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Five questions about GOP's plan to privatize Medicare

By Mark Miller

(Reuters) - The Congressional Super Committee negotiations are coming down to the wire, and Republicans are demanding that Medicare privatization be included in any final budget deal.

The news comes on the heels of GOP Presidential candidate Mitt Romney's recent call for creation of a "premium support" option that would let seniors choose between traditional fee-for-service Medicare or a defined amount of money that they could use to shop for a private plan in a federally-sponsored Medicare exchange marketplace. Romney's proposal is a cousin of the privatization plan proposed by Rep. Paul Ryan, and endorsed by the House of Representatives earlier this year.

Even if the Super Committee process stalls, the future of Medicare will be a key issue in the 2012 Presidential race, and any restructuring of the program would impact billions of dollars of healthcare spending and tens of millions of beneficiaries. How would privatization impact seniors? How would benefits change, and what would it mean for seniors' cost of healthcare? Here are answers to five key issues.

1. What are Medicare premium supports and vouchers, and how would they change the current Medicare program?

Proposals for Medicare premium supports and vouchers all have one thing in common: They would transform Medicare from a program of defined benefits to one of defined contribution. Much like the transition from defined benefit pensions to defined contribution 401(k) plans, the change would shift risk from an institution (the federal government) to individuals (seniors). Medicare today promises to deliver a specific set of benefits to seniors; premium supports and vouchers would provide a defined government contribution toward whatever healthcare cost they incur in the private market.

But there's a significant difference between premium supports and vouchers. Vouchers could be set purely on the basis of meeting federal budget-cutting goals. Premium supports usually take into account some measure of the cost of purchasing private coverage.

Romney hasn't released details on his Medicare proposal, but it appears to most closely resemble the proposal of the Bipartisan Policy Center's Debt Reduction Task Force, which was chaired by Alice Rivlin, the Clinton Administration's budget director, and former Republican Sen. Pete Domenici.

The Rivlin-Domenici plan would limit the government's per-beneficiary financial contribution to a formula tied to Gross Domestic Product plus a percentage point. In this sense, Rivlin-Domenici really is more a voucher than a premium support.

2. Would privatization cut healthcare costs and shrink the budget deficit?

Vouchers would reduce federal Medicare spending by capping benefit payments. But the assertion that privatization can reduce overall healthcare costs is ideological; the argument here is that unleashing competitive marketplace forces will lead to innovation and cost savings.

Yet traditional Medicare has a much stronger record of controlling costs than the private insurance market. As the largest U.S. purchaser and regulator of healthcare, Medicare has purchasing clout far beyond what any single private insurance plan could exert.

An analysis of federal data by the Center on Budget and Policy Priorities (CBPP) found that between 1970 and 2009, Medicare spending per enrollee grew by an average of 1 percentage point less than private health insurance premiums, or one-third less during that period.

Private Medicare Advantage plans have been gaining marketshare, but they don't reduce federal health spending. In fact, Advantage plans currently are reimbursed by the federal government at 114 percent of traditional Medicare rates -- a payment scheme that was put in place to encourage private insurers to participate in the market and to help them compete with traditional Medicare. (The Obama Administration's health reform law freezes those payments Advantage calls for gradually reducing those payments over a period of years, ultimately equalizing reimbursements with traditional Medicare.) Medicare Advantage plans also have benefited by marketing to healthier seniors who are less costly to serve.

"Premium support is just another approach to privatizing Medicare and moving away from the traditional fee-for-service plan," says Edwin Park, vice president for health policy at CBPP. "A lot of the arguments about lower cost and efficiency in private plans just don't hold up."

3. Would seniors have to pay more out of pocket?

Yes. The Congressional Budget Office (CBO) estimates that under the House-endorsed Ryan plan, the total cost of providing benefits to a typical 65-year-old in 2022 would be $20,500. The government would contribute $8,000 of that amount, with beneficiaries paying the remaining $12,500 -- more than twice what they would pay under traditional Medicare ($5,630).

The Rivlin-Domenici proposal hasn't been scored by CBO, but if its voucher didn't keep pace with rising healthcare costs, beneficiaries who want to stay in traditional Medicare would have to cover the difference.

The alternative would be to enroll in a private plan with lower premiums. But those plans might be allowed to keep costs down by offering less generous benefits, restricting provider networks or requiring higher cost-sharing via co-pays or higher deductibles. Much would depend on the specifics of how new rules and regulations would be drafted that govern the private plans.

4. How are these proposals different from the current Medicare Advantage program?

Medicare Advantage lets seniors opt for an all-in-one private plan that covers hospitalization, doctors' visits, drugs and other benefits. But the private plans must commit to provide services at least equal to those provided under traditional Medicare. Many of the new privatization plans would permit variation in benefits and premiums.

5. Wouldn't these Medicare exchanges resemble the exchanges being created under Obama's healthcare reform?

While there are some similarities, the exchanges under the Affordable Care Act (ACA) would provide support designed to keep up with health insurance inflation. Also, the ACA exchanges are designed to cover millions of uninsured Americans, while proposals like Rep. Ryan's actually eliminate traditional Medicare over time, and force seniors to enroll in private plans.

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The author is a Reuters columnist. The opinions expressed are his own.

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