According to the report, turning Medicare into a “premium support” program would encourage private insurers to draw less costly beneficiaries from traditional Medicare, leading to bloated per-beneficiary reimbursements. The study arrives at this conclusion by extrapolating existing trends in Medicare Advantage (MA), which has appreciably higher per-capita costs than traditional Medicare in 75 percent of counties serviced:
The debate around premium support misses the potential within Medicare’s existing structure to harness the market to promote efficiency and to do so on terms that do not put beneficiaries at risk for escalating costs…By design, MA plans have been paid above per capita costs for equivalent beneficiaries in traditional Medicare, and have used these payments to provide extra benefits that have successfully attracted more than a quarter of Medicare beneficiaries into private health plans.
Measures taken by the Affordable Care Act significantly reduce these extra payments. But they do not eliminate the long-standing bias favoring payment policies designed to attract private plans rather than to encourage lower costs. Our analysis of recent MA experience shows that most private plans are more, not less, costly than traditional Medicare. In fact, MA plans with the lowest costs have been found to serve only 10 percent of MA enrollees, despite their attractiveness in the current market, and they do not reflect the typical MA experience. Only in the highest cost areas for traditional Medicare do typical MA plans deliver care at lower costs than the public program. Even this difference is likely exaggerated, given continuing evidence of favorable risk selection (that is, disproportionate enrollment of low cost enrollees) in private plans. In short, overpayment, not lower costs, drives most of MA plans’ success in competing with the public program for enrollees.
The GOP defends premium support models like the Romney/Ryan plan by claiming that they will exert downward pressure on providers and encourage competitive bidding in the insurance industry. The logic is that seniors, whose Medicare subsidies would stagnate relative to the rising cost of health care, will look for the best deals on the market and thus force insurers to compete, lowering overall health care costs.
But as the Urban Institute report demonstrates, private insurance competition is unlikely to yield much in the way of savings since providers would simply adapt their business models to pick up the least costly beneficiaries. Studies have repeatedly shown that this is the exact kind of adverse selection and cost-shifting that occurs in Medicare Advantage plans. Transitioning traditional Medicare away from its current defined-benefit model into a premium support one would exacerbate the problem, leading to increased premiums, more overpayments to private insurers, and even higher costs in the health care industry.