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The Privatization of Medicare


Medicare is the federal health insurance program that provides coverage to 43 million Americans who are age 65 and older or who are younger than 65 and receiving Social Security disability payments. Traditional Medicare consists of hospital insurance, Part A, and supplementary medical insurance, Part B. Every Medicare beneficiary has the same cost-sharing amounts and benefit structure under both Parts A and B. Premiums were originally uniform, but Part B premiums have been increased for higher-income beneficiaries.

The Medicare Part D prescription drug benefit, established by the Medicare Modernization Act of 2003 (MMA), differs dramatically from traditional Medicare. The MMA allows only private companies to participate in Medicare Part D, thus privatizing prescription drug coverage for America's seniors and eroding the social insurance nature of the Medicare program. Because of this privatized structure, beneficiaries pay different premiums and must choose between a very large number of plans with varying drug coverage and cost sharing amounts.

Despite the success and popularity of the traditional fee-for-service Medicare program, and the failure of past privatization efforts such as Medicare+Choice, the MMA greatly expanded the role of the private sector in Medicare. In addition to the prescription drug benefit that is delivered only by private stand-alone prescription drug plans or private Medicare Advantage (MA) plans, the law threatens traditional Medicare by overpaying private health insurance companies, means-testing the Part B premium, imposing a completely arbitrary 45 percent cap on general revenue financing of the Medicare program, and establishing a "premium support" demonstration to compare costs between fee-for-service Medicare and subsidized private plans.


Create a Medicare-operated prescription drug benefit with the government required to negotiate drug prices

Seniors should have the option of a Medicare prescription drug benefit rather than having to sort through countless private plans in order to receive prescription drug coverage. Seniors face too many plan choices with various premiums, deductibles and other cost-sharing amounts. A Medicare-operated drug benefit would offer the dual benefit of simplifying and standardizing the coverage provided by the program, and it could provide a more comprehensive formulary at uniform prices. Furthermore, unlike private companies, a government plan would not need to increase prices and change formularies throughout the year to maximize profits. Overall, traditional Medicare achieves administrative efficiencies not matched by private plans. Extending this efficiency to the Part D program will save taxpayer dollars.

Require the federal government to negotiate drug prices

The federal government should be required to use leverage through negotiating in bulk to negotiate lower drugs prices for the Part D program. States currently use this leverage to negotiate lower prices for their health care programs, as does the Department of Veterans Affairs. It would be easiest to achieve effective price negotiation under a Medicare-operated drug benefit, but there are a number of alternatives by which CMS could effectively achieve lower prices for private plans as well.

Level the playing field between traditional Medicare and private Medicare Advantage plans

Private plans should be paid at the same rate that the traditional Medicare program is paid for covering beneficiaries. However, due to provisions of the Medicare Modernization Act of 2003 (MMA), private Medicare Advantage plans are now paid an average of 14 percent more than traditional Medicare. Inflated payments to Medicare Advantage plans, which amount to $15 billion a year, are funded by all taxpayers and all Medicare beneficiaries, not just the 20 percent of Medicare beneficiaries enrolled in private plans. Equalizing Medicare payments would save about $169 billion over ten years, reduce Medicare Part B premiums by $3.00 a month per beneficiary and bring an additional 18 months of solvency to the Medicare hospital trust fund. Better uses of the money would be to improve the Part D benefit by reducing costs to seniors, including filling-in the so-called "donut hole" that requires beneficiaries to pay 100% of the cost of their prescription drugs while continuing to pay full premiums to private plans; and enhancing benefits in traditional Medicare.

Repeal the means-testing of Part B premiums

Medicare beneficiaries with incomes above certain levels are paying higher Part B premiums due to passage of the Medicare Modernization Act of 2003 (MMA). Prior to 2007, all Medicare beneficiaries paid premiums equal to about 25 percent of the Part B program's average cost per beneficiary. Today, higher-income seniors are paying premiums ranging from 35 to 80 percent of the average per beneficiary cost which translates into premiums that are double or triple the standard premium amount.

Means-testing undermines the social insurance nature of the Medicare program and could lead to increased costs for middle- and lower-income seniors if higher-income seniors, who are often younger and healthier, are driven away by increased cost-sharing. It also raises premiums for those who have paid the most into the program through Medicare payroll taxes, harms seniors and their families regardless of their financial obligations, and puts the burden on seniors to demonstrate that their premiums should not be increased if their income is reduced.

Repeal the 45 percent cap on general revenue funding for Medicare

The Medicare Modernization Act imposed a completely arbitrary cap of 45 percent on general revenue financing of the Medicare program. When the Medicare Trustees project, for two consecutive years, that 45 percent of Medicare funding will come from general revenues at a set future date, the President is required to present a plan to Congress to reduce general revenue funding. This approach would prevent consideration of all potential solutions to the program's long-term shortfall. Further, it ignores Medicare's financing structure, which is designed to include substantial contributions from general revenues to fund Medicare Parts B and D, as well as the need to address Medicare's future in the context of U. S. health policy as a whole. The National Committee supports the House of Representatives' decision to suspend the 45 percent rule for the 111th Congress and urges its permanent repeal.

Prevent implementation of the 2010 comparative cost adjustment demonstration

The "comparative cost adjustment demonstration project" - also known as "premium support" - established in the Medicare Modernization Act requires traditional fee-for-service Medicare to compete with private Medicare Advantage plans in selected regions beginning in 2010. Seniors will receive the equivalent of a voucher in an amount reflecting the average per beneficiary cost of private plans and traditional Medicare for their region. If they enroll in a less expensive plan, either a private plan or traditional Medicare, they can keep a portion of the savings; if their plans' premiums or the traditional Medicare Part B costs are higher, they will pay the difference out-of-pocket.

Proponents of the comparative costs adjustment demonstration project claim that this competition will result in better benefits to seniors at lower cost. Healthier seniors who enroll in subsidized Medicare Advantage plans, which are overpaid compared to the traditional Medicare program, may do better in such a system for a time. Older, sicker seniors are more likely to remain in traditional Medicare where they are certain of the benefits it provides and they can continue seeing the doctors they know. However, because the risk of insuring these seniors would be spread among many fewer people, it is inevitable that they will end up paying higher Part B premiums than beneficiaries who are not in comparative cost adjustment areas. At the same time, they are subsidizing the private companies that drain healthier retirees from their risk pool and further increase their costs. This privatization experiment would likely move Medicare beneficiaries out of traditional Medicare and into private health plans thus further eroding the social insurance nature of Medicare.


Forty years after its enactment, Medicare, along with Social Security, remain our most popular and essential federal social insurance programs. Any changes in Medicare must not alter the fundamental social insurance principle that has made Medicare such a popular and effective program.

The National Committee to Preserve Social Security and Medicare will continue to advocate for expanding traditional fee-for-service Medicare to include a prescription drug benefit with the government negotiating drug prices. The National Committee is also dedicated to leveling the playing field between traditional fee-for-service Medicare and private Medicare Advantage plans in order to enhance benefits for all Medicare beneficiaries and to make the best use of all Medicare expenditures. In addition, the National Committee will continue to oppose initiatives such as means-testing premiums and the "premium support demonstration" that likely could result in a two-tiered Medicare program based on income and health status.


Government Relations and Policy, March 2009

The National Committee is a nonprofit, nonpartisan organization that acts in the interests of its membership through advocacy, education, services, grassroots efforts and the leadership of the board of directors and professional staff. The work of the National Committee is directed toward developing a secure retirement for all Americans.

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