Senator Max Baucus (D-MT) is proposing major changes to the
Medicare program under the America's Healthy Future Act of 2009.
According to the Congressional Budget Office (CBO), these changes
would reduce Medicare spending by hundreds of billions of dollars
over 10 years. Unfortunately, the projected Medicare savings would
not be sequestered and redirected back into the financially
troubled Medicare program, nor would they constitute a down payment
on real Medicare reform. This policy would, in other words, simply
fuel expanded government at taxpayers' expense.
The Medicare proposal is a grab bag of large and small policy
changes ranging from benefit expansions to payment formula changes
for doctors (including the physician payment update) and hospitals
combined with new reporting requirements and even more layers of
regulation. The CBO estimates that these Medicare payment changes
would save an estimated $182 billion over 10 years. But the major policy
change is the introduction of "competitive bidding" to Medicare
Advantage, a new way of financing the system of private health
plans created by the Medicare Modernization Act of 2003. This would
save an estimated $123 billion over 10 years.
A Policy Success
In many (though not all) respects, Medicare Advantage has been a
policy success. Traditional Medicare covers slightly more
than half of the health care costs of senior and disabled citizens.
To make up for the gaps in Medicare coverage, roughly nine out of
10 enrollees buy some form of supplemental private insurance or
Seniors who enroll in Medicare Advantage--approximately 23
percent--usually pay a single premium and have broad access to a
variety of integrated private health plans, including HMOs, local
and regional PPOs, private fee-for-service plans, "special needs"
plans and even medical savings account plans. The plans offer a
broader and richer package of health benefits, including preventive
care and prescription drugs, and deliver superior value for
seniors' dollars. Note the Medicare Advantage enrollment by
Medicare Advantage provides seniors with choice, variety, and
value. This is especially true for those residing in rural America,
where seniors have previously not had sufficient private
alternatives. Because lower-income and minority enrollees are
disproportionately enrolled in Medicare Advantage plans, they would
also be disproportionately affected by payment reductions, likely
resulting in a greater reliance on Medicaid or the more expensive
Meanwhile, with emphasis on preventive care and coordinated care
for chronic conditions, the plans are clearly delivering quality
and meeting some of the key stated objectives outlined by the Obama
Administration. For example, based on preliminary analysis,
reductions in hospital readmissions for Medicare patients were
significantly higher than those enrolled in traditional Medicare.
Under current law, federal financing of Medicare Advantage plans
is based on a government benchmark payment for the estimated costs
of providing hospital and physician services, under the traditional
Medicare program, in given geographic areas of the country. The
competing plans make bids to provide these services under Medicare
Parts A and B, plus separate bids for drugs under Medicare Part
If a plan's bid is higher than the government benchmark, then
the Medicare patient enrolled in that plan pays the difference in
the form of a higher premium payment. If the plan's bid is lower
than the benchmark, then, by law, the Medicare patient gets a
rebate from the plan (equal to 75 percent of the difference) and
the government taxpayer gets the savings (equal to 25 percent of
Historically, most plans have bid below the government
benchmark, and the Medicare patients have enjoyed rebates in the
form of lower premiums and co-payments or richer health benefits.
These rebates amount to roughly $1,200 annually per
In terms of overall financing, the federal government has been
paying private insurers involved in Medicare Advantage plans 12-14
percent more, on a per capita basis, than it has to traditional
Medicare. For that, among other reasons, liberals in Congress have
proposed cuts in payments to Medicare Advantage plans. Nonetheless,
the higher payments to these plans have resulted in additional
benefits for the Medicare patients enrolled in them, and the
congressionally proposed cuts would mean cuts in patients'
benefits. Those seniors losing access to the benefits
of these private plans--particularly the low-income and minority
seniors that are disproportionately enrolled in Medicare
Advantage--would be forced to rely on the more expensive Medi-gap
coverage. More poor seniors would be forced to rely on Medicaid, a
The Baucus Proposal
Baucus would change the financing of these Medicare Advantage
plans, and beginning in 2011, phase in the calculation of the
government benchmark payment in the geographical regions on
actual plan costs rather than the administered
pricing of medical services under Medicare Parts A and B.
