The unpredictable risk and benefit of Medicare vouchers

Trying to figure out whether Medicare vouchers are a good idea for patients and their physicians?  Then consider these two basic questions:

  1.  How much will the federal government contribute?
  2.  Who is at risk for health care cost increases?

How much will the government contribute?  The traditional Medicare program has no set limit on how much the federal government will contribute to a beneficiary’s health care, although there are limits on how much it will pay doctors and hospitals.  That’s what makes it an open-ended entitlement.  Medicare vouchers (or premium support, if you prefer) place an annual limit on how much the federal government will contribute, and anything above that comes out of the beneficiary’s own pocket.  As such, Medicare would no longer be an open-ended entitlement, but a defined contribution program.

One can imagine a voucher that would be so generous that beneficiaries could buy even more coverage than they have today under the traditional program.  But that would defeat the purpose of vouchers, which is to drive down costs.  So by necessity, the federal voucher contribution has to start out by being less per person than the government is now spending on traditional Medicare, or it won’t save money, right? 

And no matter where the initial dollar amount is initially set—let’s assume that it would start out being pretty generous, good enough to buy a health plan that offers benefits comparable to traditional Medicare–the government would have to decide how much it would be allowed to go up each year:  enough to keep pace with rising health care costs or less than that?  If the federal contribution doesn’t keep up with average costs of the benefits covered by Medicare, beneficiaries would pay more, but the government saves more; if it keeps pace with average costs, the government saves less but beneficiaries pay less. 

Voucher advocates say that the cost-savings will principally come from competition among competing health plans, and if so, seniors wouldn’t necessarily have to pay much more than they do today and the government would still save money.   Beneficiaries will have an incentive to choose a health plan that offers coverage at a premium that is not much more than the voucher amount.  Insurers will have an incentive to keep costs close to the voucher amount or risk being priced out of the market. 

The theory sounds good—but let’s look at who is really at risk for keeping costs down under a Medicare voucher system (hint: it isn’t the government).

Who is at risk?   Competition between health plans and traditional Medicare will only be successful in driving down costs if the competing health plans can use their market power to change the behavior of patients, physicians and hospital.    That’s because health plans (except for ones attached to physician group practices and hospitals) don’t really deliver care, they pay for it, through contracts with physicians and hospitals.

In a voucher system, competing health plans will try to drive down those costs by leaning on patients and “providers” to lower costs.  They might pay clinicians and hospitals less, hire less expensive mid-level providers, restrict patients to an approved network of providers, pay their network “providers” based on performance (lower costs, and one hopes, also better outcomes) rather than volume, deny claims for services, demand lower rates from drug companies and device manufacturers, require that Medicare patients enrolled in their plans pay more out-of-pocket, and place limits on benefits (to the extent that they are allowed to by the government). 

The better and more innovative plans might try to organize care better to achieve improved outcomes more efficiently, through models like Patient-Centered Medical Homes. 

So to a great extent, under a voucher system, it’s the physicians and hospitals who will be at risk for cost increases, because to be successful in keeping their premium costs competitive, the insurers would have to get the “providers” and “suppliers” of care to charge less and deliver services more efficiently

Health plans that are integrated with physician group practices and hospitals would likely have a competitive advantage under a voucher system because they can “organize” their providers more effectively than traditional insurers that contract with individual physicians and hospitals on an a la carte basis.   Vouchers, then, might accelerate the trend to hospital-physician-insurer consolidation, at the expense of physicians in independent practice.

But patients enrolled in Medicare would be the ones at the greatest financial risk: either because they would get fewer benefits and have to pay more out of pocket for the less costly plans that the voucher amount would (mostly) cover, or because the federal contribution falls short of the cost of the premiums charged by the competing plans, with the difference made up by them. A new study by the liberal-leaning Center for American Progress Action Fund, based on the Congressional Budget Office’s analysis of the most recent version of Rep. Ryan’s Medicare premium support proposal, concluded that if competition doesn’t lower costs enough, the voucher contribution would not keep pace with rising costs—and the result would to vastly increase beneficiaries’ average health care bills over their retirement years:  

–For seniors reaching age 65 in 2023 by $32,900
–For seniors reaching age 66 in 2030 by $73,600
–For seniors reaching age 67 in 2040 by $139,100
–For seniors reaching age 67 in 2050 by $225,200

I am sure that voucher advocates will take issue with those estimates, because the Center assumes that competition between health plans—and, more to the point, health plans’ ability to drive savings out of the “providers” and suppliers of health care– won’t be effective in slowing cost increases, so beneficiaries will be left holding the bag between the capped federal contribution and the average premiums.    

Neither voucher advocates nor voucher critics really know for sure, since this is uncharted territory—there is no actual real-life experience with instituting a voucher system on a large scale basis for people who, by definition, are older and need more health care.  Competition might be enough, but if it isn’t, the cost-shift to seniors would put affordable health care out of reach for many, if not most of them.

Given the uncertain benefits and risks of vouchers, wouldn’t it make more sense to first pilot test a premium support system, as the American College of Physicians has recommended in a recent position paper, before adopting it as national policy?  This is how ACP puts it:

 “It is vitally important that a premium support model be tested to determine possible adverse effects or unintended consequences. Particular attention should be given to such issues as enrollee and provider reaction, plan participation, market effects, premium levels, and barriers to care. If done properly, a defined benefit voucher program may encourage beneficiaries to select coordinated care plans that may promote preventive care, wellness, and better cooperation among physicians and other health providers. However, caution should be exercised prior to implementing such a significant change in Medicare financing that will affect millions of the nation’s elderly and most vulnerable citizens.”

A pilot-test, in other words, would be the sensible, even conservative approach to resolving the voucher controversy, because it would allow us to learn from real-life experience how premium support might be designed and work in practice, and what its effects are on patients and physicians, rather than embracing or rejecting vouchers based on unproven ideology, beliefs, conjecture and assumptions.

Today’s questions: Who do you thinks bears the greatest risk under a Medicare voucher system?  Do you agree with ACP that it should be pilot-tested first before a decision is made on its adoption?