Medicare Advantage is the privately insured alternative to traditional Medicare.

The Washington Post fact checked the following exchange from the Vice Presidential debate on Medicare Advantage:

Rep. Paul Ryan: “7.4 million seniors are projected to lose their current Medicare Advantage coverage they have. That’s a $3,200 benefit cut.”

Vice President Biden: “That didn’t happen…More people signed up for Medicare Advantage after the change.”

— exchange during the vice presidential debate, Oct. 11, 2012

Who’s Right? The strange thing, according to the Washington Post, is that both are right. But the larger questions remain unaddressed.

While Ryan provided a correct future projection of 7.4 million enrollees leaving Medicare Advantage, the actual projected reduction from today’s level is 5.7 million. Also, his claim of a $3,200 benefit cut, which came from a report by the right-leaning Heritage Foundation, is dubious.

The ACA does cut funding for Medicare Advantage, the privately insured alternative to traditional Medicare. The larger question that I will explore here is how the cuts actually impact Medicare beneficiaries and insurers who market Medicare Advantage policies.

Medicare Advantage Spending Facts

  •  Medicare Advantage,  has enrolled 27% of the Medicare population – 13.1 million beneficiaries.
  • The ACA (Obamacare) cuts $145 billion in projected spending for Medicare Advantage.
  • The cuts are intended to reduce costs, since the government pays more per senior for Medicare Advantage plans than into traditional fee-for-service Medicare.

The Spending Cuts

Extent of the Cuts: The Medicare actuary, Robert S. Foster, estimated that the projected enrollment in Medicare Advantage would be halved. Foster wrote:

We estimate that in 2017, when the MA provisions will be fully phased in, enrollment in MA plans will be lower by about 50 percent (from its projected level of 14.8 million under the prior law to 7.4 million under the new law.)

It is important to note that this isn’t a cut in today’s spending, but a reduction of future budget allocated to the program:

  • The reduction will be made to a future projected enrollment level  of 14.8 million (which is higher than the 13.1 million now enrolled.)
  • The actual projected reduction from today’s level is 5.7 million.

No Current Enrollment Decline: Vice President Biden’s response that enrollment has gone up “after the change”is technically correct. Enrollment in Medicare Advantage plans is actually up:

  • Up to from 13.1 million from 11.1 million when the health care law was approved.
  • Planned cuts were deferred, however, and a $6.7 billion infusion of funds were made into Medicare Advantage in the form of quality based bonus payments.
  • Still, the extra payments do not fully explain why enrollment has continued to climb according to a Kaiser Family Foundation report.

While the projections are just estimates, the Medicare actuary has estimated that millions of retirees would switch out of Medicare Advantage in response to the reductions contained in the health care law. However, the Washington Post notes that the trend towards growing Medicare enrollment has been persistent over time and is unlikely to be fully explained by the quality bonus payments alone, but rather a combination of:

  • Historical trends in payment.
  • The quality bonuses.
  • The continued erosion of retiree benefits
  • Other factors affecting beneficiary choice.

In other words, the Medicare Advantage marketplace is  strong, with robust plan participation and enrollment.

Why Cut When Republicans Say Private Plans Save Money

It should not be surprising that Republicans support private plans over government-run programs. What may surprise you is that they cost more than government-run Medicare.
In an interview on NBC’s “Meet the Press,” Republican presidential candidate Mitt Romney was asked by host David Gregory: “If competitive bidding in Medicare fails to bring down prices, you have a choice of either passing that cost on to seniors or blowing up the deficit. What would you do?” Candidate Romney pointed to Medicare Advantage and Medicare Part D as proof that competitive bidding works to bring down costs. But do these programs actually reduce federal spending?
 
Medicare Advantage Actually Costs More: The Washington Post notes here that despite candidate Romney’s insistence that private plans would lower costs, Medicare Advantage has not reduced Medicare spending, but, as noted above, costs the government more per senior than traditional fee-for-service Medicare. An article examining by reporter Sarah Kliff explains why. These points summarize the Washington Post’s explanation of why, , despite the relatively low bids from private insurers, Medicare Advantage has cost the government more than traditional Medicare:

  • The Center for Medicare and Medicaid Services establishes the maximum amount the government will pay for a list of defined benefits matching those of traditional Medicare.
  • This “benchmark” is always higher than what the government pays for Medicare. For instance, it might be 112% of the traditional-Medicare price.
  • Private insurers submit bids for how much they’re willing to pay for the defined benefits, generally staying below the benchmark.
  • The average bid in 2011 was 2% less than the cost of traditional Medicare.
  • Seniors who participate in Medicare Advantage then select plans from among the bidders, and the government sends Medicare money to help cover the beneficiaries.
  • However, under the current system, the government doesn’t just pay the low bid amount, but also sends the insurance company a rebate equal to 75% of the difference between the bid and the high benchmark.
  • The provider must use the rebate to reduce out-of-pocket costs or to provide extra benefits such as gym memberships, dental care, hearing coverage and so on.
  • Under this formula, the average government payment for Medicare Advantage was 107% of the price for traditional fee-for-service Medicare in 2011.

Voices in both political parties agree that benchmark-driven rebates make Medicare Advantage unnecessarily expensive.  Robert Moffit, director of the conservative Heritage Foundation’s Center for Health Policy Studies and a former assistant secretary for the Department of Health and Human Services during the Reagan administration, believes that the government should do away with the payment system and plow back any savings from competitive bidding directly to seniors and the government. That is in fact what Obamacare intends to do in part by ending the insurer rebates.

