Modernizing Medicare

October 26, 2016

Modernizing Medicare centers on reforming Medicare Advantage, which unlike traditional, fee-for-service Medicare, provides care through private plans. It has proven immensely popular, with enrollment having increased from 6% of all beneficiaries in 1992 to 31% in 2016. But current policies prevent the program from delivering high-quality, low-cost care to its full potential. The solution lies in reforming incentives and expanding competition among the program’s plans and providers, which would accelerate the cost-saving innovations that arise routinely in other industries with vibrant markets.

CED projects that its plan would yield considerable savings if the following reforms were to be enacted:

  • Eliminate the Medicare Advantage price benchmark based on traditional Medicare’s fee-for-service cost, and provide enrollees with a premium subsidy. Medicare Advantage (MA) plans with lower costs than the benchmark rate (determined by traditional, fee-for-service Medicare) can’t pass all savings on to seniors through lower premiums. The “haircut” on rebates discourages MA plans from pursuing efficiencies, and seniors from considering MA. CED calls for allowing plans to bid as low as their efficiency allows, unconstrained by the benchmark. A credit would allow all enrollees to obtain the lowest or second-lowest-price plan in their region at no additional out-of-pocket cost. 
  • Increase the income-conditioning of Part B and Part D premiums, including a temporary Part B premium reduction for lower-middle income seniors. This would allow seniors with limited means to continue in traditional, fee-for-service Medicare, should they need to do so, at no or limited additional cost relative to the current system.
  • Risk-adjust premium revenue for plans. Risk adjustment rewards – and thereby incentivizes – plans that find more-efficient ways to treat the sick. Medicare currently prohibits insurers from rejecting applicants, yet some “cherry-picking” has been alleged. Medicare should hold back a portion of premium revenue for later distribution among plans according to how each plan’s patients’ diagnoses relate to the average diagnoses for the entire population.
  • In rural areas, allow Medicare beneficiaries to enroll in traditional Medicare at no additional out-of-pocket cost, until Medicare Advantage plans meet a minimum threshold of availability.