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The Balanced Budget Act of 1995 would allow Medicare beneficiaries to choose a high-deductible health insurance plan with a medical savings account (MSA). The Congressional Budget Office (CBO) prepared this memorandum in response to Congressional interest in the topic and to several requests for further information about CBO's cost estimate of the Balanced Budget Act. The memorandum examines the design features of a high-deductible/MSA option that would affect its attractiveness to beneficiaries and explores the overall impact of the provision on program costs. Based on the limited evidence available, the memorandum concludes that the particular specification of the high-deductible/MSA option in the Balanced Budget Act would tend to raise Medicare's costs.
The memorandum was written by Linda Bilheimer of CBO's Health and Human Resources Division under the direction of Joseph Antos, and by Frank Sammartino of the Tax Analysis Division under the direction of Rosemary Marcuss. Len Burman and Larry Ozanne contributed to the analysis. Sandra Christensen, Harriet Komisar, Julia Matson, Murray Ross, and Paul Van de Water provided valuable suggestions.
Sherwood Kohn edited the manuscript, and Christian Spoor provided editorial
assistance. Ronald Moore prepared the final version of the memorandum.
Questions about the analysis may be addressed to Linda Bilheimer or to
Frank Sammartino.
SUMMARY AND INTRODUCTION
THE PROPOSED HIGH-DEDUCTIBLE/MSA OPTION UNDER MEDICARE
SELECTION AND RISK-ADJUSTMENT ISSUES
DESIGN CONSIDERATIONS
CBO'S COST ESTIMATE
SUMMARY AND INTRODUCTION
The Medicare program is one of the fastest-growing components of the federal budget. Medicare outlays, less premiums from enrollees, will account for about 11 percent of federal outlays in fiscal year 1996. Under current law, Medicare spending is projected to grow at an average annual rate of more than 9 percent between 1996 and 2002 (the latter being the year in which the Congress and the Administration are seeking to balance the federal budget). By 2002, Medicare is expected to account for 15 percent of federal outlays. That rapid growth will take place during a period in which Medicare enrollment is growing slowly, at slightly more than 1 percent a year. Far more explosive growth in Medicare spending is anticipated after 2010 when the baby-boom generation begins to retire.
Policymakers have been seeking ways to reduce the rate of growth of Medicare spending by improving the efficiency of the program and restructuring it for the long term. A potential strategy for achieving those goals is to make Medicare more competitive by allowing beneficiaries to choose from a greater range of private-sector health plans. Under current law, Medicare beneficiaries can generally choose from only two types of health insurance: traditional fee-for-service coverage and health maintenance organizations (HMOs). Moreover, for some beneficiaries, fee-for-service is the only option available; more than one-third live in counties where no Medicare HMOs with risk contracts operate. (Under risk contracts, HMOs receive a fixed monthly payment--known as a capitation payment--for each enrollee, regardless of the actual cost of the health care that the enrollee may use.) Although HMO enrollment is growing rapidly, about 90 percent of Medicare beneficiaries are still enrolled in the traditional fee-for-service program. The majority of fee-for-service beneficiaries have little financial incentive to constrain their use of Medicare-covered services because they have supplementary coverage that pays for some or all of Medicare's deductibles and coinsurance.
The Balanced Budget Act of 1995, passed by the Congress but vetoed by the President, would provide beneficiaries with more choices among private health plans. Those choices could include HMOs, preferred provider organizations, provider-sponsored organizations, union- and association-sponsored plans, private fee-for-service insurance, and high-deductible insurance with a medical savings account (MSA). The act is designed to slow the rate of growth of Medicare spending by reducing payments to providers in the traditional fee-for-service sector, making fixed capitation payments to all nontraditional health plans (referred to as MedicarePlus plans), and prompting Medicare beneficiaries to consider price in choosing health insurance.
If Medicare beneficiaries faced the real differences among plans in costs and benefits and made their choices accordingly, the new system could improve the efficiency of the Medicare program. But greater choice could also have undesirable consequences if payment rates to different plans were not adjusted to reflect that selection process. Some plans, for example, might attract a disproportionate share of healthier beneficiaries, and relatively more higher-risk beneficiaries would remain in the traditional fee-for-service sector. Medicare's costs for enrollees in MedicarePlus plans would rise if the capitation payments made on their behalf exceeded the costs they would have incurred in the fee-for-service sector. Such an outcome would be particularly likely with the high-deductible/MSA option.
Adjusting the capitation payments to MedicarePlus plans for differences in risk could reduce the additional costs that would result if healthier people selected high-deductible plans. But Medicare's current risk-adjustment mechanisms are limited, and substantial improvements in the near future appear unlikely. Consequently, effective risk adjustment may remain elusive, in which case the effects of selection would be a continuing problem.
The magnitude of those effects would depend on features of the program's design that affect the attractiveness of MedicarePlus plans and, hence, enrollment patterns among beneficiaries of different risk levels. Although new Medicare options could be designed to lessen the adverse consequences of selection, any such design features would necessarily diminish the attractiveness of Plus plans in general and high-deductible plans in particular. Thus, policymakers designing Medicare proposals with a high-deductible option face a trade-off between increasing the attractiveness of that option and ensuring a level playing field for all other Medicare options, including the traditional fee-for-service sector.
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