Budget Options
October 5, 2017

Mandatory Spending Health Option

Function 570 - Medicare

Convert Medicare to a Premium Support System

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Under a premium support system, Medicare beneficiaries would choose health insurance from a list of competing plans, and the federal government would share the cost of their premiums. CBO examined two approaches for determining the federal contribution for premiums: One would set the contribution on the basis of insurers’ second-lowest bid in each region; the other would use the region’s average bid. (In the alternatives CBO analyzed, Medicare’s traditional fee-for-service program would be one of the competing plans.) CBO also examined the effects of grandfathering, which would keep beneficiaries in the current Medicare program if they were eligible for Medicare before the premium support system took effect instead of requiring all beneficiaries to enter the premium support system once it began. CBO constructed its estimates under the assumption that the system would be implemented in 2022.

Without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $419 billion between 2022 and 2026, CBO estimates; the average-bid option would reduce such spending by $184 billion over the same period. With grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $50 billion between 2022 and 2026, and the average-bid option would reduce such spending by $21 billion.