Net Federal Spending for Medicare Parts A and B for A ected Beneficiaries

Net Federal Spending for Medicare Parts A and B for A ected Beneficiaries

Total Payments by A ected Beneficiaries

Combined Net Federal Spending for and Total Payments by A ected Beneficiaries

Premiums Paid by A ected Beneficiaries

-15% Second-Lowest-Bid Option

Average-Bid Option

-8%

-8%

-5%

-7%

-7%

18%

35%

Estimated Difference From Outcomes Under Current Law, Without Grandfathering, in 2024

CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE

CBO A Premium

Support System for Medicare:

Updated Analysis of Illustrative

Options

OCTOBER 2017

Notes All years referred to in this report are calendar years. The estimates were generated using the Congressional Budget Office’s March 2016 baseline projections of Medicare spending.

The amounts in the text and tables are in nominal (current year) dollars. Numbers in the text, tables, and figures may not equal totals because of rounding.

Supplemental information accompanies this report on CBO’s website (www.cbo.gov/publication/53077).

www.cbo.gov/publication/53077

Figures

1. Estimated Difference From Current Law in Net Federal Spending for and Total Payments by Affected Medicare Beneficiaries Under Illustrative Premium Support Options, Without Grandfathering, 2024 7

2. Ratio of Actual and Projected Medicare Advantage Bids to Medicare FFS Spending per Capita Under Current Law, in Two CBO Studies 13

Table

1. Estimated Change in Net Federal Spending for Medicare Under Illustrative Premium Support Options, Relative to Spending Under Current Law, 2022 to 2026 6

Contents

Summary 1 What Are CBO’s New Estimates? 1 How Much Did CBO’s Estimates Change and Why? 1

What Is the Current Role of Private Plans in Medicare? 2

What Policy Options Did CBO Analyze? 2 The Federal Contribution 3 Grandfathering 3 Other Features 3 Key Design Decisions for Future Proposals 5

What Were CBO’s Analytical Methods? 5

What Are CBO’s New Estimates? 5 Budgetary Effects Without Grandfathering 6 Budgetary Effects With Grandfathering 8 Other Effects 8

How Much Did CBO’s Estimates of Effects Without Grandfathering Change and Why? 10 Changes in the Estimates 10 Reasons for the Changes in the Estimates 11 BOX 1. THE ROLE OF THE MEDICARE FEE-FOR-SERVICE PROGRAM AND ITS PROVIDER PAYMENT RATES 14

How Much Did CBO’s Estimates of Effects With Grandfathering Change and Why? 15

About This Document 17

A Premium Support System for Medicare: Updated Analysis of Illustrative Options

Summary Over the past two decades, policymakers and analysts have advanced a variety of proposals for converting Medicare to a premium support system as a way to reduce federal spending. Under such a system, beneficia- ries would choose health insurance from a list of compet- ing plans, and the federal government would share the cost of their premiums. The proposals have differed in many respects, notably in the way that the federal con- tribution would be set and how that contribution might change over time.

The Congressional Budget Office has in the past ana- lyzed the budgetary effects of some illustrative options for a premium support system.1 This report updates the agency’s work on the topic, presents new estimates of the budgetary effects of those options, and examines the reasons for the changes in the estimates, including changes in law that have affected the Medicare program. CBO constructed its estimates for this report under the assumption that the system would be implemented in 2022. Depending on their details, future cost esti- mates for legislative proposals that resemble the options analyzed in this report could differ substantially from the estimates presented here.

In the options CBO analyzed, the federal government’s contribution would be determined from insurers’ bids, and Medicare’s traditional fee-for-service (FFS) program would be included as a competing plan. CBO examined two approaches for determining the federal contribu- tion: One would set the contribution on the basis of the second-lowest bid in each region; the other would use the region’s average bid. CBO also examined the effects of grandfathering, which would keep beneficiaries in the current Medicare program if they were eligible for Medicare before the premium support system took

1. See Congressional Budget Office, Options for Reducing the Deficit: 2014 to 2023 (November 2013), pp. 204–210, www.cbo.gov/ content/options-reducing-deficit-2014-2023, and A Premium Support System for Medicare: Analysis of Illustrative Options (September 2013), www.cbo.gov/publication/44581.

effect instead of requiring all beneficiaries to enter the premium support system once it began.

What Are CBO’s New Estimates? CBO’s new estimates indicate the following:

■ Without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $419 billion between 2022 and 2026; the average-bid option would reduce such spending by $184 billion.

■ With grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $50 billion between 2022 and 2026; the average-bid option would reduce such spending by $21 billion.

Those savings would arise because private insurers’ bids would generally be lower than FFS costs per capita and would substantially influence the federal contribution. Savings would be much smaller if the options included a grandfathering provision because only a small portion of the Medicare population would be covered by the new system initially, and that portion would increase gradually.

