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The Problems with Converting Medicare to “Premium Support”

In a speech today at Stanford’s Hoover Institution, House Budget Committee Chairman Paul Ryan repeated his call for converting Medicare to a “premium support” system. Premium support proposals, such as those in the House-passed fiscal year 2012 budget resolution (which Chairman Ryan developed) and the deficit-reduction plan from the Bipartisan Policy Center’s Rivlin-Domenici commission, would replace Medicare’s guarantee of health coverage with a flat payment — often termed a voucher — that beneficiaries could use to help pay for private insurance. (Some proposals would retain traditional Medicare as an option.)

As I explain in a new report, converting Medicare to premium support would likely create a two-tier health care system. Affluent people would receive the most up-to-date medical care, since they could buy comprehensive coverage by supplementing the voucher with their own funds. But people of modest means who could only afford the coverage that their voucher buys would increasingly find medical advances out of reach.

Premium support raises important issues that may seem manageable in theory but would be extremely hard to resolve satisfactorily in practice. My report discusses four such issues:

  • Maintaining traditional Medicare’s ability to control costs. Premium support plans that phase out traditional Medicare, such as the House plan, would increase total health care spending (public and private combined), as the Congressional Budget Office has shown. Even premium support proposals that retain traditional Medicare as an option, such as the Rivlin-Domenici plan, would undercut Medicare’s ability to serve as a leader in controlling costs by reducing its enrollment and thereby weakening its market power in dealing with providers.
  • Providing adequate premium support payments. Under both the Ryan and Rivlin-Domenici plans, premium support payments would grow more slowly than health care costs. As a result, these proposals would shift more and more health care costs to beneficiaries each year through higher premiums and out-of-pocket charges.
  • Preventing insurers from focusing on attracting healthier enrollees. A premium support system would need to standardize plans’ benefit packages and regulate their marketing practices to assure that traditional Medicare and private plans competed on a level playing field. Otherwise, private plans would seek to attract healthier people (who cost less to cover) and discourage sicker ones from signing up, leaving traditional Medicare with a disproportionate share of less-healthy enrollees — which could drive up its costs and threaten its long-term viability. Securing the needed regulation, reporting, and enforcement would be very difficult.
  • Protecting low-income beneficiaries. Low-income beneficiaries would need substantial financial assistance to afford health insurance premiums and co-payments and obtain needed care. Some premium support proposals, including the Ryan plan, provide inadequate support and would force large numbers of vulnerable low-income beneficiaries to pay much higher out-of-pocket costs or forgo needed care.