At the last interim meeting of the American Medical Association (AMA), which concluded on November 13, delegates from around the country voted to officially support transitioning Medicare from a defined benefit entitlement, to defined contribution - this is essentially what Mitt Romney proposed during the past election.
Currently, Medicare operates under a defined benefit scheme - a set of benefits are covered under Parts A and B (inpatient and outpatient care, respectively) with the option to purchase Part D (prescription drug) coverage as well, for relatively low premiums. Because neither premiums nor the Medicare tax revenue come close to covering the costs of the coverage, Medicare tries to shift costs around by using an outdated formula called the resource based relative value scale (RBRVS), and ends up paying doctors around 80 percent of what private insurance does.
Even with Medicare's creative fiscal magic, Medicare's actuaries routinely note that the pace of spending is unsustainable - neither in the short-run nor the long-run, and its solvency is at best projected to last through 2024.
A proposal routinely offered as an alternative to Medicare's unsustainable trajectory is competitive bidding with premium support. Under this type of reform, private insurance plans would bid for Medicare beneficiaries, with a benchmark plan (under the Romney plan, the second-cheapest plan would be the benchmark) setting the level of support from the government (in the form of subsidies to beneficiaries), which would be scaled based on income. Most proposals also keep traditional Medicare intact for seniors who choose to remain in it.
In essence, this is what the AMA endorsed as a means of protecting seniors' access to affordable health insurance, while trying to fix Medicare's financial woes.
Critics are often quick to point out that Medicare Part C (also known as Medicare Advantage), which allows beneficiaries to purchase private insurance, costs about eight percent more than traditional Medicare. While this may be technically true, these critics address only one set of numbers to draw their conclusions - the amount that the government pays these plans. These amounts are set by a complicated benchmark formula, which private insurers routinely underbid. However, rather than paying private insurers the amount that they do bid (which is about $717 less expensive than traditional Medicare), Medicare pays them the benchmark amount, which is greater than traditional Medicare.
If the benchmark were to be set through the bidding process (based on what the second-cheapest plan bids), rather than government administration, there is more than enough reason to believe that the plans could deliver the same coverage as traditional Medicare at less cost.
While premium support may be off the table for the time being, the AMA's backing may lead Senate Democrats to take such proposals more seriously in the future.