Medicare’s Actuaries Say Obamacare Vouchers Could Be Tied to the CPI

Yesterday, I posted a detailed explanation of how Obamacare would index vouchers provided through the state exchanges. This was a follow-up to my original column on this and other subjects from last week.

But, detailed though yesterday’s post was, there’s still more to this story.

To recap from the beginning: The president and his allies have been attacking House Budget Committee chairman Paul Ryan’s Medicare reform plan for indexing, on an annual basis, the “premium support credits” provided to future program entrants to the consumer price index (CPI).

These attacks seemed more than a little hypocritical to me. After all, didn’t Obamacare do exactly the same thing? Section 1401 of the law requires the “premium credits,” or vouchers, provided through the state exchanges to be adjusted in the years after 2018 “to reflect the excess (if any) of the rate of premium growth … over the rate of growth in the consumer price index.” That would seem to mean that beneficiaries getting insurance through the exchanges would pay for cost growth above the CPI, and the government’s contribution toward the premium would grow with the CPI. Further, this adjustment is only to occur in years when the aggregate cost of the premium credits and cost-sharing subsidies in the exchanges exceed 0.504 percent of GDP.

It turns out, however, that the law is written so poorly and ambiguously that other conclusions might be reached about what the words of the law actually mean. That seems to be the case with the Congressional Budget Office, as its cost projections for premium credits in the exchanges grow at a rate above the CPI in the years after 2018, even though CBO believes that aggregate spending will exceed that threshold of 0.504 percent of GDP.

So, as I explained yesterday, it would appear that CBO is assuming a different adjustment is applied, which would have the effect of scaling back the government’s contribution below health-cost growth — and for some people, even below CPI growth — but on average somewhat above it.

But what about the actuaries who run the numbers for the administration? How do they see things?

First, they expect that the aggregate-spending condition won’t be met. In other words, the CPI-based adjustment to the premium credits doesn’t become operative in their projections because they see spending on the credits and cost-sharing subsidies coming in below 0.504 percent of GDP. After 2018, they assume the effect of this threshold will be to index the government’s contributions toward premiums to GDP growth.

But what would happen if their cost projections are wrong and aggregate spending did exceed 0.504 percent of GDP?

If that were to occur, they believe the law would require indexation of the vouchers provided by the government in the exchanges to the CPI — the exact same policy that is under so much attack in the Ryan plan. And, let’s be clear, it wouldn’t take much of an adjustment in cost projections for the actuaries to assume this indexing provision will go into effect in 2019 and future years. 

So, yes, those who are attacking the Ryan Medicare plan have a serious problem. They, starting with the president, have made a huge political issue of how that plan indexes the government’s contribution for Medicare coverage. But their own experts believe Obamacare, under certain conditions, does exactly the same thing. 

[Cross-posted on Critical Condition]

posted by James C. Capretta | 6:43 pm
Tags: Obamacare, CPI, Paul Ryan, Medicare, vouchers
File As: Health Care

Debunking Medicare Myths

Here’s a puzzle: Critics say Medicare Advantage plans — the private insurance options offered to beneficiaries — are inefficient and costly. But those same critics oppose vouchers for Medicare — even though that would set up a direct competition between the private plans and the traditional fee-for-service program.

What are they afraid of?

After all, if the case critics (see Austin Frakt’s August 19 KHN column) make is correct and private insurers simply can’t do the hard work of cost control as well as the government, then Medicare’s “public option” would presumably win this contest.

But that’s apparently not how these critics see things. They are just as resistant to subjecting Medicare fee-for-service to a level playing field of competition as they are enthusiastic about cutting Medicare Advantage’s administratively determined payments.

Indeed, when the bipartisan leadership of the Medicare Commission in the late 1990's recommended a move toward a voucher-like program, would-be defenders of government-administered, fee-for-service Medicare viewed it as a mortal threat (“privatization!”). They took this position even though the fee-for-service plan would have been preserved as one of the options for beneficiary selection. In the end, the Clinton administration killed the idea to avoid offending the defenders of the fee-for-service status quo.

