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Brookings Fellow: Premium Support a 'Premature' Idea

By John Reichard, CQ HealthBeat Editor

January 27, 2012 -- Brookings Institution Senior Fellow Henry Aaron recently said that a premium support system that would cap federal outlays for Medicare is a premature remedy for the budget threat posed by Medicare.

Aaron, who championed the idea in 1995, said that taking that overhaul approach now would be too disruptive to seniors.

Aaron's views are important because they could shape how Democrats respond to pressure on Capitol Hill after the election to overhaul Medicare based on the premium support approach.

Aaron spoke on a panel with Alice Rivlin, who also is a Brookings Institution senior fellow. She is pulling Democrats in the other direction. Rivlin is calling for adoption of a premium support proposal she made with former New Mexico Sen. Pete V. Domenici, a Republican.

The Rivlin-Domenici plan and a subsequent proposal by Sen. Ron Wyden, D-Ore., and Rep. Paul D. Ryan, R-Wis., would give Medicare enrollees a menu of competing plans from which to pick. Traditional Medicare would be one option. Enrollees would go to regional Medicare exchanges to compare plans and enroll. The federal government would set an amount each year it would pay toward the cost of premiums. The amount would be based on the second-lowest bid by insurers competing to provide Medicare benefits.

Rivlin said competition among plans would hold down premium costs. But if Medicare costs in a given year were to exceed the gross domestic product plus 1 percentage point, Medicare would hike its contribution to premiums by no more than that amount.

Aaron said Medicare is much different now than it was in the mid-1990s because the health care law (PL 111-148, PL 111-152) is now in effect. Provisions in the law to control Medicare spending should be given time to work before any attempt is made to incorporate premium support, he said.

He added that the kinks in developing insurance exchanges under the overhaul should be worked out before they are attempted in the Medicare program. The health care exchanges are designed to serve some 30 million Americans, but the regional Medicare exchanges established under premium support would serve far more people—around 70 million a decade from now.

"We have a big job now to get the insurance exchanges up and running," he said. Problems developing exchanges for Medicare may be "intractable," he said. One issue is that many beneficiaries are mentally impaired, he added.

Aaron said competition in exchanges could only work if plans are tightly regulated to prevent cherry picking, under which plans select low-cost enrollees and avoid high-cost ones. But the current political climate is hostile to regulation, he said.

Premium support "is not a terrible idea," Aaron concluded. "I just think it's a premature idea right now."

Rivlin told the forum that a bipartisan deal to control Medicare spending is a must because of the debt crisis the U.S. faces.

She agreed with Aaron on the importance of maintaining provisions in the health care law to control Medicare spending. She said she strongly supports the law's provisions to overhaul Medicare payments, test new ways to organize care and establish the Independent Payment Advisory Board, which has powers to limit Medicare spending if it exceeds certain target levels.

However, Rivlin added that the debt situation is dire enough that both the health care law provisions and her premium support plan should be adopted.

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