A Premium Support System for Medicare: Updated Analysis of Illustrative Options

Over the past two decades, policymakers and analysts have advanced a variety of proposals for converting Medicare to a premium support system as a way to reduce federal spending. Under such a system, beneficiaries would choose health insurance from a list of competing plans, and the federal government would share the cost of their premiums. The proposals have differed in many respects, notably in the way that the federal contribution would be set and how that contribution might change over time.

The Congressional Budget Office has in the past analyzed the budgetary effects of some illustrative options for a premium support system. This report updates the agency’s work on the topic, presents new estimates of the budgetary effects of those options, and examines the reasons for the changes in the estimates, including changes in law that have affected the Medicare program. CBO constructed its estimates for this report under the assumption that the system would be implemented in 2022. Depending on their details, future cost estimates for legislative proposals that resemble the options analyzed in this report could differ substantially from the estimates presented here.

In the options CBO analyzed, the federal government’s contribution would be determined from insurers’ bids, and Medicare’s traditional fee-for-service (FFS) program would be included as a competing plan. CBO examined two approaches for determining the federal contribution: One would set the contribution on the basis of the second-lowest bid in each region; the other would use the region’s average bid. 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.

What Are CBO’s New Estimates?

CBO’s new estimates indicate the following:

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

Those savings would arise because private insurers’ bids would generally be lower than FFS costs per capita and would substantially influence the federal contribution. Savings would be much smaller if the options included a grandfathering provision because only a small portion of the Medicare population would be covered by the new system initially, and that portion would increase gradually.

On average, CBO estimates, beneficiaries’ total payments for Medicare premiums and cost sharing (enrollees’ out-of-pocket spending on copayments, coinsurance, and deductibles for Medicare-covered benefits) would be higher under the second-lowest-bid option, but lower under the average-bid option, than under current law. Under either option, the total payments made by particular beneficiaries could differ markedly from the national average. For example, in many regions, total payments by beneficiaries who chose to enroll in Medicare’s FFS program would be substantially higher than under current law because of the increases in beneficiaries’ premiums.

How Much Did CBO’s Estimates Change and Why?

CBO’s current estimates of the federal savings from the premium support options without grandfathering are much higher than its earlier estimates. In a November 2013 report, CBO estimated that if a premium support system was implemented without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $275 billion between 2018 and 2023 and the average-bid option would reduce net federal spending over that period by $69 billion.

CBO’s savings estimates increased primarily because the agency’s current projections of the bids that Medicare Advantage plans would submit under current law are lower relative to FFS spending per capita than the projections used in its earlier analysis. Medicare Advantage plans submit bids to Medicare for the amount that it would cost to provide enrollees with Medicare benefits covered under the Hospital Insurance (Part A) and Medical Insurance (Part B) programs. Medicare pays plans based on those bids, and then Medicare Advantage plans assume responsibility for paying providers for beneficiaries’ care. (In contrast, Medicare’s FFS program pays providers directly for services covered under Parts A and B.) CBO used its projections of the bids Medicare Advantage plans submit under the current program to estimate the bids of private insurers under the premium support options. The lower current projections of Medicare Advantage bids suggest that those insurers’ bids would be lower than CBO had previously anticipated. Other factors also affected CBO’s budgetary estimates, but with smaller net effects.

CBO lowered its projections of Medicare Advantage bids relative to FFS spending per capita for two reasons. First, Medicare Advantage bids have declined relative to FFS spending in recent years. Second, legislation affecting updates to Medicare’s FFS physician payment rates caused CBO to revise its projections of how much Medicare Advantage bids will change relative to FFS spending.