Medicare is an extraordinarily complex program, consisting of four parts that provide payments to health care providers to reimburse them for health care services or to health insurance companies to offset the cost of these services. There are numerous options to achieve savings in Medicare. We propose five reforms to bring more transparency and competition to the current program and a modest increase in Part B premiums for higher income beneficiaries, which combined, would produce savings of nearly $500 billion over 10 years.
Our first proposed reform applies to the Medicare Advantage program (MA). The Centers for Medicare and Medicaid Services (CMS) currently make payments to MA plans to provide health care coverage for Medicare beneficiaries that opt to participate in the program. Currently, those payments include an adjustment for risk factors based on the population the relevant plan serves. Research has indicated that these payments overcompensate for these risks. Currently, CMS makes a 5.9% reduction to reflect these overpayments. The Medicare Payment Advisory Commission’s (MedPac), a non-partisan agency that conducts analysis of the program for Congress, estimates that CMS is still making payments in excess of the actual risk. This CBO option would reduce those payments by 8% with estimated savings of $46 billion over 10 years.
Our second proposal would bring more competition to the provision of drugs via Medicare’s Part B program. Medicare spent $37 billion in 2019 for Part B drugs with this spending concentrated on a limited number of drugs. Currently, there is a lack of competition among drugs and little incentive for providers to prescribe lower priced drugs. We join the Committee for a Responsible Federal Budget in proposing a reform to the way providers are reimbursed for Medicare Part B drugs to strengthen incentives to select lower cost drugs, saving an estimated $78 billion over 10 years.
Our third reform would permanently repeal a Medicare rule governing drug rebates and discounts. Medicare currently provides coverage for prescription drugs through its Part D program. Currently, drug manufacturers negotiate drug prices with health care plans and pharmacy benefit managers that include a rebate to lower the prices paid for those drugs. In 2019, the Department of Health and Human Services (HHS) proposed to modify rules governing drug rebates and discounts. The Congressional Budget Office concluded the rule would increase federal spending. The Inflation Reduction Act (IRA) suspended this rule through 2031, reducing Medicare spending on drugs by $122 billion for FY 2022-2031. This reform would permanently cancel this rule, producing Medicare savings beginning in 2032, saving an estimated $99 billion through FY 2034.
Our fourth Medicare proposal would apply to premiums beneficiaries pay for Medicare Parts B (physician services) and D (prescription drugs) coverage. When the program was created in 1965, beneficiaries were charged premiums equal to 50% of the program’s costs. Congress reduced those premiums and today they are 25% for Part B and 25.5% for Part D. Congress recently reformed these two programs to charge higher premiums for those beneficiaries with higher incomes. The income brackets to determine these increased premiums are adjusted annually for inflation. We propose freezing that adjustment for 2026 through 2034, leading to a small increase in premiums for higher income beneficiaries. It would generate an estimated $57 billion in 10-year savings.
Fifth, we would equalize Medicare payments for certain services, frequently referred to as site neutral reform. Currently, Medicare pays a higher rate to certain hospitals than it pays for the same services provided in physician offices. The reform is based on MedPac recommendation. MedPac found that the current disparity in Medicare payment rates generated a financial incentive for hospitals to acquire physician practices, which resulted in higher costs to both Medicare and patients. Their recommendation targeted services that can be safely performed in hospitals and physician offices and proposes that the payments be equalized. If the reform had been in effect for 2021, MedPac estimated it would save the Federal government $6.5 billion and patients $1.5 billion for that year alone. The reform has bipartisan support (it was included in President Obama’s proposed budget and has been proposed by House Budget Committee Chairman Jody Arrington (R-TX)) and would generate an estimated $145 billion in 10-year savings.