Premium Support—Replace Medicare’s current defined-benefit system with a defined-contribution approach that provides a fixed subsidy to cover the cost of enrolling in an available health plan. Beneficiaries would receive a government contribution to purchase coverage and then be responsible for any extra premium. This reform incorporates competitive bidding and expands on it to include features such as a capped subsidy that is adjusted according to the health risk of the beneficiary.
 
The author maintains that traditional Medicare’s uncapped subsidy and reliance on fee-for-service payment promotes more spending on health services, not better spending. Legislation to reduce program cost has focused on reducing the prices paid for services. However, Congress has overridden cuts in physician fees called for by the sustainable growth-rate formula and is unlikely to enforce large payment reductions called for in the Affordable Care Act. The author argues that market competition can reduce unnecessary spending and still allow beneficiaries to select more expensive plans if they choose.

The challenge is to follow a path to reform that “does not require unsustainable political discipline” to be implemented. The author suggests a phased-in approach to premium support that would allow health care providers to adapt to the new system. He also suggests other reforms for traditional Medicare, which likely would remain competitive as a low-cost option in many markets. He concludes that plan competition and consumer choice can be effective in promoting high-quality care at an affordable price.

Other papers in this series:

The role of Medicare fee-for-service in inefficient health care delivery, by James C. Capretta
A competitive bidding approach to Medicare reform, by Roger Feldman, Bryan Dowd, and Robert Coulam