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The grand Medicare compromise?

Remember “premium support”?

It was the idea, most prominently associated with Rep. Paul Ryan but also advocated by Mitt Romney, to add private insurance plans to the Medicare system and then give seniors a coupon that lets them choose between the private and public options. In most versions of the proposal, the value of the coupon grows more slowly than the cost of health insurance, and while seniors could pay out-of-pocket for more expensive options, the hope is that they'll choose cheaper, more cost-effective plans, and in doing, bring down Medicare costs.

To Republicans, premium support was the sine qua non of “Medicare reform.” It was the one policy with a chance of controlling Medicare costs forevermore. To Democrats, premium support was but the latest in a long line of Republican attempts to privatize the Medicare system.

Republicans lost the election, and with it, their chance to rebuild Medicare into a premium support system. But as Republicans try to figure out what kind of Medicare changes would be sufficient for them to sell a tax increase to their base, and as Democrats try to figure out what kind of Medicare reforms will satisfy Republicans without undermining the system, it might be time to give premium support-lite a look.

In September, the Urban Institute published a paper with the rather dull title: "Why Premium Support? Restructure Medicare Advantage, Not Medicare."

Most of the report is a sustained attack on premium support. The authors argue that adding private plans to Medicare hasn't worked before and there's little reason to believe it will work now. They worry that more private plans will scoop up healthy seniors and leave Medicare with the bad risks. They note that private insurers pay hospitals 40 percent more and doctors 25 percent more than traditional Medicare. They show that private plans in Medicare tend to spend about 11 percent of premiums on administrative costs, while Medicare spends two percent.

But on the last page, they make an intriguing suggestion. Private plans already exist inside Medicare. About a quarter of Medicare beneficiaries have them through the Medicare Advantage program. But that program is flawed: Though it was intended to save money, today it costs significantly more than traditional Medicare, and it ploughs any savings back into lusher benefits. In an age of austerity, there’s no reason to have private plans in Medicare that aren’t trying to save money.

While the Affordable Care Act ratchets back those overpayments, it doesn't refocus the program to try and cut costs rather than offer more generous benefits. But that could be the next step, and once complete, Medicare Advantage could be a testing ground for premium support.

The Urban Institute study won't have much credibility with backers of premium support because the authors so clearly oppose the idea. But Alice Rivlin, the former director of the Congressional Budget Office and co-author, with Paul Ryan, of one of the earlier and better-received premium-support proposals, is now suggesting the same thing. In the latest incarnation of the deficit-reduction plan she's co-authored with former Sen. Pete Domenici, she proposes "using Medicare Advantage over time as the vehicle to bring in competition."

Her plan would go further than most Democrats are going to be comfortable with: It makes Medicare a defined-contribution rather than defined-benefit system, with the federal contribution “based on the cost of the second-least-expensive plan or traditional Medicare, whichever is less expensive, and the growth of the per-beneficiary federal support will be capped at GDP+1%.” Note that that’s actually a more generous growth rate than the GDP+0.5% President Obama proposed in his most recent budget.

Steve Zuckerman, one of the authors of the Urban Institute’s proposal, thinks the Rivlin plans goes too far. “There is this belief if you somehow put pressure on the premiums and people have less price support, either through tax subsidies or a voucher in Medicare, that people would gradually force the system to become more efficient. There’s not a lot of evidence of that,” he says. Meanwhile, “Medicare has a huge advantage in terms of market power and being able to dictate the prices providers received. We worry that would be eliminated or reduced with private plans enrolling beneficiaries.”

That said, Zuckerman and his coauthors believe that if Medicare is going to have private plans – and, through Medicare Advantage, it already does, and they’re not going away – those plans shouldn’t be paid any more than traditional Medicare, and they should be restructured so they’re focused on cutting costs rather than increasing benefits. And if they work, that would be evidence that a more robust version of premium support might work, too.

That time spent piloting premium support-lite would be valuable, says MIT health economist Jon Gruber, one of the key architects behind the structure of the Affordable Care Act. His view is that premium support is “a good idea” whose time hasn’t come. In particular, he says we don’t know enough about how to ensure real competition in insurance markets, how to build strong risk adjustment mechanisms so insurers can’t just sign up healthy seniors and kick out sicker ones (which appears to be happening in Medicare Advantage today), and how to help seniors, many of whom may not have all their faculties, make good decisions.

“The good news is that the new state and/or federal exchanges will provide laboratories where we can learn about these things,” says Gruber, referring to Obamacare. So if private plans do show themselves able to save money in the revamped Medicare Advantage program and we want to move forward with premium support, we would know more about how to design a premium support system that would actually work.

Is this everything Republicans want? Of course not. But it rescues their most cherished Medicare idea from the ash heap of the 2012 election and gives liberals and conservatives alike a chance to see whether it will work under relatively controlled conditions. Meanwhile, Medicare will be implementing the Obamacare pay-for-quality reforms, giving us a chance to see whether those work, too. In a few years, we’ll know much more about which approach is proving more promising, and how to build on it.

That won’t be an easy sell to Democrats. But that’s what negotiations are for, and the Rivlin-Domenici plan has some ideas for what Republicans can trade away, too. It includes $1.6 trillion in tax increases -- equal to what Obama is asking for. Infrastructure investment, which most Republicans don't actually oppose, would be another sweetener, and would have the added benefit of helping the economy recover. And Rivlin emphasizes that alongside premium support, Medicare should be empowered to negotiate directly with pharmaceutical companies and device manufacturers. Democrats would like that quite a lot, too.