Yesterday, House Budget Committee chair Paul Ryan (R-WI) and Sen. Ron Wyden (D-OR) introduced a new “premium support” Medicare reform proposal. Among other features of the plan, beginning in 2022, private plans would compete against the traditional fee-for-service Medicare program on a federally regulated Medicare exchange. Premium support levels would be determined by the cost of the second least-expensive plan in a region, or by the cost of traditional Medicare, whichever is lower, with additional support given to the sick and the poor. Private plans would have to offer at least as comprehensive a benefit as traditional Medicare, and all seniors would enjoy a limit on out-of-pocket costs.

The term “premium support” was introduced by Henry Aaron and Robert Reischauer in a 1995 Health Affairs article. Aaron and Reischauer’s ideas drew heavily on Alain Enthoven’s theory of managed competition, explained in a 1993 Health Affairs piece.

In a Health Affairs Blog post earlier this year, Aaron explained the attributes of premium support as he and Reischauer envisioned it, and how the concept differed from voucher plans:

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.

In his post, Aaron goes on to demonstrate why, in his view, earlier competition-based Medicare reform proposals by Ryan amounted to vouchers, not premium support. He also explains why he no longer supports premium support as a model for Medicare reform.