Medicare (Dis-)Advantage

August 17th, 2012 at 3:05 pm

One more quick dive into the weeds on the Medicare dust up and then I promise to get back to the real economy and jobs.   I’m not saying that these campaign debates re retiree health care are a distraction from what matters most to most people.  Jobs and paychecks are of course up there at the top of most peoples’ concerns.  But so are retirement security, affordable health coverage, and a boatload of what the eminent physician Dr. John would call “refried confusion.”

And hear this: the next misleading turn in the debate will be around something called Medicare Advantage and one can already get a pretty good idea of the obfuscation that’s coming.

For decades, Medicare recipients could enroll in private plans instead of traditional Medicare and a few years ago, Congress created Medicare Advantage, further expanding private coverage options for seniors in Medicare.   About a quarter of Medicare recipients are enrolled in such plans right now.

So why am I bugging you about this?  At least three reasons.

First, yesterday Gov Romney said the following:

“The plan that I’ve put forward is a plan very similar to Medicare Advantage. It gives all of the next generation retirees the option of having either standard Medicare, a fee-for-service-type, government-run Medicare, or a private Medicare plan.”

So, yeah…you’ll be hearing a lot about MA plans in coming days.  FTR, there’s nothing inconsistent with what the Gov said and Paul Ryan’s premium support plans I’ve discussed a lot around here lately.

Second, a significant source of health-care savings in the Affordable Care Act—a chunk of which extend the life of the Medicare trust fund by eight years—comes from reducing overpayments to these MA plans (see the blue section of the pie chart here).

That’s right—as the figure below reveals, payments to MA plans have in recent years been higher than those that go to tradition Medicare.  Note, for example, that the Medicare program’s payments to the private fee-for-service plan in 2009 were 18% above traditional Medicare.

Source: Kaiser Family Foundation

These overpayments have fallen over time—the link above to the Romney story cites 7% as the most recent figure.  But that’s in part because Congress has already been enforcing lower payments.  I mean, given that we already have Medicare—widely considered to be an excellent form of coverage—why should money be diverted from it to pay for more expensive private plans?

At any rate, ceasing these overpayments is important not only to sustain the program, but as a stark warning that you shouldn’t assume private coverage automatically saves money.  To the contrary—remember, health care is a very unique market.  We’re not talking normal goods here; we’re talking about a service that must, by law, be provided to you if show up at the emergency room regardless of what your treatment costs or your coverage status.  Once you enter that realm, all market bets are off.

Okay, third and final reason.  Contrary to the chart above, on the Diane Rehm radio show the other day, someone on the panel claimed that such numbers in the bars above were wrong and that a new study (“by three Harvard professors!”) showed that in fact, MA plans come in at 9% below traditional Medicare.

Turns out one of those professors is David Cutler, who sent me a link to the paper.  It shows nothing of the kind.  Cutler confirmed to me, in fact, that the numbers in the chart are correct in his view.  What he and his colleagues actually did in their paper, however, is relevant and related to this discussion.

They asked whether a Ryan-Wyden style premium support plan would lead current beneficiaries to have to pay more out of pocket, something I and others have stressed is a likely outcome of a voucher plan that shifts costs onto beneficiaries.

And here’s what they found (note that Ryan/Wyden benchmarks the voucher to the second least expensive plan in the county):

…68% of traditional Medicare beneficiaries in 2009 (approximately 24 million beneficiaries) lived in counties in which traditional Medicare spending was greater than the second–least expensive plan and would have paid more to keep their choice of coverage (a share that would have been 81% in 2008, 75% in 2007, and 67% in 2006). Furthermore, more than 90% of MA beneficiaries (approximately 6.6 million seniors, excluding those dually eligible or in employer plans) would have also paid more for the plan they chose.

In other words, the majority of both Medicare and MA participants would pay more out-of-pocket.  That may be OK with you, it may not be.  The average increase in out-of-pocket costs came to $770 a year, which is a lot given that the median income of Medicare households is $25,000, though certainly not much for rich retirees.  But it clearly shifts costs onto beneficiaries, something the ACA conspicuously avoids, for good reason.

