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Is A Competitive Health Care Model All It’s Cracked Up To Be?

Sep 20, 2012

This story was produced in collaboration with

Republican vice presidential nominee Paul Ryan says his proposal to overhaul Medicare would use market competition to tame costs in the government health program relied on by almost 50 million people.

As models, he often cites the health program for federal employees – including members of Congress -- and Medicare’s prescription drug program. "It works with federal employees, it works with the prescription drug benefit, and more to the point, it saves Medicare," Ryan said on "Meet the Press" in April.

Both of those programs get high marks from beneficiaries for the choices they offer. But their track record on cost control is more complicated, raising questions about whether the competitive model is in fact the silver bullet that backers have suggested. 

The federal employee health insurance program is often touted as holding down the increase in premium prices more successfully than private workplace plans or government-run programs. But a data analysis done for Kaiser Health News (KHN) and interviews with experts shows it has not held down costs per enrollee as efficiently as Medicare during the past decade.

Average spending in the federal workers’ program grew at 7.1 percent annually per enrollee, higher than the 5.8 percent growth rate for traditional Medicare – excluding the drug program -- over the decade ending in 2010, according to data analyzed at KHN’s request.  The analysis, based on 10-year averages, was done by Walton Francis, a consultant and principal author for 30 years of the Consumers’ Checkbook Guide to Health Plans for Federal Employees.

In addition, the analysis found that spending growth in the federal workers' program far exceeded the rate at which Ryan proposes to cap Medicare each year -- the increase in the nation’s economic growth plus half a percentage point. Had federal workers’ benefits been indexed to that rate, "there's no question …. [it would] have constrained spending or increased premium costs of participants," Francis said.

More significant cost control has been achieved by the Medicare prescription program, which relies on private plans to provide seniors with drug benefits.  Since its start in 2006, the program’s spending growth has been 30 percent less than initially projected by the Congressional Budget Office.

The reasons for that are intensely debated, however. Some attribute it to the structure of the program, in which multiple plans compete for enrollees, giving insurers strong incentives to hold down costs. "The cost they've come up with is far less than anyone predicted," GOP presidential nominee Mitt Romney said on "Meet The Press” Sept. 9. “Look, competition works."

Others point to an increase in the use of less costly generic drugs, and a slowed pipeline of new brand-name drugs, which have held drug spending nationwide at historically low levels.

"The most important factor has been the large number of popular drugs that have gone off patent and become generics," which are less expensive, said Jack Hoadley, a researcher at Georgetown University's Health Policy Institute who studies Medicare.

The blockbuster cholesterol-lowering drug, Lipitor, for instance, went off patent in 2011.  

How We Got Here

For most of the last 50 years, health care spending, both by government and private programs, has grown an average of 2.5 percent points faster than GDP each year, according to federal data. Spending has slowed recently, partly because economic difficulties have led people to put off elective medical care.

Medicare now consumes about 15 percent of the federal budget. With 10,000 baby boomers retiring every day, pressure on the program’s finances is expected to intensify and both political parties have offered options to curb the cost increases.  

The Democrats' approach, enacted in the 2010 health law, relies heavily on financial incentives to spur greater efficiencies from providers. The law also reduces annual payment increases to hospitals and other providers, as well as payments to private Medicare Advantage plans. As a backstop, beginning in fiscal 2015, if Medicare spending exceeds 1 percentage point above the nation's economic growth rate, also called gross domestic product, an expert panel must propose reductions in spending. Premium increases and benefit cuts would be off limits. If Congress fails to enact an alternative, the board’s recommendations would be put in place.

Republicans argue that a more effective approach would be to use market forces to promote more choice and drive down costs – touting examples of competition such as the federal employee health benefit program, known as the FEHB plan, and Medicare’s prescription drug plan, as examples.

To be sure, neither program is directly comparable to Medicare in scope, benefits or enrollees – the FEHB program has more generous benefits and younger beneficiaries, while Medicare Part D deals only with drugs.  Perhaps most important, neither indexes spending to economic growth.

Federal Workers’ Plan Is More Generous

FEHB, which covers about 8 million people, allows enrollees to choose among competing private plans, which offer varying premiums and services.  For most of them, the government pays 75 percent of the premium up to a specified cap. The cap is based on 72 percent of the average cost of all plans. Beneficiaries who choose more costly plans pay the difference.