The Obama administration’s preferred approach to Medicare Advantage payment “reform” — rejected at the last minute by Congress in favor of more formulaic cuts — reflects the same bias. Private insurers would have submitted bids in competition with each other, with the average bid used to set regional benchmark rates. The benchmark would then establish a payment ceiling for all private plans competing within the same geographic area. But it wouldn't have constrained Medicare fee-for-service. In regions where fee-for-service was more expensive than the average private plan, beneficiaries could have enrolled in the more expensive “public option” at no additional cost above the statutory part B premium.

It’s not just speculative musing to consider what would happen if fee-for-service were more expensive than private coverage in certain markets. Because, despite all of the talk about overpaid private plans, it turns out that some Medicare Advantage plans are almost certain to beat fee-for-service in a direct price competition. According to the Medicare Payment Advisory Commission (Medpac), the average cost of providing Medicare-covered benefits through private insurance is exactly the same as it is through fee-for-service. That average, however, includes some very loose networks.

Medpac also found that, on average, more tightly controlled Medicare Advantage HMOs provide Medicare benefits for just 97 percent of the cost of fee-for-service. These HMOs are by far the most popular form of Medicare Advantage plan, with nearly 80 percent of Medicare’s private plan enrollees choosing them.

And these HMOs win on costs despite the huge advantages fee-for-service enjoys in today’s arrangements. Fee-for-service is the default option for enrollment. If a beneficiary does nothing, that’s where they end up. There’s no advertising budget necessary. In addition, much of the administrative costs of running the fee-for-service program, such as revenue collection by the Internal Revenue Service, is not built into the premium paid by the beneficiaries. Most importantly, fee-for-service is able to dictate the prices it will pay to medical service providers. Private plans have no such option. They must negotiate contracts with their networks and get hospitals and physicians to agree to a fee schedule. Moreover, in many parts of the country, private plans are forced to pay premium rates to compensate hospitals and physicians for the losses they incur on their Medicare fee-for-service business.

But even with these advantages, fee-for-service is still more expensive than Medicare Advantage HMOs, which probably explains why fee-for-service’s advocates are so adamantly opposed to the kind of direct and transparent price competition that a move toward a defined contribution approach in Medicare would bring about.

Previous estimates by the Congressional Budget Office and the chief actuary of the Medicare program confirm that a move in this direction would lower costs in the Medicare program because in many parts of the country efficient managed care models would be able to offer coverage at much less cost than price-controlled fee-for-service. Beneficiaries who chose to remain in fee-for-service would thus pay more for the privilege of doing so, and the assumption is that many of them would decide to switch into less expensive private coverage rather than face higher premiums in the traditional program.

Nearly everyone agrees that there is tremendous waste in today’s arrangements. But it is bordering on delusional to believe that the federal government has greater capacity than the private sector to engineer a more productive and efficient health delivery system.

The federal government has been running Medicare fee-for-service for nearly half a century, and the results speak for themselves. Medicare fee-for-service is the number one reason the nation suffers from dangerously fragmented and uncoordinated care. It pays any licensed provider of medical services a fee for rendering a service to a Medicare patient, no questions asked. Every provider is paid the same, regardless of how well or badly they treat their patients. To cut costs, Congress has always found it easier to impose arbitrary, across-the-board payment reductions than to steer patients away from some hospitals or physicians who provide low value at high cost.

The recently enacted health law is no exception. Despite all of the talk of “delivery system reform,” the cuts in Medicare come from arbitrary payment rate reductions – decreases that will drive Medicare’s reimbursement levels below those of Medicaid by the end of the decade, according to Medicare’s chief actuary.

What’s needed most today in American health care is innovative change which drives up productivity and value. With the right incentives, that’s what the private sector can deliver, even as it’s been clear for some time that the federal government cannot do likewise.

posted by James C. Capretta | 5:01 pm
Tags: Medicare Advantage, vouchers, fee-for-service
File As: Health Care