Tuesday, November 22, 2016

What exactly is the Medicare guarantee?

As Paul Ryan revs up Republican engines for Medicare privatization, Nancy Pelosi vows to Greg Sargent that Democrats will fight it to the death:
Pelosi adamantly stated that Democrats would not give any ground on the core ideological dispute here, which is over whether to maintain a government coverage guarantee. “We are not going to a casino — this is a guarantee,” Pelosi said. “This is a value system for us, and we will fight for it. Is it a guarantee, or not?”
This raises a question: what precisely is the Medicare guarantee?

At present, there's a pretty specific answer: for 95% of seniors, the federal government will pay about 85% of the premiums for insurance that covers a bit more than 80% of the average user's medical costs. That's what traditional Medicare does right now, via Parts A, B and D, for those whose incomes are below $85,000 for a single person or $170,000 for a couple.

Put another way, the federal government pays a bit more than two thirds of the average senior's total medical costs. Low income beneficiaries have all or part of their premiums and out-of-pocket costs paid by Medicaid, though a variety of programs. High income seniors pay higher shares of their premiums, with the percentage stepped up through several income brackets.

To unpack that calculation a bit, Medicare Part A, hospital coverage, has $0 premium for almost all beneficiaries, i.e., anyone who paid Medicare taxes while working, or has a spouse who did. For Part B, physician and outpatient coverage, beneficiaries under the $85/170k cutoff pay 25% of the premium. For Part D, prescription drug coverage, enrollee premiums are designed to cover 25.5% of costs.  Medicare Parts A and B have an actuarial value (AV) of 84%*, according to one analysis -- meaning that Parts A and B combined cover 84% of the average user's hospital and physician costs.

Part D covers a lower percentage of prescription drug costs, starting with 75% of costs up to $3,700 after a $400 deductible in a standard plan (see the note at bottom for more details*). As drug costs represent about 17% of total costs for the average Medicare beneficiary, I'm assuming that Part D modestly reduces the overall AV of traditional Medicare, leaving it over 80%.

Private Medicare Advantage plans offer comparable value to traditional Medicare, with some tradeoffs  -- for example, an MA enrollee might accept a limited provider network in exchange for annual caps on out-of-pocket spending, or vision, hearing and/or dental coverage.  At  present, 31% of Medicare enrollees are in MA plans, a share that has been rising steadily.

Keeping the Medicare guarantee sustainable requires keeping a lid on the rates that Medicare -- and Medicare Advantage -- pay to healthcare providers. At present, Medicare has the pricing power to do that. In a post I published yesterday on medicareresources.org, sister pub to healthinsurance.org, I argue that Ryan's "premium support" plan would have the government abdicate much of that power in favor of the magic of market competition. The shift from government rate-setting to market rate-setting requires a leap of faith -- a faith that today's Republican party possesses in ample supply.

Update, 12/1:  The calculations above suggest that Medicare pays about 69% of the average enrollee's medical costs. In a subsequent post, I calculate that the subsidy for the average subsidized enrollee in the ACA private plan marketplace is about 59% -- on a steeply sliding scale. In Tom Price's ACA repeal/replace plan, the average subsidy would at most be about 35% -- a subsidy level he'd probably also ultimately aim for in Medicare.

* Here is the Kaiser Family Foundation's summary of the standard Part D benefit:
In 2017, the Part D standard benefit has a $400 deductible and 25% coinsurance up to an initial coverage limit of $3,700 in total drug costs, followed by a coverage gap. During the gap, enrollees are responsible for a larger share of their total drug costs than in the initial coverage period, until their total out-of-pocket spending in 2017 reaches $4,950...After enrollees reach the catastrophic coverage threshold, Medicare pays for most (80%) of their drug costs, plans pay 15%, and enrollees pay either 5% of total drug costs or $3.30/$8.25 for each generic and brand-name drug, respectively. The standard benefit amounts are indexed to change annually by rate of Part D per capita spending growth, and, with the exception of 2014, have increased each year since 2006. 

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