The Medicare program currently operates as a fee-for-service program, which contributes to the program’s growth at an unsustainable rate. We propose that 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 Benefits 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. According to CBO, this reform would save both the federal government and Medicare beneficiaries money. Because the reform is slowly phased in, savings would initially be modest ($31 billion over 10 years) but would grow rapidly as the reform was fully implemented.