In 2021, Federal spending on Medicare amounted to $689 billion or 3.1% of GDP. Government actuaries project Medicare’s hospital insurance trust fund will go insolvent by 2028. The Medicare program is growing rapidly due to demographics and the growing cost of health care. CBO projects Medicare spending will more than double by 2032. The program has grown faster than the economy and is projected to grow nearly twice as fast as the economy for the next 30 years. By 2052, CBO projects Medicare spending will equal 5.9% of GDP.

The Medicare program currently operates as a fee-for-service program which is causing the program to grow at an unsustainable rate. The plan assumes the program is reformed to bring more transparency and competition to Medicare, helping to lower its cost while maintaining quality health care. Under a premium support plan, health insurance plans would compete to provide health insurance to Medicare beneficiaries. The program’s beneficiaries would choose from competing health care plans and the Federal Government would subsidize the cost of their health insurance. Currently, the health care plans offered to federal employees and retirees (the Federal Employees Health Care Program (FEHB)) share a similar design.

There are a number of options in the design of a Medicare premium support program. Our proposal would grandfather existing Medicare beneficiaries and phase in a premium support system for new beneficiaries. The government’s subsidy would be equal to the average bid of all competing health care plans. Because the reform is slowly phased in, savings would initially be small but would grow rapidly as the reform was fully implemented.