GO TO: Medicare HOME

Meeting Agenda
Wednesday, February 24, 1999 / 3:00 p.m.
Dirksen Senate Office Building, Room 215
Washington, D.C.

This agenda reflects a continuing discussion among the Commissioners of a Medicare reform proposal presented by Chairman John Breaux at the January 26 Commission meeting in Washington, D.C. Chairman Breaux’s proposal includes a "premium support" model, patterned after the Federal Employees Health Benefits Program (FEHBP), which provides health insurance for nine million federal employees, retirees and dependents nationwide.

February 24, 1999

SENATOR BREAUX: I’d like to welcome everyone to one of the last meetings of the National Bipartisan Commission on the Future of Medicare. With the Commission’s March 1 deadline fast approaching, we have a lot of important work to do today.

At our last meeting, I proposed a premium support model based on the FEHBP style system. One of the most frequently asked questions since then has been about numbers. Particularly, does this premium support model save money? I’m pleased to say that we now have the answer to that question from three different sources and the answer is a resounding YES. In the time we have today, I would like to ask Bobby Jindal to go over the reports and analyses we’ve received over the past week from Commission staff, the Congressional Budget Office (CBO) and the Health Care Financing Administration (HCFA). I hope to adjourn today’s meeting around 5:00.

Before we get started, I’d like to first reiterate something I’ve said in previous Commission meetings: the reason I have long supported a premium support approach is because I believe it will give us the best opportunity to provide a better benefit package to seniors which includes prescription drugs and to deliver health care in a way that enables Medicare benefits to better keep up with medical technology. We all agree that the Medicare benefits package could and should be better than it is. The 1965 model we’re running Medicare under today needs to be updated and modernized for the 21st century and adapted to conform to modern notions of health care delivery -- I believe that a premium support approach is the best way to do that.

Some people want to talk about new revenues, as well, but what I tried to do first was to isolate the efficiencies that a premium support model could yield and then look at ways to address any remaining shortfalls in the program. I think there is widespread agreement that we can’t add revenues without looking at fundamental reforms.

The analyses we will review today looks at one premium support option and suggest various levels of savings that will result depending on certain design details. The design details that affect the level of savings can also have an impact on beneficiaries, and that needs to be carefully considered, as well.

I am very encouraged by the fact that there is bipartisan interest in this premium support concept and that analyses from both public and private sector sources say that a competitively-based premium support produces savings for the Medicare program.

After Bobby’s presentation, the Commission staff will be available to answer additional questions.

Let me also say at this point that I am in the process of preparing a modified proposal addressing the prescription drug issue. This is obviously a very sensitive issue, both from a policy and political standpoint but the goal should be to make a viable prescription drug benefit available to all beneficiaries. To that end, I am working to construct a scenario that builds around what I think are four fundamental principles.

1. Public spending should not crowd out private spending. The point has been made many times that 65% of Medicare beneficiaries currently have a drug benefit (whether through Medigap, former employers, Medicaid or an HMO) and we should try to minimize any displacement of those existing dollars.

2. We should avoid creating a buyer with monopoly powers.

3. We need to minimize the need for new revenues while recognizing that new revenues will be needed.

4. All Medicare beneficiaries should have access to an affordable drug benefit.

To that end I am exploring the possibility of expanding drug coverage to Medicare beneficiaries in the following ways:

1) I would like to see drug coverage provided to the current QMB and SLMB population through the Medicaid program. This would for the first time provide a drug benefit for all beneficiaries up to 135% of poverty (about $11,000 for an individual). Currently, only those beneficiaries who are dually eligible for Medicare and Medicaid have access to a drug benefit. This provision would help focus on those beneficiaries who don’t have a drug benefit and who need it most--those who aren’t poor enough to be dually eligible for Medicaid but can’t afford prescription drugs. I’ve asked Commission staff to analyze this proposal to determine how much it would cost (assuming Medicare picks up the additional cost), and how many beneficiaries would benefit from this expansion.

2) Another way of increasing access to a drug benefit for fee-for-service beneficiaries is to require that all Medigap plans offer a prescription drug benefit--this would hopefully reduce adverse selection against those Medigap plans that offer prescription drugs. The reason those plans are so expensive is that only beneficiaries who need a drug benefit buy them.

3) I would like to pursue the idea of giving fee-for-service beneficiaries who don’t qualify for low-income subsidies access to a privately-run drug benefit option and requiring private plans to offer an option that includes prescription drugs. There is still a great deal of work that needs to be done on this last provision and there are many different ways this could be structured. I will be putting some details together over the next few days after hearing more from commissioners.

Let me underscore AGAIN that this is still very much a work in progress and nothing I’ve said today represents a final recommendation or a line in the sand in any respect--what I’ve tried to do is explore every option in an attempt to find a middle ground on this very difficult issue.

I am very encouraged by the willingness of the members of this Commission to discuss the best way to design a premium support model. With all of these analyses just coming out in the past week, I realize that it might take additional time to conclude our deliberations. If members are willing to work together in good faith, I am open to possibly extending our deadline by a few weeks to allow us to review and digest these analyses and to try to reach a bipartisan consensus that goes beyond Commission members.

