In the mid-1990s, a number of health care analysts and some elected officials, worried about projected growth of Medicare spending, suggested replacing Medicare with flat dollar payments to Medicare beneficiaries. These payments could be used to buy private insurance plans that the recipients preferred.
Federal payments would be capped. Individuals could buy any approved plan. Advocates claimed sizable savings from such a switch. One source was the hope that competition among insurers would discipline providers, holding down the price of care and encouraging providers to practice cost-effective medicine. Whether or not such economies were realized, vouchers would slow growth of federal health care spending by capping federal liability.
Critics pointed out that savings from the first source were speculative, while reductions in spending from the second source were virtually certain because growth of health care spending has outpaced not only prices but also income growth. There was also concern that competition might take the form of a socially useless, but administratively costly struggle by insurance companies to enroll ‘good risks’—that is, the healthy—and exclude ‘bad risks’—that is, the sick. Because of these and other criticisms, the term ‘vouchers’ began to carry negative undertones. More than that, the criticisms called attention to genuine shortcomings with the voucher approach.
In response, Robert Reischauer and I coined the term “premium support” to refer to a type of health plan, that, like vouchers, would give people dollar payments they could apply to the cost of health insurance plans they would choose from a limited menu and that would include protections that voucher plans lacked.
The Attributes Of Premium Support And Why They’re Important
The defining attribute of the plans that Reischauer and I christened “premium support” was that the amount of support was to be indexed to average health care costs, not, as in voucher plans, to a price index or per person income. If savings were to result from the exercise of consumer choice and market discipline, that would be well and good, we argued. But savings should not come from erosion of the adequacy of support resulting from linking the payment to a slowly growing index. This difference is crucial. Voucher plans are virtually guaranteed to become increasingly inadequate; premium support plans will not.
In addition, premium support plans were to be subject to regulations that voucher advocates ignored or rejected out of principle. These regulatory safeguards were intended to minimize or eliminate competition based on risk selection, to facilitate informed choice by consumers, and to hold down administrative costs. Specifically, we suggested three safeguards: 1) the number of plans that could be offered would be limited and specified by a regulatory agency, public or nonprofit; 2) the same agency would prepare materials explaining the alternative plans, provide counseling to buyers, and handle all sales; and 3) the government would redistribute premiums among insurance plans to offset any financial advantage that any insurer might secure by enrolling low-cost customers.
Of late, various sponsors of plans to change the terms of Medicare have applied the term ‘premium support’ to plans that provide vouchers, but lack one or more of the protections that distinguish the two approaches. People are, of course, free to redefine terms: trying to avoid tainted terms is commonplace—people are no longer ‘fired’ but are given ‘new career opportunities.’ But it is important that the affective trappings of the term ‘premium support’ not protect the harsher realities of voucher plans from the scrutiny they deserve.
The recently released plan of the House Budget Committee chair, Paul Ryan (R-WI) is illustrative. The Ryan plan would replace traditional Medicare with a voucher indexed to consumer prices. For decades, per person health care spending has exceeded price growth by an average of about 4 percentage points a year. It is not surprising, therefore, that the Congressional Budget Office estimates that the share of health care expenses that a typical elderly beneficiary would have to pay out of pocket would go up in 2030—from 25-30 percent under current law, to 68 percent under the Ryan plan. Since the same adjustment factor would be used for Medicaid, which Ryan would convert into a block grant, it is also not surprising that federal health care spending would be reduced by approximately two-thirds by 2050.
Other plans, including previous drafts by Mr. Ryan, alone and in collaboration with others, and one by approved by the Debt Reduction Task Force of the Bipartisan Policy Center (the Domenici-Rivlin Report) had neglected the regulatory safeguards that Reischauer and I stressed. In that respect, the House Budget Committee proposal improves on its predecessors, as it includes a requirement that insurers serve all comers and provides for risk adjustment based on actual enrollments and usage. But as long as any of these plans ties support to indices that are virtually certain to lag health care spending and thereby promise erosion of benefits, they are not premium support, unless the term is redefined to suit the moment.
Why I Have Moved Away From Premium Support
Terminological issue aside, the proposal Reischauer and I advanced came in for some pretty tough criticism from advocates of traditional Medicare, many of them published in Health Affairs. I have become more sympathetic to those criticisms for three reasons:
- First, the character of recent proposals and the widespread antipathy to vigorous federal regulation of health care offerings makes it improbable that the safeguards necessary to enable Medicare enrollees to make informed choices will be sustained.
- Second, I have come to believe that the welfare gains from being able to choose among competing insurance plans have been exaggerated. Considerable research suggests that most people, to say nothing of a population that includes the frail elderly and the disabled, are not very good at evaluating insurance plans and choosing the one that is in their best interest.
- Third, the decades long aversion to mobilizing the power of the nation’s largest buyer of health care, Medicare, to leverage delivery system change seems at last to have been broken. The Independent Payment Advisory Board to be established under the Affordable Care Act may well have the means to effect such change, particularly if the many demonstrations, pilots, and experiments under that Act yield results that justify nationwide implementation. To abandon this experiment even before it has been given a fair chance to succeed seems foolish to me.
Finally, there is something distinctly odd when the same people who are working hard to repeal health insurance exchanges for the non-elderly, non-disabled population simultaneously call for setting up such exchanges for the elderly and disabled. If there are populations for whom exchanges have the least chance of success, it is for the elderly and disabled, where the stakes in risk selection are highest.
Vigorous supporters of market-based controls on health spending should start where chances for success are greatest. That means proceeding resolutely to implement the Affordable Care Act, not repeal it, and to wait for radical change in Medicare until we see how the new system works.