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Reduce Medicare Spending by Using Fixed Subsidies, Authors Argue

By Rebecca Adams, CQ HealthBeat Associate Editor

August 2, 2012 -- The best solution for holding down health care spending would be to limit Medicare patients to a fixed subsidy and change the tax benefits of employer-sponsored insurance, wrote American Enterprise Institute scholar Joe Antos and others in a new New England Journal of Medicine article.

The article provides a contrast to another New England Journal piece published in the same issue this week with a competing viewpoint of the best way to hold down health care spending. The other paper was co-written by former Obama administration advisers Ezekiel Emanuel and Peter Orzsag, along with other Democrats.

National health spending will be about $2.8 trillion in 2012, or 18 percent of the gross domestic product. It is expected to rise to 20 percent of the economy by 2020.

At an AEI discussion last week about the paper co-written by Antos, one panelist said that although the two papers present two ideologically distinct approaches, they do have some commonalities. The panelist, Center for Studying Health System Change President Paul Ginsburg, said both papers did a good job of addressing the urgency in reducing cost trends and accepting that both the market and government have to play some role. Each would nudge the current system away from payments based on volume, as the current fee-for-service system does, he said.

Antos, University of Pennsylvania scholar Mark Pauly and Project Hope expert Gail Wilensky said in their paper that Medicare should move to a defined contribution approach instead of continuing with the defined benefit system. They proposed giving seniors and other beneficiaries a uniform subsidy that they could use to buy insurance from competing health plans or traditional fee-for-service Medicare. All of the coverage would offer a common set of core benefits.

"Reliance on competitive markets rather than on regulatory controls provides strong incentives for more efficient delivery of the health care services that consumers truly value," they wrote.

One of the goals of their idea, Antos said, is "for people to become aware of what they are actually spending." He wants people to ask themselves, "Why am I buying this? Shouldn't this be better?"

Under their plan, lower-income and sicker patients would get higher subsidies.

The proposal, based on the "premium support" model, shares characteristics with others that have been floated before by Republicans and others over the years. The House has adopted in two subsequent years budget resolutions by House Budget Committee Chairman Paul D. Ryan, R-Wis., that include a variation of the idea.

Congressional Democrats criticize Ryan's plan as a voucher system and say it would cut benefits for future retirees. One version of the Ryan plan would limit growth to the equivalent of GDP plus 0.5 percent. The Antos paper does not include those restrictions. The authors noted those limits and said, "If unduly restrictive limits were enforced, they could threaten access to beneficial care and impede medical progress."

At the AEI forum, the authors and other panelists were asked by an audience member whether providing subsidies and allowing people to choose insurance might result in younger and healthier people buying one type of coverage, while sicker patients would be stuck together in a different type of plan. The concern is that if this happened, this could increase costs for the sicker patients.

Wilensky, who ran Medicare and Medicaid during the George H.W. Bush administration, said this fear would not materialize if appropriate adjustments were made to the payments so that plans would get paid more for sicker patients.

She also said there are "a lot of advantages in having a lot of sick people group together in plans because you can develop real expertise" about how to care for that population.

However, she acknowledged that if the payments were not adjusted for the health of patients, then there could be problems.

Ginsburg disagreed that risk adjustment payment tools are refined enough now to be able to identify and appropriately predict the future costs of beneficiaries.

"Theoretically, risk adjustment completely solves the problem," he said. "On the ground, though, it doesn't. It's not good enough yet."

The article said the current Medicare program not only costs too much but also produces poor results.

"The uncapped entitlement and distorted fee-for-service structure of traditional Medicare are major causes of the rapid rise in program spending," they wrote. "Poorly targeted fee-for-service payments promote the use of more—and more expensive—services, delivered in a fragmented and uncoordinated environment. The result has been higher spending and poorer patient outcomes."

The authors also said the current tax exclusions on health insurance provided by companies to their workers are ineffective. They said they could be converted into a tax credit that could be used by individuals to buy insurance on their own—if political support for the idea increased.

During the forum, political analyst and AEI fellow Norm Ornstein said he suspected that if you put the authors of the two New England Journal articles in a room together, they probably could "hammer out something that'd be better than what we got." But he said that although some moderate senators are looking for bipartisan compromises, many lawmakers in the next Congress will have no interest in listening to any approaches that find common ground. "Making that work in this political environment is a near impossibility," he said.

  • Antos paper
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