A Premium Support System for Medicare: Analysis of Illustrative Options

Report
September 18, 2013

Over the past two decades, numerous proposals have been advanced for the establishment of a premium support system for Medicare. Under such a program, beneficiaries would purchase health insurance from one of a number of competing plans, and the federal government would pay part of the cost of the coverage. The various proposals have differed in many respects, including the way in which the federal contribution would be set and how that contribution might change over time.

This CBO report presents a preliminary analysis of the ways two illustrative options for a premium support system would affect federal spending and beneficiaries’ choices and payments. The agency has developed significant new tools to analyze such a system in greater depth than in the past; the specifications of the options examined here also differ from those CBO analyzed previously. As the agency refines its modeling approach and considers alternative options for a premium support system, its findings could change. CBO’s analysis to date, as summarized in the figure below, indicates the following:

  • Both options for premium support considered here would reduce federal spending for Medicare net of beneficiaries’ premiums and other offsetting receipts.
  • Under the second-lowest-bid option, the option with the greater reduction in net federal spending, beneficiaries’ premiums and total payments for Medicare’s Part A and Part B benefits would each be higher on average than they would be under current law. (Total payments consist of premiums and out-of-pocket costs for deductibles, copayments, and coinsurance.) Under the average-bid option, the option with the smaller reduction in net federal spending, those amounts would each be lower on average than they would be under current law.
  • Under both options, combined spending by the federal government and by beneficiaries (that is, premiums and out-of-pocket costs) would be less than that if current law remained in place.
  • Under both options, effects on premiums and total payments for some beneficiaries would differ greatly from the national averages. In particular, in most regions, the premiums and total payments of beneficiaries enrolled in the fee-for-service program would be higher than they would be under current law.
  • Alternative specifications for key features of a premium support system would yield different results.

Effects of Options on Spending for Medicare Benefits

Addition: CBO's Options for Reducing the Deficit: 2014 to 2023 (published in September 2013) includes analysis of some alternative specifications for premium support systems.