Modernizing Medicare: Harnessing the Power of Consumer Choice and Market Competition

Top policy experts offer Medicare reform solutions for the millions of seniors whose health care depends on America’s fastest growing federal entitlement.

In Modernizing Medicare, editors Robert Emmet Moffit and Marie Fishpaw bring together a rare combination of leading scholars and policy practitioners to outline a vision for Medicare reform and provide solutions for the millions of seniors whose health care depends on it. Contributors include a former Medicare trustee, a former Medicare administrator, and a former director of the Congressional Budget Office. 

Detailing Medicare’s biggest problems, this team of top policy experts offer solutions based on personal freedom of choice, transparency of price and performance, and market competition among health plans and providers that will secure patients more affordable, more accountable, and higher quality medical care. They also address Medicare’s reform needs and analyze the promising performance of the Medicare Advantage program. The authors outline Medicare’s major financial problems and the best solutions for Medicare patients and taxpayers alike. While Medicare’s accelerating spending is generating higher deficits and debt, standard cost-control strategies―such as payment reductions and price controls―jeopardize patients’ access to high-quality care. 

Contributors: Joseph R. Antos, PhD; Doug Badger; Charles P. Blahous, PhD; Walton F. Francis; John C. Goodman, PhD; Edmund F. Haislmaier; Douglas Holtz-Eakin, PhD; Brian J. Miller, MD, MBA, MPH; Robert Emmet Moffit, PhD; Mark V. Pauly, PhD; Christopher M. Pope, PhD; Gail R. Wilensky, PhD.

AEI Scholar Chapter Summaries

The Next Step in Medicare Reform Summary

by Brian J. Miller and Gail R. Wilensky

As Medicare expenditures are on an unsustainable growth curve and health expenditures writ large consume an increasing share of the federal budget, policymakers must consider reforms to promote fiscal discipline and programmatic sustainability. In their recent book chapter, Brian J. Miller and Gail R. Wilensky argue that an increased focus on Medicare Advantage (MA) is crucial to the broader program’s long-term sustainability.

Traditional fee-for-service (FFS) plans operate under a pay-for-volume system, in which physicians and health systems are incentivized to drive utilization to increase their own revenue, driving higher Medicare program expenditures. Researchers and policymakers questioned the long-term sustainability, building out market-driven alternatives. Emerging in the 1970s, what is today’s MA program model is built around publicly financed, risk-adjusted, capitated (i.e., population-based) payments from the government to private health plans. Health plans then construct networks and a comprehensive health benefits package typically comprised of at least traditional Medicare benefits, prescription drug coverage, supplemental coverage, and supplemental benefits. 

Beneficiaries may elect MA or remain in FFS, which is the default choice if beneficiaries do not elect MA. While both MA and FFS Medicare require further reforms, only MA has a framework suited to long-term population-based budgeting. Allowing beneficiaries to choose between public and private plans preserves and permits beneficiaries to take into account the benefits and trade-offs of both models. However, with the increasing fiscal pressure on the Medicare program, policymakers should address default enrollment. Default choices shape the structure of benefits markets, most notably retirement benefits, with 401(k) plan participation increasing with a change in employee defaults. Dr. Miller and Dr. Wilensky will make a convincing case for automatically enrolling beneficiaries into MA plans, which would, in turn, help stabilize the program’s finances through promotion of a capitated budgetary framework for coverage for America’s elderly population. 

Modernizing Traditional Medicare: The First Step to Effective Competition Summary

by Joseph Antos

Policymakers face a growing challenge with Medicare, the federal program that provides health coverage to over 61 million seniors and individuals with disabilities. Rapidly rising costs driven by perverse financial incentives and burdensome regulations have led to wasteful spending in Medicare that adversely affects the entire health sector. 

A comprehensive defined-contribution system of financing—a “premium support” model—would align incentives in Medicare to promote efficient health care that better meets beneficiaries’ needs. That reform would replace traditional Medicare’s uncapped entitlement and distorted fee-for-service structure with a uniform subsidy to purchase coverage from competing health plans. This would give all beneficiaries the opportunity to select lower-cost plans and give plans an incentive to provide necessary services in a more cost-effective manner.

For competition to work, all Medicare plans—including traditional Medicare—must be able to compete on equal terms. That calls for major reforms of the traditional program to better align with the offerings of Medicare Advantage plans. A critical first step is to simplify and modernize the traditional Medicare benefit, which does not meet current standards for comprehensive health coverage. Medigap reform, better information to improve consumer decision-making, and new payment and delivery approaches are also necessary to create a level playing field between traditional Medicare and private health plans.

Medicare Advantage enrollment has increased rapidly in recent years, but the traditional program remains the choice of tens of millions of seniors now and in the future. In our ongoing efforts to reform the American health care system, traditional Medicare is too big to ignore.