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Seniors Face Uncertain Costs as Lawmakers Eye Market-Based Medicare

By John Reichard, CQ HealthBeat Editor

November 11, 2011 -- Congress faces enormous pressure to restructure Medicare after the next election regardless of how deeply the deficit reduction package ends up reducing the cost of the entitlement program.

That is because Medicare's costs are on track to jump at least a projected 6 percent a year, dwarfing whatever level of savings the budget control law (PL 112-25) produces through automatic cuts or a proposal being developed by the Joint Select Committee on Deficit Reduction. Lawmakers already are examining how best to slow the program's rising costs while preserving core benefits and not alienating the program's politically powerful supporters.

There is fairly widespread agreement that under a restructured Medicare, many beneficiaries will no longer have their pick of doctors and hospitals. Health care will be increasingly managed and beneficiaries will have less access to the most technologically advanced medical tests and procedures. Beneficiaries are likely to pay higher out-of-pocket costs, particularly if they want to stay in traditional Medicare. Some analysts foresee a market-based system in which competition among health plans slows cost growth but keeps beneficiaries' premiums affordable. Others say that system would shift too many costs onto enrollees.

Last spring, House Budget Chairman Paul D. Ryan, R-Wis., proposed transforming Medicare into a premium support program under which seniors would select their coverage from a menu of competing plans with a set payment to help defray premium costs. Others have sought to soften the impact of Ryan's plan on beneficiaries. Former Congressional Budget Office (CBO) Director Alice Rivlin and former New Mexico Sen. Pete Domenici developed a plan that has drawn a less hostile reaction from Democrats and gained more attention now that GOP presidential hopeful Mitt Romney has endorsed its broad outlines.

The Rivlin-Domenici proposal, like Ryan's, would have private insurers set premiums for a basic set of Medicare benefits. Premiums would vary based on factors such as the size of networks and quality of providers; beneficiaries would then pick from a menu of plans. Each year, the government would specify how much of the premium it would cover. Seniors would be on the hook for any charges above that, but they could save money by selecting a plan with a premium below the federal subsidy.

The Ryan plan would increase the federal contribution each year by a percentage equal to the growth in the gross domestic product (GDP). That is well below the current rate of growth and would impose heavier costs on beneficiaries each year, the CBO has said. The Rivlin-Domenici plan would raise the contribution by GDP plus one percentage point—easing the pocketbook hit. Still, the federal contribution would be less than the projected growth in costs, and that, Rivlin says, would save Medicare $423 billion in the first decade and $1 trillion over 15 years.

Starting in 2016, beneficiaries would choose their health plan from regional Medicare exchanges. Unlike Ryan's plan, Rivlin and Domenici would include traditional Medicare as one choice. The federal contribution would be tied to the cost of the second-cheapest approved plan or to traditional fee-for-service Medicare in each area, whichever is lower. Rivlin said using the second-lowest bid would give seniors a chance to save money.

Resistance to Shifting Costs on Elderly

In some parts of the country, such as rural areas or the upper Midwest, where analysts say providers deliver care more efficiently, traditional Medicare would be the lowest-priced option on the exchange, says University of Minnesota economist Roger Feldman. But Feldman, coauthor of a similar bidding approach he says would save Medicare $500 billion over 10 years, says competitive pressure would lead bidders to offer only basic benefits, ending the relatively generous coverage now provided by plans in the Medicare Advantage program. In fact, beneficiaries could view the options offered by an exchange menu as either paying overly high premiums for traditional Medicare or settling for cut-rate medicine in a managed-care plan.

Paul Ginsburg, a consultant to Rivlin, said seniors are likely to feel the pinch. "If the net effect is to save money, I'm not sure that consumers will be that pleased by it," he says. He notes that the plan does have features consumers may like, such as tweaking Medicare benefits to add protection against catastrophic medical expenses. It would cap out-of-pocket costs, something that could limit the need for supplemental Medicare insurance. That would help shield seniors against exorbitant medical bills and save Medicare money, according to preliminary data from the Medicare Payment Advisory Commission.

But insurance industry analyst Robert Laszewski says the current proposals shift too much financial risk from the government to the beneficiary. "Everything's on the back of Grandma," he says. "How is Grandma going to do this?" Capping expenditures at GDP plus one would solve America's health spending problem, but, he says, insurers, doctors and hospitals also should have to absorb some costs if expenses increase. "Most of the risk needs to be with the big boys in the system."

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