On average, CBO estimates, beneficiaries’ total payments for Medicare premiums and cost sharing (enrollees’ out-of-pocket spending on copayments, coinsurance, and deductibles for Medicare-covered benefits) would be higher under the second-lowest-bid option, but lower under the average-bid option, than under current law. Under either option, the total payments made by partic- ular beneficiaries could differ markedly from the national average. For example, in many regions, total payments by beneficiaries who chose to enroll in Medicare’s FFS pro- gram would be substantially higher than under current law because of the increases in beneficiaries’ premiums.

How Much Did CBO’s Estimates Change and Why? CBO’s current estimates of the federal savings from the premium support options without grandfathering are much higher than its earlier estimates. In a November

2 A Premium SuPPort SyStem for medicAre: uPdAted AnAlySiS of illuStrAtive oPtionS october 2017

2013 report, CBO estimated that if a premium sup- port system was implemented without grandfathering, the second-lowest-bid option would reduce net federal spending for Medicare by $275 billion between 2018 and 2023 and the average-bid option would reduce net federal spending over that period by $69 billion.2

CBO’s savings estimates increased primarily because the agency’s current projections of the bids that Medicare Advantage plans would submit under current law are lower relative to FFS spending per capita than the pro- jections used in its earlier analysis. Medicare Advantage plans submit bids to Medicare for the amount that it would cost to provide enrollees with Medicare bene- fits covered under the Hospital Insurance (Part A) and Medical Insurance (Part B) programs. Medicare pays plans based on those bids, and then Medicare Advantage plans assume responsibility for paying providers for beneficiaries’ care. (In contrast, Medicare’s FFS program pays providers directly for services covered under Parts A and B.) CBO used its projections of the bids Medicare Advantage plans submit under the current program to estimate the bids of private insurers under the pre- mium support options. The lower current projections of Medicare Advantage bids suggest that those insurers’ bids would be lower than CBO had previously anticipated. Other factors also affected CBO’s budgetary estimates, but with smaller net effects.

CBO lowered its projections of Medicare Advantage bids relative to FFS spending per capita for two reasons. First, Medicare Advantage bids have declined relative to FFS spending in recent years. Second, legislation affecting updates to Medicare’s FFS physician payment rates caused CBO to revise its projections of how much Medicare Advantage bids will change relative to FFS spending.

What Is the Current Role of Private Plans in Medicare? In 2016, about 30 percent of Medicare’s 57 million beneficiaries were enrolled in Medicare Advantage plans. Almost all other beneficiaries were enrolled in Medicare’s FFS program. Insurers who wish to participate in Medicare Advantage submit bids to the government

2. For that estimate, CBO assumed implementation in 2018, four years earlier than the current estimate. See Congressional Budget Office, Options for Reducing the Deficit: 2014 to 2023 (November 2013), pp. 204–210, www.cbo.gov/content/ options-reducing-deficit-2014-2023.

indicating the per capita payment they will accept for providing benefits to enrollees under Medicare Parts A and B. The resulting federal payments depend in part on the insurers’ bids and on how those bids compare with county-level benchmarks, which range from 95 percent to 115 percent of local spending per capita in Medicare’s FFS program. Federal payments to insurers are adjusted to account for the health status of their enrollees, and plans receive bonus payments if they earn high ratings for quality of care. (Private insurers also participate in a separate bidding process that determines payments under Medicare Part D, the prescription drug program.)

What Policy Options Did CBO Analyze? In the current analysis, CBO examined two sets of illustrative options for converting Medicare to a pre- mium support system. For each, the federal government’s contribution would be determined from insurers’ bids, including the “bid” of the Medicare FFS program, which would be a competing plan. The nation would be divided into regions within which competing private insurers would submit bids indicating the amount they would accept to provide Medicare benefits to a benefi- ciary in average health.3 Similarly, Medicare’s FFS bid in each region would be based on the projected cost of providing benefits in Medicare FFS to an enrollee in average health.

Insurers would submit bids for a benefit package that covered the same services as Parts A and B of Medicare (with a few exceptions, noted below) at the same actuar- ial value as Parts A and B combined. (That is, each policy would cover the same benefits and percentage of total expenses for a given population that would be covered under current law by Medicare’s FFS program.) As under current law, Medicare Part D would be administered separately.

The options CBO examined differ from each other along two dimensions: the approach used to deter- mine the federal contribution, and whether the option included a grandfathering provision so that beneficiaries who became eligible for Medicare before the premium support system took effect would remain in the current

3. Throughout this report, the term bid refers to the standardized bid for a beneficiary in average health. As under current law, federal payments to plans would be adjusted to account for differences in their enrollees’ health.

