Brookings Rethinks...Medicare

As promised, the Brookings Institution's Hamilton Project has released the remaining papers in its series "15 Ways to Rethink the Budget." We will be discussing the papers a series of blog posts. We covered two defense proposals on Friday, and next we focus on their Medicare proposals which affect both beneficiaries and providers in the program.

The first proposal comes from MIT economist Jonathan Gruber in a paper on "Restructuring Cost Sharing and Supplemental Insurance for Medicare." Gruber describes the value of his proposal as follows:

Traditionally, efforts to control the costs of the Medicare program have focused on the “supply side,” changing the method and amount that Medicare pays its providers. There has been much less focus on the “demand side,” using financial incentives to encourage less medical spending by enrollees....Yet efforts both to improve the value of the Medicare program for beneficiaries and to lower its costs to the government would benefit from some focus on the demand side.

Gruber describes the current cost-sharing system in Medicare as "both variable and uncapped, with an overall structure that is hard to rationalize." The confusing nature of Medicare's cost-sharing and the potential for unlimited costs to beneficiaries has led the majority of beneficiaries to seek supplemental insurance, which has been shown to increase over utilization and consequently Medicare spending.

Thus, this proposal seeks to improve cost-sharing through changes to Medicare and supplemental insurance, somewhat similar to what the Simpson-Bowles proposal did. First, Gruber builds upon a 2008 CBO option that would replace current cost-sharing rules with a single combined deductible of $525, a 20 percent coinsurance rate, and a $5,250 out-of-pocket (OOP) maximum. Instead of a $5,250 OOP maximum, Gruber proposes instituting a progressive out-of-pocket limit on payments. The limit would be a sliding scale fraction of the Health Savings Account limit based on the beneficiary's income, going from one-third of the HSA limit ($1,983) for people making between 100 and 200 percent of the poverty line to the full HSA limit ($5,950) for people making over 400 percent. In addition, he proposes reducing the deductible to $250 for seniors below 200 percent of poverty.  Second, to address the supplemental insurance issue, he proposes an excise tax of up to 45 percent on premiums for Medigap plans and employer-sponsored retiree coverage (for those over 65). Gruber roughly estimates the proposal would save about $125 billion over ten years, although he acknowledges this depends on the exact level of the excise tax and other uncertainties.

The second Medicare proposal, "Transitioning to Bundled Payments in Medicare," from Harvard Medical School's Michael Chernew and USC's Dana Goldman focuses, as you would expect, on the provider side of the equation. The paper proposes reforming Medicare's payment system to align provider incentives with efficiency and quality of care. They describe the problems with the current system as follows:

The existing FFS portion of Medicare, which enrolls almost 75 percent of Medicare beneficiaries, relies on a byzantine system of fee schedules. There are thousands of codes for different services; setting the appropriate fee is enormously complex. Mispriced fees create incentives leading to the overuse (or underuse) of medical services. As a result, resources flow to overpriced activities and infrastructure. Importantly, the FFS system reduces incentives for providers to be efficient over the entire episode of care (Chernew, Frank, and Parente 2012; Landon 2012).

To address these issues, Chernew and Goldman would create a global payment model within Medicare, which would involve paying provider systems or Medicare Advantage plans a fixed per beneficiary payment to cover all medical services. While the level of these payments can be dialed, they recommend as a default setting them equal to current law Medicare spending (which would be $100 billion lower than current policy spending). In addition, they suggest creating as much regulatory neutrality as possible between Medicare Advantage (MA) plans and Accountable Care Organizations (ACOs). Such neutrality would involve allowing ACOs to act like MA plans in controlling benefit design and charging above benchmarks for higher quality plans (to attract beneficiaries). Finally, they would drop various fee-for-service regulations (i.e. self-referral rules) for providers who accept global payments, since efficiency gains under a global payment model would eliminate the need for them.

Both proposals are welcome ideas that not only have potential for savings, but could modernize Medicare to operate more efficiently. Success in containing federal health care spending depends on making Medicare more efficient to encourage higher value.