Medicare Reform: Competition, Choice, and Restructuring Markets not Madness: Medicare Reform That Works AEI April 16,

1. Medicare Reform: Competition, Choice, and Restructuring Markets not Madness: Medicare Reform That Works AEI April 16, 2013 Joseph R. Antos, Ph.D. Wilson H. Taylor Scholar in Health Care and Retirement Policy American Enterprise Institute

2. An ailing program • Cost • Crowding out other federal spending priorities • Crowding out private spending priorities • Fairness • Intragenerational equity • Intergenerational equity • Market distortions • Value—do seniors get what they want/need? • Medicare’s reach—coverage, payment, coding, quality of care, structure of health care business and care delivery • Tremendous leverage on the system—for better or worse

3. Has Medicare turned the corner? Slower Per Capita Medicare Spending in Last 3 Years Comparable growth rates for total spending and GDP: 8.0%1.9%6.9%-2.2% 4.3% 3.8%6.2%4.0% Source: Hartman et al., National Health Spending in 2011, Health Affairs, January 2013 Is GDP + ½% feasible?

4. Current law is optimistic…

5. …if you call this optimistic

6. Federal health spending and the budget Federal spending as a percentage of GDP, Alternative Fiscal Scenario* Assumes aging accounts for 52% of growth in health spending and 68% in health and Social Security *Assumes Medicare physician fees held at 2012 level, IPAB does not take effect, current law reductions in per-person exchange subsidies not enforced, other automatic spending reductions not enforced.

7. An ailing program • Cost • Crowding out other federal spending priorities • Crowding out private spending priorities • Fairness • Intragenerational equity • Intergenerational equity • Market distortions • Value—do seniors get what they want/need? • Medicare’s reach—coverage, payment, coding, quality of care, structure of health care business and care delivery • Tremendous leverage on the system—for better or worse

8. Rising burden on future workers Enrollment (millions) Workers per Beneficiary

9. An ailing program • Cost • Crowding out other federal spending priorities • Crowding out private spending priorities • Fairness • Intragenerational equity • Intergenerational equity • Market distortions • Value—do seniors get what they want/need? • Medicare’s reach—coverage, payment, coding, quality of care, structure of health care business and care delivery • Tremendous leverage on the system—for better or worse

10. Medicare reform = health reform

11. Incentives drive spending • A system that promotes volume • Traditional Medicare’s open-ended subsidy • FFS incentives • Lack of provider coordination • Medigap insulates consumers and providers • Limited consumer information • Medical liability • Fee reductions alone do not change incentives • Can plan competition and consumer choice work? • Blend defined benefit, defined contribution • Who bears risk? • Information challenge

12. Key elements of reform • Premium support • Competitive bidding • Comprehensive coverage • Defined contribution • Consumer information • Spending cap • Reform traditional Medicare • Regulation

13. Do we need a limit on spending growth? • Ryan and Obama agree on GDP + ½ target • CBO scoring at stake • Bids reveal full cost of benefit, not how much beneficiaries pay • Will competition drive down cost? • How do we know when the growth target is too tight? • Can we pull the trigger? • Signal to health sector?

14. What happens to traditional Medicare? • Free traditional Medicare to operate more efficiently and better meet demand • Song, Cutler, Chernew (JAMA 2012) – traditional Medicare low bidder for 75% of beneficiaries • Improve payment methods • Bundled payment, preferred providers, centers of excellence, ACOs/shared savings with teeth • Reduce need for Medigap • A + B +streamlined cost-sharing • Limit gap coverage/offer coverage at market rate • Regional FFS plans with greater ability to innovate

15. Can market-based reform work? • Part D spending 37 percent lower than initial cost estimate • $485 B vs. $768 B between 2006 and 2013 • Lower Rx spending growth in Part D than rest of country • Flexible benefit design drives generic usage, lower cost • MA plan cost reflects policy decision, poor bidding structure • BBA 97 limited payments to 2% annual growth, and half of the plans dropped out • MMA 03 set benchmark above traditional Medicare’s cost—telling plans what the government is willing to pay • HMOs bid 3% below FFS, but paid 9% above (2010)

16. Can seniors make good choices? • 27% of beneficiaries chose MA plans to gain extra benefits • Part D demonstrates that seniors respond to incentives, once they understand what is at stake • Initial plan choices in 2006 were often not lowest cost • Between 2006 and 2007, large sample of beneficiaries switched plans and saved $298 on average • Oldest consumers and those with Alzheimer’s disease improved by more than the average

17. Do plans cherry-pick? • Risk selection could leave traditional Medicare with the high-cost patients • Improved risk adjustment system for MA payments plus one-year lock-in has reduced extent of over/under payment • Self-fulfilling prophecy • Patient “risk” measured by observing actual use of services • If MA plan manages care well, average use declines • Use rates for major service categories (e.g., ED, ambulatory surgery) 20-30% lower in MA HMOs than in FFS Medicare • More appropriate care or cherry-picking?

18. Is market-based reform on the table? • Sluggish economy, rising debt/deficit • Administration emphasizes demographics, which account for only ~ ½ of spending growth • President’s budget replaces sequester with fee cuts and limited “structural” changes • Income-related premiums, increase Part B deductible, home health copays, premium surcharge for Medigap purchasers • If there is a negotiation, this is the starting point