Make Medicare better by building on Medicare Advantage's success

Medicare, the $1 trillion federal health program serving seniors and disabled persons, turned 58 on July 30. But it is no longer your grandfather’s Medicare.

A Kaiser Family Foundation analysis of this year’s enrollment data shows that fully half of all Medicare beneficiaries are enrolled in private health plans.

Traditional Medicare is a heavily regulated, defined-benefit, fee-for-service program in which the price of each medical service is fixed and capped by the government. In short, it is an early  version of what progressives hoped would be a “single-payer” national health insurance system.

In 2003, Medicare Advantage was created as an alternative to traditional Medicare. Medicare Advantage provides private health coverage financed through a defined government contribution to the beneficiary’s chosen plan. Ever since Medicare Advantage was created, seniors have been increasingly choosing its private coverage over traditional Medicare — voting with their feet, so to speak.

Medicare Advantage can serve as the template for broader changes to the healthcare system. Armed with a range of personal choices of private coverage and more competitive health options, tens of millions of Medicare beneficiaries — not politicians — can drive major improvements in America’s largest health care program.  

But that dynamism cannot happen in a policy vacuum. Medicare, including Medicare Advantage, has structural problems that require carefully crafted reforms. If done right, these can unleash the potential of personal choice and market competition.

But it will take time, and Washington policymakers do not have time to waste.

The most recent Medicare trustees report shows that seniors’ Medicare hospitalization insurance program faces an automatic 11 percent benefit cut in 2031 if nothing is done. Also, Medicare's supplemental medical insurance program, which covers physician and drug benefits, faces a steep rise in combined monthly premiums, from $197.64 today to $316.31 in 2031.

Meanwhile, traditional Medicare’s payment rules for hospitals and related medical facilities threaten patients’ future access to high quality care.  

In addition, without reform, total annual Medicare spending is projected to jump from an estimated $1 trillion today to more than $1.8 trillion in 2031.  

Medicare’s Board of Trustees has warned that Congress and the president must work together sooner rather than later to address these issues and to enact reforms with the least possible disruption.

If lawmakers were to build on the increasingly popular Medicare Advantage program — a program that beneficiaries already know, like, and voluntarily choose — they could unleash the full power of personal choice and competition within a transparent environment of price and provider performance. These can pave the way for a stable Medicare future offering better health outcomes.

Medicare Advantage's defined-contribution system of financing, whereby the government pays a fixed amount to each beneficiary’s chosen health plan, can surely be improved upon. But overall, it has been a success. The growing popularity of Medicare Advantage is fueled by its affordability, its broader benefit offerings, its superior performance in delivering quality care, and its protection against the financial devastation of catastrophic illness.

Naturally then, reform should start by improving Medicare Advantage, which will soon be the dominant form of Medicare coverage. For example, its overly complex plan payment and risk adjustment systems should be overhauled and simplified. It should be changed so that beneficiaries secure 100 percent of any savings from the choice of a more efficient plan. And private health plans should be prevented from financially gaming Medicare at taxpayers’ expense.

Reform should also provide greater flexibility in benefit and coverage options. For example, Medicare patients, faced with complex health challenges, should be able to take full advantage of health savings accounts and to continue contributing to these accounts tax-free. Likewise, medical savings account plans, an existing option within Medicare Advantage, should be free to offer prescription drug coverage, something they cannot do today.

Reformers should lay the groundwork for a full range of competition among health plans and providers. Traditional Medicare, for example, should be transformed into a comprehensive health plan, combining coverage of hospital and physicians’ benefits. It should provide enrollees with simplified copayments and guaranteed protection from the financial devastation of catastrophic illness. And it should be compelled to compete with Medicare’s private health plans.   

With a level playing field for competition between Medicare’s private health plans and a modernized fee-for service Medicare plan, seniors and taxpayers alike would enjoy major financial benefits.

In Modernizing Medicare: Harnessing the Power of Consumer  Choice and Competition, former CBO Director Douglas Holtz-Eakin estimated that such market competition would yield 10-year program savings of more than $2.2 trillion, including $333 billion in savings for beneficiaries. University of Pennsylvania economist Mark Pauly observes that highlighting the mutual benefits — to taxpayers and beneficiaries alike — could break the legislative logjam that has long thwarted past reform efforts.

Intense competition can lower costs, stimulate innovation in care delivery, and enable Medicare patients to secure better value for their health care dollars. They deserve no less.

Robert Emmet Moffit, Ph.D., is a senior fellow specializing in health policy at The Heritage Foundation.