January 27, 2003

"Medicare Reform 101"

The Alliance to Improve Medicare (AIM) and the Progressive Policy Institute (PPI) hosted a Congressional staff briefing on recent efforts to improve and strengthen Medicare.  Speakers included Dr. Michael O'Grady, Senior Research Director, Center for Health Affairs, Project HOPE, and Mr. Jeff Lemieux, Senior Economist, Progressive Policy Institute.  Tracey Moorhead, Executive Director, AIM, moderated the panel.

Dr. O'Grady outlined four central issues in the Medicare debate and briefly examined policy implications for each.  First, he recognized the stress on the program's long term financial strength due to generational disparities (i.e., the coming retirement of baby boomers).  He reported that, under the current benefit structure, Medicare spends roughly $6,000 per year per beneficiary to provide insurance coverage.  Beneficiaries, however, are currently paying only approximately $600 per year (in addition to taxes paid while they were employed).  He noted that previously proposed solutions for addressing the financial problem include benefit reductions, tax increases, and increased efficiencies within the program.

Second, Dr. O'Grady identified the addition of a prescription drug benefit as the largest issue currently confronting Medicare.  He outlined as policy questions to be answered before a benefit can be enacted: 1) universal benefit for all or targeted benefit for special populations (i.e., low income or high expenditure seniors); 2) stand alone benefit or part of broader efforts to reform and improve the overall Medicare program; 3) funding sources; and 4) government-run or private sector based. Dr. O'Grady noted that current Medicare beneficiaries have not "pre-funded" a prescription drug benefit through payroll taxes collected during their working careers. On the issue of government vs. private sector management, he noted that fee-for-service-based Medicare is government managed through an administered pricing formula.  Conversely, he noted that a private-sector based program would rely on plans to bid and negotiate payments based on competitive market forces.

Third, Dr. O'Grady outlined the need to modernize the current benefit package and noted that the current program design includes no maximum out-of-pocket or catastrophic spending limit for beneficiaries, has poorly designed cost-sharing structures including low, unrealistic deductibles, and lacks flexibility to adapt to changes in medical care.

Finally, he discussed the delicate balance of public and private sector roles in Medicare.  He stated that government performs some tasks more efficiently than the private sector, namely,  premium collection (directly from Social Security checks) and eligibility issues.

Conversely, the private sector has proven more adept at price determination and response to innovation.  Dr. O'Grady noted that some recent legislative proposals have attempted to find a compromise based upon these successful private and public sector roles.

Mr. Lemieux stated that Medicare reform is necessary to ensure that seniors have good choices of comprehensive, private health plans and to ensure a better, more flexible fee-for-service program.  He then provided a brief history of budgetary issues and reform efforts through the past decade.

He noted that Medicare spending grew dramatically between 1987 and 1993, leading to the first of several efforts to restrain spending and update the program. The Omnibus Budget Reconciliation Act of 1993 (OBRA) attempted to slow discretionary spending growth through a few small spending cuts for Medicare and other programs.  The Balanced Budget Act of 1995, however, was the first large scale attempt to curb discretionary spending and was motivated by continued dramatic increases in annual Medicare spending.  Mr. Lemieux stated that BBA '95 also included a "clumsy attempt" at defined contribution health plans. Ultimately, however, Congress did not approve BBA '95.

Mr. Lemieux noted that Congress was still motivated by dramatic cost increases and not benefit deficiencies while drafting the Balanced Budget Act of 1997 (BBA '97).  According to Mr. Lemieux, Senator John Breaux (D-LA) commented at the time that he wanted to remove the "cost issue" from the day-to-day Medicare program and focus more on benefits and beneficiaries.  BBA '97, however, ultimately included hundreds of Medicare program spending cuts.  Congress approved the bill and it did slow spending growth but also resulted in reductions in payments to health care plans and providers which caused many to leave the program altogether.

BBA '97 also created the National Bipartisan Commission on the Future of Medicare, chaired by Senator Breaux and Representative Bill Thomas (R-CA). Charged with examining Medicare and developing a modernization proposal, the Commission's final proposal included a premium-support system modeled on the Federal Employees Health Benefits Program (FEHBP) and a high-option fee-for-service plan in exchange for full competition among participating health plans. Mr. Lemieux, who served as staff economist to the Bipartisan Commission, noted that the Commission's proposal did not receive the required "super-majority" support as a result of Clinton Administration opposition to the premium support model.

Mr. Lemieux then outlined legislative efforts developed by Senators Breaux and Bill Frist (R-TN) in the aftermath of the Bipartisan Commission.  The first Breaux-Frist Medicare proposal, introduced in 1999, included a full premium support model as recommended by the Commission. Unlike the Commission's recommendations, Mr. Lemieux stated, Breaux-Frist I generated no savings for the program but was a budget neutral plan. He noted that the government moved from a budget deficit to a revenue surplus in 1998 and this temporarily reduced pressure to realize savings from Medicare and other discretionary programs.  Mr. Lemieux noted that, at the time, Medicare spending was also slowing as a result of BBA '97 implementation.

In 2000, Mr. Lemieux reported, Senators Breaux and Frist introduced Breaux-Frist II.  The proposal was dubbed "premium support lite" and was a scaled down version of the first proposal. Breaux-Frist II did not include a high option plan, and provided less drug coverage.  The plan was scored by the Congressional Budget Office (CBO) as costing approximately $150 billion over ten years.

Mr. Lemieux then listed other legislation considered in 2000, including legislation passed by the House of Representatives.  These proposals offered prescription drug coverage only, with little or no reform, and were each estimated to cost more than $300 billion over ten years. 

Looking toward debate on the issue in the 108^th Congress, Mr. Lemieux noted that, as a result of continued projected budget deficits, cost control has reemerged as an important issue in the Medicare debate. He stated that the failure of the Medicare+Choice program to expand to all areas of the country will likely mean future efforts to reform Medicare will not rely on robust competition among private plans, as originally proposed by the Bipartisan Commission.  Finally, Mr. Lemieux noted that Congressional Republicans should focus on pluralism, not financial risk issues and that Congressional Democrats should focus on results, not programmatic control.

An attendee asked the panelists to explain how competition between fee-for-service Medicare and the Medicare+Choice program will reduce program costs and why the Medicare+Choice program is considered a workable example given that program's current problems. Dr. O'Grady responded that the idea of competition among private plans is drawn from the success of the FEHBP and CalPERS programs.  He stated that one solution to the M+C program problems, and to help ensure adequate competition between fee-for-service and M+C, is to utilize different tools for different environments and markets.  Specifically, Dr. O'Grady noted that health plans may need additional incentives to offer basic coverage in rural markets while plans in large metropolitan markets may have high costs and need higher reimbursements.  Mr. Lemieux responded that plan competition and the Medicare+Choice program were expected to offer good, comprehensive benefits (including prescription drug coverage) for about the same as, or less than, the fee-for-service program. Mr. Lemieux also noted that private plans were expected to be more flexible in benefit coverage than the fee-for-service plan.

In response to a question about deficit spending, Mr. Lemieux noted that any Medicare drug and/or reform proposal is likely to cost more than $400 billion over ten years and that it would be very difficult to pay for through program efficiencies.