of high-deductible insurance plans, cost-containment efforts within state Medicaid programs, and Medicare policies unrelated to the ACA. The ACA probably also contributed to low spending growth—for example, Medicare payment reductions to hospitals and other providers, the reduction in Medicare Advantage payments, and the managed competition structure of the marketplaces, which were reflected in the 2010 forecast.

Other ACA-related factors not in the original forecast that might have helped slow spending growth include adjustments to ACA Medicare payments, which reduced the number of Medicare hospital days, outpatient visits, skilled nursing facility days, and advanced imaging procedures between 2010 and 2014. Lower Medicare payment rates might also have had spillover effects on other payers. In addition, Medicare policies such as financial penalties for hospital readmissions could have changed provider practice patterns for patients of other payers.

CMS actuary releases 2016-2025 health care expenditure projections

The growth in national health expenditures is expected to average 5.6 percent annually over 2016-2025, according to a report from the CMS Office of the Actuary. Health care spending is projected to grow 1.2 percentage points faster than gross domestic product (GDP) during this period. As a result, the health share of GDP is expected to rise from 17.8 percent in 2015 to 19.9 percent by 2025. This growth in national health expenditures is driven by a projected faster growth in medical prices, offset by a projected slowdown in the use of medical goods and services. The projections in the report are based on current law and do not assume potential legislative changes by the new administration.

The report also projects health care spending to grow 5.4 percent in 2017, due to faster growth in Medicare and private health insurance spending; and at an average rate of 5.9 percent for 2018-19, as projected growth in Medicare and Medicaid accelerates. For 2020-25, an average growth of 5.8 per year is projected, due to the deceleration in growth in the use of medical goods and services.

ACA-related findings

Although the largest health insurance coverage impacts from the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) have already been observed in 2014-15, the report projects the insured share of the population to increase from 90.9 percent in 2015 to 91.5 percent in 2025. The report attributes this increase to continued growth in private health insurance enrollment, in particular for employer-sponsored insurance, during the first half of the decade.

The report also projects that national health spending growth decelerated from 5.8 percent in 2015 to 4.8 percent in 2016 as the initial impacts associated with the ACA expansions fade. In addition, Medicaid spending growth is projected to have decelerated sharply from 9.7 percent in 2015 to 3.7 percent in 2016 as enrollment growth in the program slowed. Similarly, it is projected that private health insurance spending slowed from 7.2 percent in 2015 to 5.9 percent in 2016.

Payer findings

Additional report findings regarding payers include:

Medicare. Medicare spending is projected to grow at an average rate of 7.1 percent for 2016-25, 7.6 percent for 2020-2025, and 8 percent for 2020.

  • Following consecutive years of expected slow growth of 3.7 percent in both 2016 and 2017, Medicaid spending growth is projected to quicken and average nearly 6 percent through 2025.
  • Private health insurance. Enrollment in private health insurance is projected to average 0.5 percent in growth for 2016-25; 5.7 percent for 2018 through 2019; and at an average rate of 5 percent per year for 2020 through 2025.
  • Out-of-pocket. Out-of-pocket spending growth is projected to accelerate 3.6 percent in 2016 from 2.6 percent in 2015; grow 4.8 percent for 2016 through 2025; steadily increase to a high of 5.8 percent in 2020; and then average 5 percent growth in the final years of the period.

Health sector findings. Major report findings by health sector include:

  • Total hospital spending is projected to grow at an average rate of 5.5 percent per year for 2016-25, compared to 4.9 percent for 2010-15.
  • Physician and clinical services. Growth in spending on physician and clinical services is projected to have accelerated slightly in 2016 to 6.6 percent, from 6.3 percent in 2015. It is projected to slow to 5.9 percent in 2017.
  • Prescription drugs. Prescription drug spending growth is projected to decelerate from 9.0 percent in 2015 to 5.0 percent in 2016 due to reduced use of newly approved specialty drugs, as well as an increase in the number of brand name drugs losing patent protection. It is projected to grow an average of 6.3 percent per year for 2016 through 2025.

Government spending. The report found that health care spending financed by federal, state, and local governments is projected to have grown 4.4 percent to $1.5 trillion in 2016; and is projected to increase to 47 percent of national health expenditures by 2025 (up from 46 percent in 2015).

Federal and beneficiary spending on Medicare will skyrocket if ACA repealed

Repeal of the Affordable Care Act, as promised by the incoming Congressional leadership and President-elect Donald Trump’s (R) Administration, would not only increase Medicare spending but also lead to higher beneficiary costs, a less-solvent Part A trust fund, and the return of the Part D drug benefit “doughnut hole.” The Kaiser Family Foundation (KFF) published an issue brief on the Medicare implications of repeal of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), finding that the Medicare provisions of the ACA have strengthened Medicare’s financial status for the future, and repeal would weaken the program.

KFF noted that the Congressional Budget Office (CBO) estimated an increase in Medicare spending of $802 billion from 2016 to 2025 if the ACA were repealed in full (see Repealing the Affordable Care Act—an unaffordable idea?, Health Reform WK-EDGE, June 24, 2015). This increase would primarily be attributed to higher payments to health care providers and Medicare Advantage (MA) plans, which the ACA reduced based on the expectation that due to coverage increases, hospitals would have fewer uninsured patients.

Repeal of the ACA would increase Medicare Parts A and B spending by $350 billion over 10 years. It would also increase Part A deductibles and copayments and Part B premiums and deductibles. Similarly, the ACA removed a payment per enrollee discrepancy that paid MA plans 14 percent more than traditional Medicare; in 2016, MA plans only received 2 percent higher payments than traditional plans. A repeal would increase MA spending; however, it would also potentially reduce MA enrollees’ costs or allow them to receive additional benefits.

Under the ACA, certain Medicare benefits are available with no cost-sharing, including a yearly exam and some preventive screenings. The ACA also closed the coverage gap, or doughnut hole, in the Part D drug benefit. Without these changes, beneficiary costs would increase for preventive services and drugs.

The ACA played a role in extending the solvency of the Medicare Trust Fund by establishing new dedicated sources of revenue. As a result, four years’ time was added to the Medicare trustees’ projection of asset depletion in 2014 (see Life expectancy of Medicare trust funds extended to 2030, July 30, 2014). A repeal of these revenue provisions would give the Trust Fund a shorter lifespan.

The analysis also considered repeal of the ACA’s provisions for the following:

  • Freezing income thresholds for the Part B income-related premium;
  • Creating a formal method to expand payment and delivery system reforms through the Center for Medicare and Medicaid Innovation (CMMI);
  • Reducing preventable hospital readmissions and hospital-acquired conditions; and
  • Establishing new accountable care organization (ACO) programs.

Overall, KFF determined that ACA repeal without corresponding replacement legislation would weaken Medicare’s financial status for the future while costing beneficiaries and the federal government more.