Hoover Convenes Experts to Propose Medicare Budget Options

The Hoover Institution's Healthcare Policy Working Group and the Fiscal Policy Initiative co-hosted a two-day conference on August 17 and 18. They brought together budget analysts, health economists, practicing physicians, and congressional staff to examine options for reducing Medicare's growing impact on the federal budget.

The discussion focused on targeted Medicare budget options that would reduce federal deficits while maintaining quality and coverage for seniors. Medicare's draw on general revenue-meaning its funding that does not come from payroll taxes, premiums, or beneficiary cost sharing-now costs taxpayers roughly $600 billion a year and will approach $1 trillion within the next decade.

The first session addressed how Medicare pays hospitals. Participants examined the gap between what the program pays a hospital outpatient department and what it pays an independent physician's office for the same service provided under the same billing code. That gap originated from the way Congress instructed Medicare to build its outpatient payment system in the late 1990s, when rates were set from what hospitals were charging at the time, with automatic annual increases.

The discussion covered a full legislative version of site-neutral payment, narrower versions limited to off-campus clinics or to a defined list of common services, and the authority the agency already holds to act on its own. As participants observed, the regulatory route has produced real but modest savings. Larger cost savings require action by Congress.

The session also took up the 340B drug pricing program, under which qualifying hospitals buy outpatient drugs at a steep discount and keep the difference when payers reimburse them at higher rates. Participants discussed evidence that the program encourages hospitals to acquire physicians' private practices, expand into wealthier areas, and favor higher-priced drugs, with no federal requirement that the proceeds reach low-income patients. Reform ideas offered during the gathering ranged widely. They ran from administrative steps such as tightening the rules on contract pharmacies to a wholesale redesign that would replace the arbitrage with a capped and transparent safety-net payment to patients funded by an assessment on drug manufacturers.

The second session turned to Medicare Advantage. Participants worked through how payments are set, beginning with a benchmark tied to expected fee-for-service costs, against which plans bid. Plans generally bid well below the benchmark, and a share of the difference is returned to enrollees in the form of supplemental benefits or premium reductions. Much of the discussion focused on two features that the Affordable Care Act layered onto this structure. Quality bonus payments raise benchmarks for highly rated plans, and a county quartile system meant to reduce overpayment was centered in a way that raised average benchmarks instead. Options for reform included eliminating the bonus program outright, scrapping the quartiles, recentering them, or narrowing their range.

The session then considered the question of Medicare Advantage overpayments by the federal government to healthcare providers. Participants discussed the difference between favorable selection, which draws healthier enrollees into the program, and coding intensity, meaning more thorough or more aggressive documentation of diagnoses. Throughout, the discussion returned to the difficulty of the comparison. Traditional Medicare is not a single insurance product, since only a small fraction of beneficiaries hold it without a supplement of some kind, and estimates of Medicare Advantage overpayment depend heavily on which group is used as the point of comparison.

The third session looked at what beneficiaries themselves pay for healthcare services. Most enrollees in traditional Medicare hold supplemental coverage through Medigap, an employer, a federal retiree plan, or Medicaid, and that coverage insulates them from nearly all cost sharing. Participants discussed proposals to bar supplemental plans from covering the first several hundred dollars of cost sharing, to limit what they can cover above that, and to pair those limits with an out-of-pocket cap that traditional Medicare has never had. Several participants argued that such rules should apply to employer and federal retiree coverage as well as to Medigap, with an adjustment recognizing that retirees often accepted lower wages during their working years in exchange for those benefits.

A companion presentation set out the broader case for redesigning Medicare cost sharing. One possible reform would replace the separate Part A and Part B deductibles with a single one; apply uniform coinsurance; introduce cost sharing for home health, hospice, and laboratory services for the first time; and add an out-of-pocket cap. Participants noted that the results are highly sensitive to where the cap is set, and that published estimates disagree on whether the package saves money at all, depending on where that cap is set. There was also discussion of whether that reform's main value lies in its likelihood as a precursor to other reforms. Modernizing the benefit design is what makes competitive bidding and premium support achievable later.

The fourth session covered two further proposals. The first addressed the income-related premiums that higher-income Medicare enrollees pay for Part B. Participants discussed reframing the question as one of subsidies granted rather than premiums paid, since taxpayers currently fund a share of the Part B premium for every enrollee, including those with retirement incomes well into the hundreds of thousands of dollars. The current structure sets premiums in discrete income tiers, which creates cliffs where a single additional dollar of income triggers a large jump in enrollee fees. The proposal would replace the tiers with a smooth phase-out of the subsidy and would swap the two-year income look-back for a prospective determination modeled on the Affordable Care Act's premium tax credits.

The session next addressed quality measurement, with particular attention to the Star Ratings program in Medicare Advantage. Participants heard new work showing that quality measures across Medicare's programs barely overlap, so a hospital or physician practice faces different measurement depending on which program a given patient is enrolled in. The discussion covered consolidating measures into a small number of categories and moving measurement from the plan contract down to a county or regional level. It also covered extending ratings to traditional Medicare and to accountable care organizations for the first time, as well as converting the bonus program to include a penalty instead of just extra payments. Participants noted the unusual coalition such a reform might attract, since hospitals, physicians, and accountable care organizations all stand to gain access to a pool they are currently excluded from.

A working lunch featured a discussion of healthcare research priorities at the Congressional Budget Office.

Policy briefs from the conference will be published in the coming months. The Healthcare Policy Working Group and the Fiscal Policy Initiative are using the research presented to inform their own recommendations for Medicare budget reforms.

Learn more about the Healthcare Policy Working Group here.

Learn more about the Fiscal Policy Working Group here.