The Nature of the Cuts

Since the private Medicare Advantage plans are judged to provide no clear benefits over Medicare despite costing the government more money through rebates, the Affordable Care Act trims spending on Medicare Advantage to eventually put the payments on par with traditional Medicare. The Washington Post points out that these cuts are part of the health-care law’s $716 billion in reduced Medicare spending that Republicans have complained about (the rest comes from reduced payments to hospitals and other providers.)

The Cuts Won’t Necessarily Raise Costs: The Republicans’ contention that cutting back on Medicare Advantage will eliminate choices for seniors is partly true because, without the rebates to insurers, the extra benefits, such as gym memberships and hearing coverage, would likely be discontinued. However, the fallacy of the Republican argument is that the rebates actually prevent what Republicans say they want: cost-reductions due to private-market competition.

The Cuts Won’t Necessarily Reduce Benefits: While the cost of extra benefits would no longer be supported by the government rebates, I believe that two factors will keep Medicare Advantage policies vital:

  • Insurers can continue to offer Medicare Advantage “Gold” plans at a higher price for seniors who are willing and able to pay extra for those added value benefits.
  • Medicare Advantage Plans provide more comprehensive coverage than traditional Medicare Part A and B. They cover the deductibles and coinsurance portions of those plans, and, additionally, can incorporate Medicare Part D.

Cuts Are Inevitable Anyway: While Paul Ryan’s tax plan actually preserves the “Obamacare” cuts to Medicare Advantage, Republicans want the savings to be applied toward deficit reduction, rather than plowed back into the health care system. The Obama administration uses them to expand Medicaid and provide subsidies for people who can’t afford coverage under the new insurance mandate. The problem with Republican deficit reduction argument is that it puts a band aid on the budget deficit problem because health care costs are the major deficit driver. By not avoiding the cost and quality of coverage issues, the Republican plan effectively kicks the can down the road.

Does Medicare Advantage Cause Adverse Selection?

Adverse selection means that when less healthy people enroll in a health care plan, the average costs go up. There is some concern that the healthier seniors would enroll in private plans, saddling government Medicare with increased costs. Harvard economics professor David Cutler, who served as senior health-care adviser to the 2008 Obama campaign, suspects that insurance companies may be finding ways to cherry-pick the healthiest seniors:

We really don’t know for sure whether it’s efficiency or selection [that keeps the private bids low]. If they’re just selecting healthier people, it’s not actually any cheaper.

Cherry-picking by private insurers would leave traditional Medicare with the least healthy seniors, raising the costs, and leave the government would be subsidizing profits for the private sector rather than reducing costs in the program. However, this may not necessarily occur.

While the elimination of the rebates may cause insurers to reprice their Medicare Advantage plans, and result in reduced overall Medicare Advantage enrollment numbers, this may not necessarily translate to an adverse selection problem for Medicare. Here’s why:

Conclusions

Cuts Will Have a Benign Effect: I believe that ending the insurer rebates would probably have either a neutral or benign effect on both government spending and insurer profitability for 3 reasons:

  • Medicare Advantage plans would attract wealthier, but not necessarily healthier, seniors.
  • Different benefit tiers will allow seniors to select the Medicare Advantage plan that best fits their budgets as well as healthcare needs.
  • Enrollees in traditional Medicare would still represent a viable market for insurers’ Medigap and Medicare Part D policies, which cover, respectively, Medicare’s deductibles and coinsurance, and prescription medicines.

The Government’s Perspective: The Medicare Advantage and Medicare Part D programs don’t prove that private-sector competition brings down costs. Although the bids for Medicare Advantage have come in well below the costs of traditional Medicare, and the price tag for Medicare Part D has been lower than the government expected, Medicare Advantage has relied on more costly government rebates, and the rate of growth for drug prices started slowing before Medicare Part D took effect.

While candidate Romney evaded David Gregory’s question about whether he is willing to pass additional Medicare costs to seniors, Medicare costs will need to be contained under any administration, and cuts are inevitable. The question is whether these cuts can bring down health care costs without sacrificing benefits to seniors. The logical way to do this is to plow savings back into the healthcare system, rather than use them for budget deficit reduction.

There are still many yet untried solutions that can reduce the rise of healthcare costs. I have shown that there is a great deal of inefficiency in the private health care system, which accounts for most of the increasing costs, as opposed to private insurer fees and profits. But reducing government subsidies to insurers and health care providers, as the Obama administration does, may pressure provider groups and hospital systems to reduce waste without sacrificing the quality of care for patients.

The Insurers’ Perspective: Medicare Advantage has worked out well for insurance companies, as they have reported greater profits than they anticipated:

  • Private insurers brought in a net combined revenue of $3.4 billion by taking part in the program in 2006.
  • This is about 66% higher than they estimated, according to a 2008 report from the Government Accountability Office.

As the government does it’s budget magic to reduce payments to insurers, insurers will need to do their own actuarial magic to continue to offer good Medicare products for seniors who can afford to spend a little more for premier benefits under a private Medicare Advantage plan, or a little less for benefits that help to offset traditional Medicare’s deductibles, coinsurance and drug coverage.

The one certainty is that in an aging population, the need for health care will continue to rise, guaranteeing a market for private insurers.

A Voucher System Won’t Work: Incrementally privatizing Medicare to squeeze more money out of Medicare recipients, as the Romney Ryan voucher system aims to do, may have a short-term impact on the budget deficit (provided an equal amount is not used to fund new military expenditures), but it will not help either seniors or private insurers. It is in fact a hidden tax on Medicare recipients that holds them accountable for additional costs under a voucher system, while providing no incentive for private insurers and medical providers to contain costs.

The ACA Sets the Right Course: The better alternative is to lower overall healthcare costs by expanding medical coverage, as Obamacare does, which controls premium increases while providing preventative services that reduce health problems in the entire population. With this foundation in place, the government and private sector can then move forward to work on lowering costs on a macro level.

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