Again, from the Cutler et al paper:

Premium support, based on competitive bidding, may offer a fiscal solution if ACA reforms fail, but at the cost of making Medicare beneficiaries responsible for solving Medicare’s fiscal crisis.

There are lots of other reasons to be skeptical about such moves toward voucherization/privatization.  I’ve always been very uncomfortable with the assumption that retirees really, really want to shop for insurance coverage.  Cutler et al have germane thoughts on that as well:

…incentivizing beneficiaries to join private Medicare plans, even if less expensive, may have undesirable effects. In particular, reliance on beneficiary shopping to discipline the market has been problematic. Beneficiaries are often slow to switch plans due to cognitive impairment, choice overload, consumer inertia, or other influences. For example, Medicare Part D plans, which also operate in a bidding system, have found it profitable to price low initially, attract many enrollees, then increase prices over time. Moreover, beneficiaries do not enroll in Part D plans that offer them the best coverage for their premiums and medical conditions. These market failures would likely be even greater in a market-based Medicare system in which choosing plans would likely be even more difficult than in Part D. The market requires beneficiaries to trade restrictions on care or limited physician networks for premiums, which is counter to how many seniors view Medicare.

As a card-carrying employee of the Center on Budget and a fiscally responsible American, I am not at all complacent about the budgetary pressures from health care cost growth.  In fact, since such growth is better controlled in the public vs. private sector, it’s one reason I want to strengthen the public programs we’ve got.  But there’s a right way and a wrong way to go about it.  Solely shifting the costs to retired beneficiaries is the wrong way.

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15 comments in reply to "Medicare (Dis-)Advantage"

  1. LaNeisa Jackson says:

    As one with a double interest, I wanted to say thanks for foraging the weeds. I sold Advantage some years back and witnessed the waste, fraud, and abuse. It was considered an easy cash cow and laughed about among many of my coworkers. The commissions paid one week would be paid again to another person and different plan the very next. Even before the first plan was in effect another insurance carrier would sell the same senior. One senior I sold the PFFS package to was refused care by his doctor because of the contract terms that allowed Drs. to reject patients on a visit by visit agreement. Good riddance to these plans.
    MIPPA Overview.indd are some more fun weeds for you.

    Second interest..I am 60 and want to retire.

    • Jared Bernstein says:

      Thanks for sharing that stuff–very useful to have granular reports from the field on stuff like this.

  2. wkj says:

    Isn’t there also a “lock-in” with MA? My understanding is that if you are in MA, but would like to switch back to “traditional” Medicare, you can, but you will have trouble getting Medigap (Part C) coverage without a pre-existing condition limitation.

    Also, the last quote from Cutler is right on. The benefit of price competition through competitive bidding is limited unless the plans are identical. I am a retired lawyer, age 67, but under the current Medicare structure, trying to chose wisely from among the competing Part D (drug) plans each year is already a big hassle. Trying to choose among a similar number of Part A/B plans with subtle differences would be a game with higher stakes and would be daunting, particularly as I get older.

    • LaNeisa Jackson says:

      You are right to be investigating those questions. For official answers go to Private Medigap plans do not have to allow you in-no matter your health- except under specific and time-stamped circumstances. Turning 65 is critical to ‘guaranteed issue.’ Ask them about initial enrollment.

      Call them–that’s why we pay taxes, right?

    • Anonne says:

      You can switch plans before the year is out only if you switch to a plan that is 5-star rated. Finding 5-star plans in your area is like hunting for unicorns in the wild, for most people.

  3. Dennis Byron says:

    This little phrase is the crux of the whole debate:

    “given that we already have Medicare—widely considered to be an excellent form of coverage—why…”

    Who has told you that healthcare insurance with no catastrophic coverage, up to $6000 a year in hospital deductibles if admitted, 20% co-pays if in a hospital but only observed (possibly thousands of dollars in one visit), 20% co-pays for outpatient and MD visits, very limited rehab benefits, no annual physical coverage, no prescription drug coverage, no vision/dental/aural coverage and severe geographic restrictions is “excellent?”

