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Mark Miller: Remaking Retirement

A New Chapter in the Medicare Reform Battle

Contributor Mark Miller takes a look at a trio of changes that may be debated in Washington.

Not much was said during the presidential election about Medicare reform, but "modernization" of one of our most critical retirement programs is on the agenda in Washington.

The term applies to a basketful of reform ideas long favored by Republicans. But if Medicare modernization moves forward next year, it will set in motion a long-term shift of healthcare cost risk from government to beneficiaries on an unprecedented scale.

Let's consider three lynchpin modernization ideas: premium support, higher eligibility ages, and simplification of the benefit structure. Most of these reforms would be phased in gradually, probably affecting future beneficiaries more than today's enrollees.

Q: What is premium support?

A: This is a plan long championed by House Speaker Paul Ryan, R-Wis., that would replace today's defined set of promised Medicare benefits with an annual voucher that enrollees would use to buy health insurance.

Medicare enrollees would buyhealth insurance from among various competing plans, which could include both traditional Medicare and plans offered by commercial insurance companies. The federal government would pay part of the cost of the coverage through an annual payment, or voucher.

"It's a bit like the difference between a defined benefit and defined contribution pension plan," says Paul Vanderwater, senior fellow at the Center on Budget and Policy Priorities. "The guarantee is a certain dollar amount that could be used to buy a plan--but no longer a guaranteed benefit."

Q: The private market option sounds like today's Medicare Advantage program. How would premium support be different?

A: The private market option might resemble Medicare Advantage, although the devil would be in the details. Advantage plans must offer the same defined set of benefits that traditional Medicare delivers; it's not certain that would be the case with premium support.

One major difference actually may be in the traditional fee-for-service program. There, payments would be capitated--different from the current system, which usually ties payments to the services that beneficiaries use.

Another major difference would be how government sets payments to private plans. In contrast to the current system, payments to private plans would be based on a pure competitive bidding model, which could include traditional Medicare. 

"This is a big change, and it could mean lower payments for private plans in low-cost areas than current law allows," says Tricia Neuman, director of the program on Medicare policy at the Kaiser Family Foundation.

Q: How would premium support shift risk to enrollees?

A: Premium support would be a massive live health reform experiment conducted in the nation's largest healthcare payment system. The outcome of injecting a major new competitive model into the system is far from certain in terms of premium and total out-of-pocket costs.

The impact on premiums would depend on the specifics of whatever program might be enacted. The Congressional Budget Office attempted to model the impact of premium support in 2013. It found that premiums could be higher or lower compared with the current system, depending on how the system is designed.

Q: How about total out-of-pocket costs?

A: That also would depend on how the annual voucher is set. One proposed approach would set the number using the average bid to Medicare by all commercial plans and traditional Medicare; that would lead to lower total out of pocket costs, according to the Congressional Budget Office. Another approach would tie payments to the second lowest plan bid, which would mean higher out-of-pocket costs.

In any case, there would be winners and losers in traditional Medicare--that is, some who stay in traditional Medicare would see higher costs. The cost of staying in traditional Medicare also could vary by region. Beneficiaries living in parts of the country with higher medical costs would need to spend more to stay in traditional Medicare than they do now.

"It would play out differently for people based on where they live and the insurance choices they make," says Neuman.

Q: Would there be more or less choice of healthcare providers under premium support?

A: Traditional fee-for-service Medicare is the gold standard when it comes to flexibility in access to providers. Private plans, like the ones offered in today's Medicare Advantage program, rely on managed care--narrow networks of providers--to contain costs. Research by KFF has turned up problems with these narrow networks, including inaccurate data about providers in the online market exchanges and limited access to top-flight cancer centers.

Q: Who would be affected by premium support in terms of age groups?

A: Most Medicare reform plans phase in changes slowly, grandfathering in today's beneficiaries and those close to retirement. Workers younger than age 55 likely would enroll under the new plans. "It's conceivable that premium support would have a bigger impact on today's midlife adults," says Neuman.

But she adds that there is uncertainty about how the new system would be phased in, and these policy decisions could impact seniors' premiums and plan choices.

"Even with a phase-in, a premium support system could potentially impact seniors who are already on or about to be on Medicare," she said. If younger seniors shift into a new premium support system, and the traditional Medicare risk pool gets older, sicker and more expensive, "traditional Medicare could experience a death spiral, unless adequate safeguards are in place," she says.

Q: What about raising the eligibility age? How would that work?

