Alice Rivlin (Courtesy of C-SPAN)

Alice Rivlin says Medicare could make more use of market forces to control costs than it already does.

The current Medicare Advantage program does let private insurers compete for Medicare enrollees’ business, but the program does not give the insurers enough incentives to reduce costs and improve quality, Rivlin testified today at a House Ways and Means health subcommittee hearing.

The subcommittee organized the hearing to look at what Rivlin, a former vice chairman of the Federal Reserve Board who is now a senior fellow at the Brookings Institution, and a colleague, Pete Domenici, a Republican who represented New Mexico in the Senate, are calling a Medicare “premium support” proposal.

The proposal calls for Medicare to continue to make the traditional fee-for-service Medicare program the default option. Medicare also would let enrollees use regional exchanges to choose from menus that would include the traditional fee-for-service (FFS) Medicare program along with guaranteed-issue private plans with the same actuarial value as the traditional Medicare coverage.

Plans would get risk-adjusted annual payments based on the age and health status of the enrollees.

The government’s contribution would be based on the amount paid to the second-lowest-priced plan in the region. Enrollees who chose the cheapest plan would get money back; other enrollees would have to pay the difference between the government’s contribution rate and the price of the plan selected.

About a quarter of Medicare enrollees already buy Medicare coverage from private Medicare Advantage plans, and some Medicare Advantage enrollees buy coverage through Web-based exchanges.

But the Medicare Advantage program does not make cost information as easy to see as the Domenici-Rivlin regional exchange-based program would, Rivlin said, according to a written version of her remarks posted on the committee website.

“The government would no longer have to pay extra to private plans when FFS Medicare provided lower-cost coverage (as is often true under [Medicare Advantage]) and would not pay more to provide FFS Medicare when private plans offer the care for less (as it currently does under [Medicare Advantage]),” Rivlin said. Beneficiaries would pay more attention, especially in areas where they could save money, because FFS Medicare premiums exceeded the second lowest bid. Plans would also have more incentive to seek efficiency when the bidding mechanism resulted in lower payments from the government than under the present [Medicare Advantage] system of administratively pegging payments to the cost of FFS Medicare.