Private Insurance in Medicare: Language and Details

One barrier to reasonable discussion of the important details for any private option in Medicare is language. Premium support, competitive bidding, vouchers are thrown around willy nilly. Sometimes the words are meant by speakers to be self-evidently bad, other times good–what does it all mean?

From chapter 7 of my book Balancing the Budget is a Progressive Priority on the future of private insurance options in Medicare comes this (bolding added here):

I distinguish three approaches to purchasing private health insurance with support from the government to defray the cost. They may seem similar, but are very different in reality. And within each of these three varieties noted below, there are innumerable policy distinctions that could be made. Within the broad category of premium support, the version below that I term competitive bidding is an idea worth trying, in both the elderly and non elderly population. The other two are probably not.

The first approach is the use of an Equal Value Voucher. An equal value voucher is when everyone gets the same amount of money to go and purchase health insurance. The main effect of such an approach is to fix the total cost to the federal government, and essentially to shift cost differences to individuals. This is not being actively proposed by anyone as a Medicare policy, but this is similar conceptually to block granting the Medicaid program to the states. The federal government would fix their cost, and shift the remainder to the states in the case of Medicaid, or to the patient if you had an equal value voucher proposal.

The second approach is an Administratively Set Voucher. This is where an amount is provided to people that enables them to purchase private health insurance, but the key detail—how much money is provided to purchase insurance—is set administratively as opposed to by market forces. The current Medicare Advantage program, and really all earlier variants of Medicare HMOs were administratively set vouchers. The amount of money provided was determined in relation to the average adjusted per capita cost (AAPCC) of Medicare in a given county; it was set at 95 percent of AAPCC for two decades in an attempt to reduce costs until the mid-2000s, when the amounts were greatly increased with a policy goal of increasing participation in private plans. However, the amounts were still administratively determined. A company that could provide care cheaper than the value of the voucher simply pockets the difference as profit.

Rep. Paul Ryan’s plan passed by the House in April, 2011 to transition over time away from the current Medicare program and toward a system of providing money for the elderly to purchase private health insurance is also an administratively set voucher program. In fact, his linking of the amount provided to the elderly in the future to purchase health insurance to overall inflation, which grows much less slowly than health care inflation, shows what can happen with an administratively set voucher program: the value and therefore purchasing power of the voucher would greatly erode over time.

Competitive bidding occurs when the amount of a voucher provided to a patient with which to purchase private health insurance is determined by the actual cost of an insurance policy that covered a set of services (defined benefits) in a given health care market. This price would differ by market, and would be set through competitive bidding, in which insurance companies were each seeking as much business as possible. Setting the voucher amount at the price at which the lowest bid company was covering the specified benefit package would incentivize other insurance companies to aim to provide better care for less money and therefore gain market share. Insurers could compete on provider network, wellness programs, or internal efficiency. If insurers charged a higher premium than this competitive bid standard for a given area, the patient would have to be willing to pay the extra amount if they wanted to sign up for the higher priced plan, as the government would only pay the lowest bid amount in a given market. If properly constructed, cost could drop and quality could increase.

The ACA exchanges are the closest thing we have to competitive bidding at this point, although there are worries that the premium subsidies provided in the out years could erode under some circumstances. Competitive bidding is a good thing to try in the exchanges, and it also a reasonable thing to try in Medicare. The key is that the amount of premium subsidy provided to patients must be set by the cost of an actual reference health insurance policy that is readily available in a given market.

Senator Wyden and Rep. Ryan’s plan proposed in December, 2011 may fall in the competitive bidding realm, because of how the amount provided by government to Medicare beneficiaries would not be set administratively, but would be set via a bidding process between private insurance companies (note: the details are important and the plan is not in legislative language as of this writing). Further, this proposal would maintain traditional Medicare, though it would have to live under the limits of the competitive bidding framework as well, with patients receiving cash payments if plans (or traditional Medicare) were able to provide health care to their covered population for less than the competitively determined bid amount, and being expected to pay more if the premium was higher. [note: the 2012 House budget included an option to remain in traditional Medicare, unlike the 2011 budget]

Without some shared language, there is no hope of a reasonable policy debate.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

2 Responses to Private Insurance in Medicare: Language and Details

  1. dennis byron says:

    Don

    “Without some shared language, there is no hope of a reasonable policy debate.”

    Couldn’t agree more but I would suggest you are contributing to the problem by using the word voucher. No proposal for Medicare Reform that I have seen involves a coupon or a similar piece of paper or a stamp or an EBT-like card or the Medicare beneficiary being mailed a check BEFORE puchasing insurance (or after for that matter, with the possible exception of the rebate noted above in Wyden Ryan relative to the beneficiary possibly receiving money AFTER choosing the lowest bid plan–although I have never heard it described that way)

    In addition I believe you are mischaracterizing both Ryan-Rivlin and Wyden-Ryan in the way in which you have both described and slotted them. If your taxonomy works, you should also be able to slot Reischauer-Aaron and Rivlin-Dominici and current Medicare as amended by the Patient Protection and Affordable Care Act and Medicare circa 2009 as supplemented by Medigap/D (all of which are “voucher” plans by your definitions)..

    • Don Taylor says:

      Dennis
      From the para in the post on equal value Voucher “This is not being actively proposed by anyone as a Medicare policy, but this is similar conceptually to block granting the Medicaid program to the states.”

      I guess you are saying everything is administratively set voucher which is something similar to what Shai Akabas said on twitter about this post (he was saying anything with a backstop like GDP + whatever is an administratively set voucher and not true competitive bidding). In that sense I guess you could go an rate all those plans in terms of how far they might be from some ‘perfect’ comp bidding proposal that won’t ever happen. Guess the taxonomy needs more categories in the admin set voucher.

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