Transforming Medicare into a Premium Support System: Implications for Beneficiary Premiums

This study illustrates why geography would matter for Medicare beneficiaries under a premium support system that relies on a competitive bidding process envisioned under several key Medicare reform proposals.

It examines potential changes in the premiums paid by Medicare beneficiaries under a payment approach that caps federal contributions per beneficiary based on the cost of the second lowest-bidding private plan or traditional Medicare, whichever is lower in their area.

Under this approach, beneficiaries can choose among competing plans, but if they enroll in a more costly plan, for whatever reason, they would pay the additional premiums themselves. This differs from the current Medicare system, in which beneficiaries generally pay the same Medicare premium regardless of where they live, whether they choose traditional Medicare or a private plan, or whether they live in a high-cost or low-cost area.

The analysis does not attempt to model any specific proposal, but is generally based on an approach included in House Budget Chairman Paul Ryan’s fiscal year 2013 budget plan, the proposal Chairman Ryan co-sponsored with Senator Ron Wyden of Oregon, and; in the plan put forward by former Senator Pete Domenici and Dr. Alice Rivlin. In the first two proposals, people who are at least 55 years old, including current beneficiaries, would be exempt from the new system. Republican presidential nominee Gov. Mitt Romney has supported a premium-support system along these lines.

To illustrate the potential effects on beneficiary premiums if such a system were fully implemented for all beneficiaries, the analysis layers the premium support proposal onto the current Medicare system reflecting beneficiaries’ current plan choices, traditional Medicare expenditures by county, and the costs of providing Medicare benefits under private Medicare Advantage plans (known as ‘bids’), drawing for actual data from 2010, the most recent year for which data are available.

Assuming full implementation of such a system, and assuming current plan preferences among beneficiaries, the study estimates that:

• Nearly six in 10 Medicare beneficiaries nationally could face higher premiums for Medicare benefits, assuming current plan preferences, including more than half of beneficiaries enrolled in traditional Medicare and almost nine in 10 Medicare Advantage enrollees. Even if as many as one-quarter of all beneficiaries moved into a low-cost plan offered in their area, the new system would still result in more than a third of all beneficiaries facing higher premiums.
• Premiums for traditional Medicare would vary widely based on geography under the proposed premium support system, with no increase for beneficiaries living in Alaska, Delaware, Hawaii, Wyoming and the District of Columbia, but an average increase of at least $100 per month in California, Florida, Michigan, New Jersey, Nevada and New York. Such variations would exist even within a state, with traditional Medicare premiums remaining unchanged in California’s San Francisco and Sacramento counties and rising by more than $200 per month in Los Angeles and Orange counties.
• At least nine in 10 Medicare beneficiaries in Connecticut, Florida, Massachusetts and New Jersey would face higher premiums in their current plan. Many counties in those states have relatively high per-beneficiary Medicare spending, which would make it more costly to enroll in traditional Medicare rather than one of the low-bidding private plans in those counties. In contrast, in areas with relatively low Medicare per-capita spending, it could be more costly to enroll in a private plan.

This analysis does not attempt to model all aspects of any specific premium-support proposal, which would require more details than are currently available and assumptions about shifts in demographics, spending, and enrollment. The analysis also differs from Chairman Ryan’s most recent proposal by assuming full implementation in 2010 (rather than a phased-in implementation starting in 2023) and by not exempting everyone who is at least 55 years old now.

The analysis reflects actual plan bids and county-specific average traditional Medicare costs for 2010, the most recent year of data available. The analysis assumes that private plans would lower their bids by 5 percent across the board under the new payment structure, a reduction consistent with an earlier Congressional Budget Office assumption. In addition to the base analysis, the study also looks at how more or less aggressive bidding by private plans would affect the results and what might happen if significant shares of beneficiaries enroll in low-bidding plans.

Report (.pdf)