This is a significant change. There is a consensus among policy
analysts that the existing system of Medicare-administered prices
does not reflect actual market conditions, and their imposition
sometimes results in overpayment--unnecessary spending--and more
often underpayment for Medicare services.
By 2014, the new benchmark would be based on the "weighted
average" of the health plan bids in a given geographical area.
Rebates for health plans that bid below the benchmark would be 100
percent rather than 75 percent. As under current law, any rebate
would be required to be used as a benefit enhancement. Plans
offering supplemental benefits would be required to charge an
Meanwhile, health plans that meet certain efficiency,
performance, or quality standards would get special bonus
Private plans would be forbidden from imposing a cost sharing
that is greater than the traditional Medicare for certain services.
Medicare Advantage plans would also no longer be able to reduce or
eliminate the Part B premiums, nor could they exclude certain
benefits, such as chemotherapy drugs, from beneficiary out-of-
pocket spending limits.
The Baucus Medicare Advantage provisions are superior to those
of the House bill (H.R. 3200) and a modest improvement in
Medicare's troubled financing. Competitive bidding as the basis of
Medicare payment, when applied only to Medicare Advantage enrollees
in isolation from the rest of Medicare, however, does not end the
imbalance in the "playing field" between traditional Medicare and
Medicare Advantage; it only reinforces the balkanization of the
program and would almost certainly disadvantage Medicare patients
enrolled in the private plans. In fact, CBO Director Douglas
Elmendorf recently told the Senate Finance Committee that the
proposed Medicare Advantage payment cuts in the Baucus bill would
result in a reduction in seniors' benefits.
A Better Policy
The right policy is to build on the success of Medicare
Advantage. If the argument is that enrollees in Medicare Advantage
benefit unfairly under current financing--getting a per capita
payment advantage of 12-14 percent--the right answer is to treat
all beneficiaries the same, regardless of their plan choices. This
could be done through a "premium support" system (i.e., a direct
government contribution) that applies equally to all enrollees.
In other words, the only way to determine the right Medicare
plan payment is with a competitive bidding system that includes all
of the options, including traditional Medicare, not aggravating an
un-level playing field by making it even more un-level.
The competition among health plans, then, should not be confined
to private plans alone but should also include traditional
Medicare, as former Senators John Breaux (D-LA) and Bill Frist
(R-TN), among others, recommended years ago.
For those in Congress who insist that a "public plan" can and
should compete with private health plans--and do so on a truly
level playing field--full Medicare competition would be a sound
test run of the practicality of their position, as well as a true
test of their sincerity.
Basing the government payment to health plans on the weighted
average costs of actual plans on a local or regional basis, as
Baucus has proposed, is the right approach. Transforming that new
financing change into a "premium support" program invites three
- For purposes of a per-capita government contribution, the
government premium payment for beneficiaries should be adjusted for
age and income, recognizing the diversity of health care needs that
vary with age and also expanding the principle of income-related
subsidies that already governs seniors' premium payments in
Medicare Part B;
- There should be an annual dollar cap on the amount of the
government contribution to an enrollee's health plan;
- Any Medicare savings--from this or other program
changes--should be sequestered to enhance Medicare solvency.
The Right Policy Direction
The old fee-for-service Medicare program, based on central
planning and price controls, is an outdated model for the baby
boomers, the next generation of retirees. For them, the best model
for a reformed Medicare program would be the Federal Employees
Health Benefits Program (FEHBP). In the FEHBP, government payment
for enrollees' health plans is calculated on the weighted average
premium of the health plans that compete for consumers' business,
and the enrollees get a generous contribution to the plan of their
In making payment to private health plans in Medicare based on
the weighted average of actual plan costs, the Baucus proposal is
going in the right policy direction. With modifications, Congress
could adopt a premium support system broadly similar to the FEHBP
and secure the same positive results in intense competition,
patient choice, high quality care, and patient satisfaction.
Without such modifications, there is no real reform but just more
of the same.
Moffit, Ph.D., is Director of the Center for Health Policy
Studies at The Heritage Foundation.