3october 2017 A Premium SuPPort SyStem for medicAre: uPdAted AnAlySiS of illuStrAtive oPtionS

Medicare system rather than enter the new system. Other program features would be the same.

The Federal Contribution CBO analyzed two approaches to determining the benchmarks for setting the federal contribution:

■ A second-lowest-bid approach would set the regional benchmark at the lower of a pair of bids: either Medicare’s FFS bid or the second-lowest bid submitted by a private insurer.

■ An average-bid approach would set the regional benchmark at the weighted average of all bids, including the FFS bid, with weights equal to the proportion of beneficiaries enrolled in that plan in the preceding year.

For each enrollee, the federal government would pay insurers an amount equal to the benchmark for the region minus the standard premium paid by enroll- ees (discussed below). Insurers would receive larger or smaller payments for beneficiaries whose health was worse or better than average. Neither the amount nor the growth rate of the federal payment would be capped.

Beneficiaries who enrolled in a plan with a bid that equaled the benchmark would pay a standard premium directly to the insurer. That premium would be the same everywhere and would be set to cover approximately one-fourth of the total cost, excluding cost sharing, for services covered in Part B (physicians’ services, hospital outpatient care, durable medical equipment, and other services, including some home health care)—a formula that is similar to that under current law for Part B premi- ums. Beneficiaries who chose a plan with a bid above the benchmark would pay the insurer the standard premium plus the difference between the bid and the benchmark. Those who chose a plan with a bid below the benchmark would pay the standard premium minus the difference between the benchmark and the bid. Income-related Part B premiums for higher-income beneficiaries would continue as under current law.

Grandfathering For each approach to determining the benchmark, CBO analyzed options with and without grandfathering. (Grandfathering would keep current beneficiaries from having to adjust to a new system.) Under grandfathering, only a small portion of the Medicare population would

participate in the premium support system initially, but that portion would increase gradually over the long term.

Other Features The other features of a premium support system were common to all options. Some illustrate the potential for savings from a premium support framework; others were chosen for feasibility of implementation or to simplify the modeling approach. Many other variations are pos- sible, and none of the options presented in this report should be considered a recommendation by CBO.

Under each option, beneficiaries would choose a plan when they first entered the premium support system. Beneficiaries who did not select a plan at that time would be assigned (with equal probability) to a plan that had submitted a bid at or below the regional bench- mark, including the FFS program if it met that criterion. Beneficiaries would remain in the plan they chose (or were assigned to) in subsequent years, unless they chose a different plan during an annual enrollment period.

To clarify the choices for beneficiaries (and thereby heighten competition based on differences in premiums), private insurers would be allowed to submit bids for the basic Medicare package for just one or two plans in each region. If they chose to submit bids for two plans, each could have different features—offering a larger or smaller provider network, for example—but both would need to have the same actuarial value. Insurers also could offer a package of enhanced benefits (with a single, fixed, higher actuarial value that would be the same for all insurers) to accompany each basic package offered. Enrollees would pay the full additional cost of the enhanced packages through higher premiums.

CBO assumed that there would be no changes to the current FFS program, either in the mechanisms for setting the rates paid to providers or in the tools avail- able to contain costs. As under current law, beneficia- ries who remained in the FFS program could purchase supplemental coverage (known as medigap coverage) from private insurers. Such policies cover some or all of Medicare’s cost sharing and may also cover certain services that are not covered by Medicare.

To simplify the analysis, CBO assumed that the pre- mium support system would not affect certain types of federal spending for Medicare. Specifically, the agency assumed that dual-eligible beneficiaries—people who are

4 A Premium SuPPort SyStem for medicAre: uPdAted AnAlySiS of illuStrAtive oPtionS october 2017

simultaneously enrolled in Medicare and Medicaid— would be excluded from the premium support system and that federal spending for their health care would continue as it would under current law. CBO made that assumption because of the additional complexity of structuring a premium support system to include dual-eligible beneficiaries, although a system could be devised to include them.

In a change from past analyses, CBO assumed that ben- eficiaries with coverage only for Medicare Part A would be excluded from the premium support system and that federal spending for their benefits would continue as it would under current law. CBO chose that feature because most such beneficiaries have primary coverage through employment-based insurance and have second- ary coverage through Medicare.4

CBO also assumed that Medicare’s spending for Part D would continue as projected under current law, as would spending for items and services that are not included in the calculation of the benchmarks or bids for current- law Medicare Advantage plans—such as Medicare’s additional payments to hospitals for medical education, hospice benefits, and certain benefits for patients with end-stage renal disease.

The categories of spending that CBO assumed would be unaffected by the premium support system—which include spending for dual-eligible beneficiaries and bene- ficiaries enrolled in Part A only, all spending on Medicare Part D, and the other categories of spending discussed above—made up about 40 percent of net federal spend- ing for Medicare in 2016. (Net spending consists of total Medicare spending minus beneficiaries’ premiums and other offsetting receipts.)

