Better Incentives for Medicare Beneficiaries
In addition to the competition induced by the new Part D benefit, its pricing structure and associated subsidy for premiums provide good incentives for Medicare beneficiaries to obtain relatively more efficient forms of insurance coverage. Because the Federal subsidy toward the prescription drug plan is generally a fixed proportion of the average premium bid each year, beneficiaries receive the additional benefits of choosing plans that are less generous than the average benchmark plan. Thus, beneficiaries appropriately receive the full marginal benefits from either a higher amount of cost sharing or a more restrictive list of covered medicines. This mechanism for having Medicare beneficiaries pay lower amounts for less generous coverage therefore improves the incentives for insurers to design more optimal products.
A potential downside to this mechanism for determining beneficiary premiums, however, is that it could lead to relatively higher premiums for people with higher expected expenses due to chronic health conditions if these high-risk people gravitate toward plans with relatively more generous benefits. As a result, these plans higher premiums would reflect a relatively sicker pool of people covered by the plan, in addition to the underlying value of more generous benefits.
This mechanism for determining the premium contribution toward different plans, currently in place for Part D, could potentially be applied to the entireMedicare program. Providing beneficiaries with a choice of comprehensive plans and having the premium contribution for each plan vary in relation to a benchmark plan has potential for improving the efficiency of overall Medicare spending. A key difference between Medicare Part D and the entireMedicare program, however, is the combination of the government-run fee-for-service and Medicare Advantage components of the latter. This benchmark mechanism is likely to be successful only if the same premium contribution is made toward both the fee-for-service component of Medicare and the private Medicare Advantage plans, putting them on equal footing. Just as described above, this mechanism for determining premium contributions would cause beneficiaries to receive the appropriate marginal benefits when choosing plans with levels of coverage that are less generous than the benchmark plan. It could therefore help to allow beneficiaries to determine the optimal forms of out-of-pocket cost sharing and the optimal adoption of new technologies over time. These two specific issues are explored below.
Premiums versus Out-of-Pocket Payments.
The level of out-of-pocket cost sharing that would induce beneficiaries to consume the optimal level of care is difficult to determine. The share of outof- pocket spending that will lead to an efficient amount of care would be set at the level at which the marginal cost of being exposed to more financial risk through relatively more cost sharing is less than the marginal benefits from reducing the overconsumption of medical care resulting from relatively more cost sharing. In practice, it is difficult to quantify these competing interests. Nevertheless, Medicare currently may be missing this balance at both the high-cost and low-cost extremes. Medicare currently does not provide protection against certain catastrophic health care costs (except in some Medicare Advantage plans). For example, there is increased beneficiary cost sharing after a hospitalization exceeds 60 days, and a cessation of benefits after 120 days. While these upper limits on benefits presumably have the advantage of reducing incentives to over consume, they appear to expose beneficiaries to excessively high levels of financial risk.
While many seniors have private retiree health or Medigap plans to cover Medicare's gaps in catastrophic coverage, these plans also frequently cover the first-dollar cost sharing, such as the hospitalization deductible and the 20 percent of physician fees. These plans limit the cost-consciousness of consumers and therefore increase total spending. However, neither insurers nor consumers bear the full marginal costs of the increased spending induced by these generous Medigap plans, because Medicare covers most of the increased spending.
If beneficiaries were to receive the marginal benefits of less generous coverage in a way that puts the fee-for-service component and the Medicare Advantage component on equal footing, there would be improved incentives for private plans to offer and beneficiaries to select plans with more efficient levels and forms of cost sharing. Beneficiaries, rather than Medicare administrators, should be the ones to decide the optimal mix of deductibles, coinsurance, and out-of-pocket maximums that best meets their needs and preferences under neutral incentives.
Appropriate Levels of Spending Over Time.
If Medicare beneficiaries were to receive the marginal benefits of choosing a more efficient plan, the incentives to adopt costly new technologies would be improved over time. As noted earlier, costly new technologies are efficient if the value of the additional benefits from improved health exceed the additional costs of that technology. People may not be willing to spend a great deal of money on new treatments with very minor benefits. If Medicare beneficiaries were to receive the marginal benefits when selecting less technology-intensive plans that delivered higher value care at lower cost, the adoption of new technologies by health plans over time would be driven by whether new technology delivers substantial enough health benefits. As a result, consumers, rather than the government, would decide the extent to which health care spending should increase over time.