    I am not arguing for the Medicare Part C rebate system to be restored to pre-PPACA levels although I am a beneficiary of the current reduced Part C rebates, including the bonus rebates currently being awarded to me through my insurer by HHS/CMS for simply being there, despite the PPACA provision that the insurance company demonstrate 4- or 5-star quality to get the bonus. I am simply saying that the reason that there is a Medicare issue is that Medicare is terrible insurance. Therefore all these crazy quilt supplemental plans are required and some of my friends actually have five different insurance companies to deal with (one for A, another for B, another for D, another for their Medigap and another for dental). I only deal with one.

    • Jared Bernstein says:

      You raise some good points. Let me clarify. First of all, according to polls, few agree that Medicare is terrible–much to the contrary (Medicaid, on the other hand, is less beloved). My point was that it’s very popular and covers a fixed set of essential services, most importantly HI coverage–though not comprehensive, as you point out–at lower costs (really, lower payments) than the avg MA plan.

  4. It’s Monday and Robert Samuelson is Confused About Medicare, Again | WestPenn Journal says:

    […] Robert Samuelson devotes his column today to misrepresenting a new article in the Journal of the American Medical Association, claiming that it shows the Ryan-Romney Medicare plan would save money. In fact, the article compares costs of Medicare Advantage plans with the current traditional Medicare plan. It notes that in many cases the former are lower, however it does not attribute the savings to the more efficient delivery of care. It notes that lower costs may be due to healthier patients, which has been the finding of other research, such this study by Kaiser via Jared Bernstein. […]

    • run75441 says:

      The Romney plan would completely repeal Medicare and you would be in the private sector. The Ryan plan has similar savings as the ACA; but, the savings would disappear the same as the SS surplus did to tax breaks and not be plowed back into Medicare. Either would save money at the expense of Medicare recipients.

  5. David Geiger says:

    Mr. Bernstein,

    Cutting overpayments to MA plans and competitive bidding are the same type of “cut” to Medicare. You can’t simultaneously argue that one doesn’t affect beneficiaries and the other does. While they both will affect some beneficiaries, they do so by lowering overpayments to less efficient insurance providers. If we can provide the full Medicare entitlement benefit for less with no effect on the quality of care, we should. We have a hybrid public/private system, which will be the case for the foreseeable future, so we should run it as efficiently as possible. The Cutler, et al study tells this story as well.

    It’s very misleading to discuss the cost of MA plans without mentioning that they provide the same benefits for less money in many counties (and for less, on average, overall).


  6. Kosta says:

    Yesterday, Robert J Samuelson published an op-ed in the Washington Post arguing that Medicare Advantage saved money compared to regular Medicare

    The money quote is “Medicare Advantage has cost less for identical coverage. From 2006 to 2009, the gap averaged 11 percent between traditional Medicare and voucher plans that, under the proposal by Ryan and Sen. Ron Wyden (D-Ore.), would serve as a price “benchmark.”

    Samuelson references a very recent publication by Zirui Song, PhD; David M. Cutler, PhD and Michael E. Chernew, PhD

    Can you reconcile the detail Samuelson is quoting with the figure that you have presented?

    • Jared Bernstein says:

      On the “money quote,” it’s comparing apples and oranges. The gap he’s pointing out there is the difference between standard Medicare and the second lowest bid from MA private providers. That differs, clearly, from the average payments to MA plans as in the figure in my post. There is no question among non-partisan experts in this area that MA overpayments exist.

      Note also, as I point out, that one of the authors of the study the Samuelson is citing (David Cutler) endorses the numbers in the bar chart in my post.

      As to whether the cost of the 2nd highest bid reveals that competition is a cost saver for Medicare, as Samuelson claims, see this piece by Peter Orszag. He argues that even the 2nd lowest bid numbers are biased down by insufficient risk adjustment.

      • Kosta says:

        Thank you for the explanation and the link to Orszag’s paper. I agree that the statistic quoted by Samuelson is not relevant.


  7. tom says:

    As seniors age into their late 70’s and 80’s, some will lose the energy as well as the mental ability to effectively shop for insurance. The easiest thing for them to do will be to stay with their current plan. If they are not prevented from doing so, private insurers would take advantage of them by jacking up rates on those effectively locked in. (My home insurer tried this on me and I’m in my 40s.)