Medicare Vouchers Could Save MoneyBut Must Be Designed Carefully To Avoid Hurting The Elderly

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Replacing the current Medicare program with a system that gives seniors a yearly sum of money (or voucher) to buy health insurance from private, competing health plans could reduce future Medicare spending. But such a shift would have to be carefully designed to avoid devastating effects on Medicare beneficiaries, the National Coalition on Health Care (NCHC) warned today in testimony before the National Bipartisan Commission on the Future of Medicare.

NCHC co-chair Paul G. Rogers, a former Democratic congressman from Florida, said a voucher approach poses dangers as well as opportunities. His remarks drew on a study the NCHC commissioned from The Lewin Group. The study is being released today.

The voucher approach is among several major reforms being promoted as ways to modernize the Medicare program and reduce its projected cost explosion over the next 30 to 50 years. Rogers told the Commission that a voucher program which terminates a government-guaranteed Medicare benefit package would very likely leave millions of elderly Americans with inadequate health insurance protection.

That would occur, the Lewin study concludes, because such a “defined contribution” voucher is highly unlikely, after a few years, to provide enough money to low-income beneficiaries to purchase adequate insurance. Under a defined contribution voucher plan, beneficiaries would have to supplement the fixed voucher amount to pay for private coverage. As the cost for private coverage rises (and government limits its Medicare expenditures), lower-income seniors could be priced out of the market for all but the scantiest coverage.

Under a “defined benefit” voucher plan, the government would retain its guarantee of a minimum or standard benefit package. Health plans would bid competitively to provide at least the minimum benefit package for a set price per beneficiary. The voucher amount would be based on those bids, which would differ from one geographical area to another.”We urge the Commission not to abandon the guarantee of a minimum benefit package,” Rogers said.

The study, Comprehensive Medicare Reform: Defined Benefit vs. Defined Contribution, was conducted by John Sheils and Andrea Fishman. It predicts that a voucher approach will cut billions of dollars each year from Medicare spending by infusing the program with more budget discipline and market competition. But the exact magnitude of savings (to the Medicare program as a whole and to its imperiled hospital trust fund) depends on so many factors that it is hard to predict accurately over decades. Using a model that makes several key assumptions, The Lewin Group projects the following:

  • A defined contribution plan, which limits Medicare spending to a budgeted amount each year, involves all Medicare beneficiaries and begins in 2005, would eliminate the hospital trust fund deficit altogether. The trust fund is currently scheduled to be depleted in 2010.
  • A defined benefit voucher plan which slows the projected rate of growth in Medicare spending could reduce the trust fund deficit by 25% to 66% by the year 2030, depending on how much the growth rate is reduced.
  • A defined contribution voucher plan involving all Medicare beneficiaries could yield savings to the Medicare program as a whole of $3.6 trillion between 2005 and 2030 (20%-27% of total program costs).
  • A defined benefit voucher plan involving all Medicare beneficiaries that reduced the annual rate of growth by 1.5 percentage points in each year from 2005 to 2030 could yield savings of $2.8 trillion (15 to 21% of total program costs).

Medicare costs per beneficiary rose at an average rate of 7.8 percent per year between 1993 and 1997. The program now serves 38 million elderly and disabled Americans at a net cost of $200 billion in 1998. The number of beneficiaries is projected to rise to 52 million in 2015 and the program will cost the government (taxpayers) around $600 billion that year if no changes are made. Projected annual costs ñ absent program changes ñ rise to between $2.2 trillion and $3 trillion in 2030 when all 77 million baby boomers will be in Medicare.

The study also projects costs to the government of adding a prescription drug benefit to Medicare and placing a cap on beneficiariesí out-of-pocket expenses. Such actions are being evaluated as ways to improve Medicareís benefit package even as the programís costs are trimmed in other ways.

Lewin calculates that even a modest $1,500 prescription drug benefit with a $500 deductible and 20% co-pay ñ coupled with a $5,000 limit on out-of-pocket costs for all medical expenses ñ would add $14.6 billion to the cost of Medicare in 1999. Thatís a 6% to 7% increase in program costs. The cost would rise to $30.2 billion a year in 2008. The cumulative cost of adding such benefits would be $217 billion for the years 1999-2008.

Comprehensive Medicare Reform: Defined Benefit vs. Defined Contribution is the second of five studies the NCHC is funding this year to analyze problems in and challenges facing the Medicare program. All are being conducted by Lewin, a private health care research firm based in Fairfax, Virginia. Sheils is the groupís vice president. Fishman is a research assistant.

The NCHC is the nationís most broadly representative non-partisan alliance working to improve Americaís health and health care system. Its member organizations include large and small businesses, labor unions, consumer and doctorís groups, religious organizations and academic health centers.

Copies of the report are available by contacting the Coalition at 202-637-6830 or through the NCHC web site at