I will now turn it over to Congressman Thomas to make his opening remarks.

Fiscal Analysis of Senator Breaux’s Premium Support Proposal

1. Overview - CBO, OACT, and staff analyses all suggest that a properly designed premium support proposal would allow plans to compete on price and quality and will result in significant savings.
   
   
• CBO (Feb. 18)
  

“Your proposal would foster greater competition among plans and greater choice for beneficiaries. We believe increased competition will reduce costs.”

“We believe that introducing competition into the Medicare program could help to reduce costs in both the short and the long run. A premium support system that resulted in effective price competition among plans would most likely lower Medicare costs.”

• Office of the Actuary, HCFA (Feb. 23)
  

Their analysis shows that Senator Breaux’s plan would result in savings of over 10% of present law expenditures by 2005.

• Commission staff (Feb. 17)
  

Analysis shows proposal slows Medicare spending. Growth in outlays is slowed by approximately 1% a year, and savings compound to significant amounts over long run.

• Lewin Group (Sept. 1998)
  

“Based upon these studies, the increase in managed care enrollment implied by a [premium support program] would result in a long-term reduction in the long-term annual rate of growth in health spending of between 0.5 and 1.5 percentage points.”¹

2. Why does premium support result in savings?

   Analysts cite different ways that the beneficiary choice and competition associated with a premium support model result in savings. For example, Commission staff analysis emphasizes reduction in growth rates, and OACT analysis emphasizes savings from switching from more expensive to less expensive plans.

• Beneficiaries would face more incentives to choose less expensive plans, since they will share in premium savings. (see Figure 1) Medicare’s costs will be reduced as beneficiaries switch from less efficient to more efficient plans.
  
  
• Plans would face incentives to compete on price, in order to attract beneficiaries, and this will result in a slowing of growth rates in Medicare spending. (see Figure 2 and Appendix) Plans may achieve this reduction for many reasons, e.g.:
  

negotiating power for purchasers due to excess provider capacity

increased productivity through series of innovations

selective contracting arrangements and other management tools result in slowdown in long-term growth rates

slow growth in unit costs and wage growth

managed care brought permanent cost-consciousness to providers

• Premium support will allow beneficiaries to coordinate multiple sources of financing and coverage into one plan.
  

“[Supplemental insurance] coverage increases Medicare spending by encouraging greater use of services. To the extent reforms mitigate that incentive, Medicare spending would be reduced.” CBO

Evidence by the Physician Payment Review Commission and CBO suggests that first dollar coverage associated with Medigap coverage increases Medicare’s spending due to higher utilization. (see Figure 3)

Beneficiaries with employer-sponsored coverage are more likely to have prescription drug coverage and less likely to have first dollar coverage than those with Medigap coverage, and thus cost Medicare $500 less per year.

Integrated plans are less likely to offer first dollar coverage without tools to manage utilization.

Integrated plans will reduce administrative costs and facilitate coordination of coverage by employers.

3. How much savings will result from Senator Breaux’s premium support plan?
   
   
• Commission staff analysis:
  

Slowdown in Medicare’s growth will reduce annual Medicare spending by $475-$850 billion in 2030. (see Figure 4)

Medicare’s portion of the federal budget would be reduced from 28-38 percent under current law to 21-29 percent. Medicare’s spending as a portion of the economy (Gross Domestic Product) would be reduced from 6.3-8.5 percent to 4.6-6.3 percent. (see Figure 5)

Beneficiaries will share in savings, as their premiums will be 15-25 percent less than those expected under current law on average. (Individual beneficiary premiums would vary based on the plan selected. Beneficiaries would pay more for selecting more expensive plans.) (see Figure 6)

• OACT analysis:
  

Medicare savings will be over $40 billion in 2006, which is 11% of what Medicare expenditures would otherwise have been. The Senator’s plan would save between $347 and $372 billion through 2009, and will produce savings of 11.2-11.9 percent of what Medicare expenditures would otherwise have been through 2030.² (see Figures 7 and 8)

Analysis shows higher savings in short run than those described by Commission staff, but lower savings in long run. (see Figure 9)

• Lewin Group analysis
  

“Based upon these studies, the increase in managed care enrollment implied by a [premium support program] would result in a long-term reduction in the long-term annual rate of growth in health spending of between 0.5 and 1.5 percentage points.”³ (see Figure 10)

4. Design details and their impact
   
   

Some analysts have expressed concern that plans would continue to compete primarily on benefits and not on price. This could result in a reduction of savings if most of the resulting efficiencies would be channeled into additional benefits. Various design parameters can be modified to address this concern and achieve the appropriate balance, without fundamentally altering the core premium support principles contained in Senator Breaux’s plan:

  

• Limit benefit variation
  

The Board could be required to limit range of actuarial value of benefits offered by plans to 10 percent, as OPM currently does with plans participating in FEHBP. Any additional benefits beyond the allowable range would be offered as supplemental riders, not subject to government contribution. This reduces adverse selection and also helps ensure that plans compete on costs as well as benefits.