A: The Heritage Foundation has proposed raising the eligibility age for Medicare from 65 to "at least 68" over a period of 10 years, and then indexing it to life expectancy. The argument is that rising longevity forces Medicare to stretch its resources over much longer lives; according to the Centers for Disease Control, in 2013, men could expect another 17.9 years of life, up from 14.1 years in 1980; women can expect another 20.5 years, up from 18.3 years in 1980.

Q: The longevity argument makes sense, right?

A: Yes and no. While longevity has been rising, the gains are not spread evenly across the U.S. population, so higher eligibility ages would hit some people harder than others in terms of lost years of Medicare coverage. Along with the gender gap noted above, higher-income white-collar workers outlive blue-collar workers by 2.5 years, on average, from age 65. Other research points to a sizable longevity gap by educational attainment and race.

Meanwhile, the lifespan gains could be leveling off.  Life expectancy for Americans actually declined in 2015 for the first time in more than two decades, according to data released this month by the National Center for Health Statistics which is part of the Centers for Disease Control and Prevention.

From a practical standpoint, a higher eligibility age would leave an open question on where workers in the 65-67 year age group who are retired or jobless would find health insurance while they wait--especially in light of possible repeal of the Affordable Care Act.

"Depending on how the ACA is replaced, they would be at some risk of having no health coverage at a time in their lives when they need it," argues Neuman. "Others may not be able to work, or may not have access to an employer plan."

The financial risk of higher Medicare eligibility ages for average households would be crushing, argues Henry J. Aaron, a longtime health economist at the Brookings Institution. He calculates that even if a subsidized market exchange policy were made available to these newly uninsured (using the ACA’s current subsidization structure),  a couple at age 65 living in Florida with an income equal to four times the federal poverty level, $62,920, would face an insurance bill equal to roughly one-fourth of income.

"There is no good argument for raising the age of eligibility for Medicare," Aaron says. "The fact is, most people retire for good or ill before the current eligibility age (65). You might argue that you want people to stay in labor force longer and use fear of lost health insurance, but that's a very rough way of going about encouraging people to remain in labor force."

Aaron also argues that any savings for the Medicare program would be small, since younger seniors are healthier.

Q: What would Medicare simplification mean?

A: The idea here is to combine Medicare Parts A and B into one program, with a single deductible and uniform coinsurance. This would be coupled with reform of the Medigap supplemental insurance program, and the addition of catastrophic protection--one of the most important weaknesses in Medicare.

Next year, the Part A deductible is $1,316 per benefit period, which covers a beneficiary's share of costs for the first 60 days of inpatient hospital care. After that, beneficiaries pay coinsurance of $329 per day for days 61 through 90, and $658 daily after that. Meanwhile, most Part B enrollees will pay a monthly premium of $109 next year, with an annual deductible of $183 (click here for a summary of all Part A and Part B premiums and deductibles for 2017).

Simplification proposals would mean a single annual deductible somewhere in the middle--perhaps $500 or $600, with a cap on out-of-pocket hospitalization expenditures.

For many beneficiaries, this would mean higher out-of-pocket costs, since "most Medicare beneficiaries don’t end up in the hospital," as Vanderwater notes.

But Medigap plans would be rendered far less compelling. About 20 percent of beneficiaries now use these supplemental plans to protect against catastrophic costs, and to cover copay and deductibles; premiums run a bit over $2,000 per year on average.

Simplification aims to improve Medicare's finances through the higher deductible, and by reducing healthcare utilization. The argument here--advanced by a variety of policymakers--is that because Medigap covers most cost-sharing requirements, the incentive for patients to weigh carefully the need to access care is reduced.

"All of the professional literature says that the impact of Medigap is higher costs over time, because people are paying higher premiums, and that there is excess utilization," says Robert Moffit, director of the Center for Health Policy Studies at the Heritage Foundation.

Q: Why are all these Medicare reforms being pushed?

A: Political advocates of reform argue that Medicare is going bankrupt and needs to be saved for future generations. The facts are more complex. The Medicare Part A trust fund has adequate funding to meet all of its obligations through 2020, according to the program’s trustees. At that point, current revenue from payroll taxes and other sources would cover 87 percent of its obligations. Meanwhile, Parts B and D have a separate trust fund financed through a blend of enrollee premiums (25%) and general revenue (75%).

It's true that Medicare is consuming a growing share of federal spending: the CBO projects that net Medicare spending (mandatory Medicare spending minus income from premiums and other offsetting receipts) will rise from $591 billion in 2016 to $1.1 trillion in 2026. But net Medicare spending is projected to rise modestly as a share of the federal budget and as a share of the economy. Between 2016 and 2026, Medicare's share of the budget is projected to rise from 15.2% to 16.8%, and 3.9% of GDP, up from 3.2%.

Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. The views expressed in this article do not necessarily reflect the views of