CBO made many other detailed assumptions concerning the options that have been described previously.5 With the following three exceptions, the specifications used in this analysis were the same as those that applied in 2013.

4. Under current law, beneficiaries must be enrolled in both Part A and Part B of Medicare to be eligible to enroll in a Medicare Advantage plan.

5. See Congressional Budget Office, A Premium Support System for Medicare: Analysis of Illustrative Options (September 2013), pp. 7–15, www.cbo.gov/publication/44581.

First, CBO assumed that beneficiaries who had Part A– only coverage would be excluded from the premium support system. That analytical choice resulted in mod- estly smaller budgetary savings, relative to CBO’s prior estimate, because Medicare is the secondary payer for most such beneficiaries and thus typically spends much less to cover them.6

Second, CBO assumed that the federal government would apply a greater reduction in the risk scores of private-plan enrollees under the premium support options than it would under the current Medicare Advantage program. Risk scores are computed for all Medicare beneficiaries on the basis of their diagnoses and other characteristics, and the government uses those scores to adjust payments to plans. (CBO assumed that a comparable risk-adjustment system would be used for the premium support options.) Research pub- lished in the past few years has shown that, on average, Medicare Advantage enrollees have higher risk scores than FFS beneficiaries in similar health and that the difference has increased recently.7 The difference between risk scores for the two groups of enrollees appears to arise more from the intensive diagnostic coding used by Medicare Advantage plans than from actual differences in health among the two groups.8 In the current analysis, CBO assumed that the federal government would take steps to ensure that the risk scores of private-plan enroll- ees would be no more than 5 percent higher, on average, than the risk scores of Medicare FFS beneficiaries with

6. In certain situations—such as when a Medicare-eligible beneficiary has health insurance coverage through a current employer or a spouse’s employer—Medicare acts as the secondary payer. That is, Medicare only pays for covered benefits after the primary payer has met its responsibility for the beneficiary’s costs of care.

7. For example, see Medicare Payment Advisory Commission, “MA Risk Adjustment and Coding Intensity Adjustment,” in Report to the Congress: Medicare Payment Policy (March 2016), pp. 344–346, www.medpac.gov/-documents-/reports; and Richard Kronick and W. Pete Welch, “Measuring Coding Intensity in the Medicare Advantage Program,” Medicare & Medicaid Research Review, vol. 4, no. 2 (2014), pp. E1–E19, https://go.usa.gov/xN5DU.

8. Because they receive larger payments for covering enrollees with higher risk scores, Medicare Advantage plans have an incentive to code all diagnoses that are included in the risk-adjustment mechanism. Many providers (particularly physicians) have no such incentive to code every diagnosis for their Medicare FFS patients; they are paid on the basis of the services furnished, not the diagnoses reported.

5october 2017 A Premium SuPPort SyStem for medicAre: uPdAted AnAlySiS of illuStrAtive oPtionS

similar health status.9 That difference is smaller than the published estimates of the difference under current law.

Third, for this analysis, CBO assumed that legislation to establish a premium support system would be enacted late in 2017. To allow time for the federal government to develop the necessary administrative structures and for beneficiaries and insurers to prepare for the new system, CBO assumed that the system would not be imple- mented until 2022.

Key Design Decisions for Future Proposals Options considered by the Congress, and the result- ing costs or savings, could differ significantly from the options analyzed in this report. Policymakers who wished to develop such proposals would need to make many complex decisions about the design of a premium sup- port system, with important implications for Medicare spending. In its earlier report, CBO discussed several such decisions that would be specific to a system with grandfathering.10

Some more broadly applicable design questions include the following:

■ Would dual-eligible beneficiaries be included in the premium support system, and if so, how would the system accommodate them?

■ Would enrollment in Part B remain voluntary, and if so, how would beneficiaries who are enrolled only in Part A be treated by the new system?

9. Recent trends informed CBO’s expectation that, under current law, the unadjusted difference between the risk scores of Medicare Advantage enrollees and FFS beneficiaries would be greater than it anticipated in 2013 and substantially above 5 percent. For the premium support options, CBO assumed that coding differences would be limited to 5 percent. That limit is illustrative and arbitrary. Pressure to have a low limit would stem from concerns that a greater divergence between risk scores under premium support would allow private plans to reduce their bids. Reductions in those bids would tend to lower the federal contribution but would not affect the FFS bid. Thus, premiums would increase for beneficiaries who chose to remain in the FFS program.

10. See Congressional Budget Office, A Premium Support System for Medicare: Analysis of Illustrative Options (September 2013), pp. 32–33, www.cbo.gov/publication/44581.

■ What rules would be established for beneficiaries who receive retiree coverage from a former employer or union?