The biggest reason for Medicare's better cost performance over the 10-year period analyzed by KHN is its ability to pay doctors and hospitals less, said Chapin White, senior health researcher at the Center for Studying Health System Change. "There’s a big and growing gap between what Medicare pays on average for hospital and physician services and what private insurers pay," he said. 

If Ryan's cap – growth in the economy plus half a percentage point -- had been in place for FEHB during that period, the increase in spending per enrollee would have been limited to 3.4 percent annually, or less than half the actual 7.1 percent growth rate.  KHN used 10-year annual averages rather than year-to-year changes to help adjust for changes in benefits or other annual fluctuations. 

Source: Analysis by Walton Francis of data from annual Medicare Board of Trustees Reports, the Green Book, the U.S. Budget Appendix and the OPM annual Insurance Report. Medicare data primarily calendar year; FEHB data primarily fiscal year. Note: Medicare per enrollee costs for individuals; FEHB per enrollee costs for individuals and families combined.

The FEHB plan is also a more generous program in several ways than what Republicans propose for Medicare -- including that the federal contribution to benefits rises in sync with premium increases.  Under Ryan’s proposal, that might not be the case. The government contribution toward enrollees' costs, an annual subsidy, would be based on the cost of the second-lowest priced private insurance plan in a region, or the traditional Medicare program, whichever submitted a lower cost bid. If spending growth exceeded his target of the rate of economic growth plus 0.5 percent, his plan calls for Congress to cap spending. 

Conservatives, however, say the Republican proposal for Medicare would work better than the federal worker program at holding down costs because it would be structured differently. The government contribution would not be based on a percentage of the premium.

In the FEHB plan, "the more expensive the plan, the bigger the (government) contribution," at least until the cap is reached, said James Capretta, a fellow at the conservative Ethics and Policy Center.

In contrast, under the Republican proposal, beneficiaries would be responsible for paying any costs above the stipend, which would be set at the price of the second lowest private plan bid or the cost of traditional Medicare, whichever is lower.

The Romney campaign has been quoted in press reports as saying he doesn’t endorse the cap in the House Republican budget, although he had praised an earlier proposal by Ryan and Sen. Ron Wyden, D-Ore., that indexed growth to GDP plus 1 percent.

Ethan Rome, executive director of the liberal Health Care for America Now advocacy group, contends there are only two ways the proposal would slow spending growth.

"The first is they shift cost from the federal government to seniors ... who can't afford them," he said. "The second is competition, and there's no evidence whatsoever that competition will control costs in any real way."

Conservatives disagree, arguing that competing health plans would have incentive and flexibility to reduce costs.

“They can reduce costs with disease management, different payment mechanisms, care coordination,” said Joseph Antos of the American Enterprise Institute. “They might have higher deductibles, or lower. We do this in the [federal worker plan] all the time. Are we going to get massive savings right away? Not right away, but over time.”

Fluctuations In Spending For Medicare Prescription Plan

Capretta argues that a better comparison to the Republicans' Medicare proposal is Medicare's drug program in which private insurers compete for enrollees, and the government covers about 75 percent of the cost of the program and enrollees pay the rest. 

Contrary to some early predictions, the program has numerous competing plans.  Although premiums for some plan sponsors have gone up, others have avoided significant increases.

Capretta and other conservatives discount the notion that trends such as the switch to cheaper generics, rather than competition, have held down cost growth.

"Would that [generic drug use] have happened without competition" among private insurers? Capretta asked. "Government would have had to mandate it and how could government do that?"

Yet even in the drug program, KHN's analysis found that cost growth has fluctuated year to year. In two of the past five years, annual spending per enrollee exceeded Ryan’s cap, according to data from the Centers for Medicare and Medicaid Services.

The program's costs are projected to grow more quickly in the next decade.  In their most recent report last April, Medicare's trustees projected the average annual increase in expenditures per enrollee to be 5.6 percent through 2021, as a result in part of a restored pipeline of new brand name drugs.

Economists say the continued rise in health spending in traditional Medicare, the drug program and the federal workers benefit plan shows how hard it is to slow costs, which are driven by factors ranging from new technologies and drugs to a growing percentage of people with chronic illnesses. 

"It’s been really hard to change the cost trend," says Marsha Gold, a senior fellow at Mathematica Policy Research, who studies Medicare. "Just saying [we’re going to do it] isn’t enough to get it to happen."

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