• Include only certain benefits when calculating average premium
  

The Board could be required to consider only the cost of Medicare-covered services when calculating the average premium, exclude certain types of benefits from its calculation, or otherwise take steps to standardize the benefits being subsidized. (see Figure 11)

• Give beneficiaries more incentives to choose lower cost plans
  

Since this concern about plans competing on benefits, to the exclusion of competing on price, depends largely on consumer behavior, it is also possible to give beneficiaries more incentives to choose lower cost plans that still meet the Board’s quality and benefit requirements. For example, CBO has traditionally criticized the FEHBP for not allowing zero premiums for low cost plans and always requiring a minimum beneficiary premium. Senator Breaux’s proposal could be modified to allow beneficiaries to choose plans with no premium costs. (see Figure 12)

Appendix:
Competition and Reduction in Growth Rates

Many experts find that if plans are permitted to compete on price and quality, a reduction in growth rates will result:

“... the payments that M+C plans receive bear no relationship to their performance, and the plans have no incentive to compete on the basis of price. By contrast, under the premium support model, plans would be given new flexibility to compete by reducing premiums or enhancing benefits. That additional element of price competition might result in beneficiaries having a broader array of plans from which to choose, thus enabling them to select a plan that meets their needs more appropriately than the choices currently available to them.” CBO

“I believe that each of these developments [changes in purchasers’ behavior, the spread of managed care, and increased competitiveness] will have significant long-term effects on both the rate of spending growth and its level. As in other industries, productivity improvements often come from a series of one-time changes, and pressure to contain costs leads to a process in which a new crop of one-time changes is developed and implemented each year. For health care establishments, these changes have taken the form of slow growth in unit costs and wage growth that more closely matches that of the rest of the economy. If health care providers feel pressure to continually cut costs and perceive real competition from other providers, the result can be a permanent effect on the rate of growth of the prices they receive.” Paul Ginsburg, Center for Studying Health System Change, Jan/Feb Health Affairs. (see Figure 13)

“A major incentive for restructuring Medicare is to generate the same competitive forces within the program that the private sector experienced in the mid-1990s…controversy has arisen about the long-term effects of managed care on prices and costs in the private health care market and whether slower cost growth associated with the shift to managed care is a one-time phenomenon. Analysts generally agree that part of the recent slowdown in private health insurance premiums did, indeed, reflect a one-time change in the level of premiums, as employers switched their employees from higher-cost to lower-cost plans. But most analysts do not anticipate a return to the double-digit rates of growth in premiums that occurred before 1993. Both employers and health plans now function in a much more competitive health care environment than existed 10 years ago. Purchasers are likely to continue to be aggressive in pressuring plans to hold down premium growth, and plans will continue to seek innovative ways to control costs while constraining payments to providers. Moreover, persistent excess capacity in the health care system will continue to give plans leverage with providers.” CBO

“The price competition among private health plans...would be a powerful force for controlling health costs. There is substantial evidence that competition has been successful in reducing the rate of growth in health care costs in the private sector. For example, between 1993 and 1997 the average annual rate of growth in per-capita premium costs was 2.7 percent for private insurance persons compared to 7.8 percent for Medicare beneficiaries. The rate of growth in per-capita costs under the FEHBP program, which adopts several of the principles of managed competition, has actually been lower than in the private sector….The crucial question in this analysis is whether competition will continue to slow the growth in health care costs in future years…Moreover, there are several studies of cost growth over the past two decades that show that the long-term rate of growth of health costs is significantly reduced as the share of the population covered under managed care plans with selective contracting arrangements increases.” John Shiels, Andrea Fishman, Lewin Group (Sept. 1998).

“After a decade of actively restructuring their health care plans to reduce medical expenses, employers will not simply roll over and pay the bill for inflationary rates of this magnitude....The dominance of managed care has imposed a cost-consciousness on providers that most analysts failed to predict a decade ago. The rate of increase in prices, use of services, and adoption of cost-increasing technologies will be far slower in a system in which providers must live within budgets that simply did not exist when indemnity insurance was dominant and when providers essentially could charge as they wished.” Jon Gabel, KPMG Peat Marwick, Jan/Feb Health Affairs.

“Employers are now accustomed to success in controlling health costs and are not likely to accept large premium increases without a fight. As long as there is excess capacity in the health care system, employers will find effective ways of slowing the growth in health spending.” John Shiels, Jan/Feb Health Affairs.

Footnotes:

¹ September 1998 report by John Shiels and Andrea Fishman for National Coalition on Health Care. Authors use terms such as defined benefit competitive bidding program or defined benefit voucher program to denote what the Commission would call a premium support program.
² OACT's parameters differ slightly from Commission staff parameters: First, OACT's analysis extends certain provisions of the BBA for 5 years (whereas Commission estimates assume continued savings in one case and no savings in the other). Second, OACT's analysis does not contain spending offset for low-income subsidies.
³ September 1998 report by John Shiels and Andrea Fishman for National Coalition on Health Care. Authors use terms such as defined benefit competitive bidding program or defined benefit voucher program to denote what the Commission would call a premium support program.

<font size="-1" , face="Arial" ,"Helvetica">Back to Top