• Obama’s Medicare Half-Truth

    Obama was called a liar during his recent address to a joint session of Congress. Actually, on another point he was not fully truthful about the implications of cuts to Medicare. Obama repeated that his health reform plan includes payment cuts for private Medicare Advantage (MA) health plans:

    The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies — subsidies that do everything to pad their profits and nothing to improve your care. … So don’t pay attention to those scary stories about how your benefits will be cut… That will never happen on my watch. I will protect Medicare.

    Obama’s claim that the cuts will trim insurer profits but not Medicare benefits was meant to calm nervous seniors. As I and others have pointed out the proposed cuts will in fact reduce benefits to some degree, contrary to the President’s assertion. But seniors, in general, should not be concerned. First, only about 23% of Medicare beneficiaries are enrolled in an MA plan.

    Second, there will be very little loss in consumer surplus due to MA payment cuts. Estimates from my 2008 International Journal of Healthcare Finance and Economics paper (co-authored by Steve Pizer and Roger Feldman) suggest that the consumer surplus loss associated with cuts in payments to MA plans will be only 14 cents per dollar saved. The study on which our paper was based was funded by the Changes in Health Care Financing and Organization (HCFO) Initiative of the Robert Wood Johnson Foundation and is summarized in a HCFO Findings Brief.

    In this case, consumer surplus is the dollar value that Medicare beneficiaries receive from the benefits provided by their chosen health plan. This is estimated by examining the detailed choices seniors actually make and then calculating what they would be willing to pay, on average, for particular bundles of benefits. It turns out that the additional benefits and flexibility created by recent increases in MA payment rates simply weren’t worth very much to seniors. By comparison, the consumer surplus loss per dollar saved associated with eliminating prescription drug plans, something no one has proposed, would be nine times larger.

    Despite Obama’s rhetoric, the truth is that under his plan a small fraction of Medicare beneficiaries will lose their MA benefits and/or face higher costs. However, the potential savings are enormous and research shows that the benefit cuts needed to achieve them will not be terribly missed. While Obama’s statements about Medicare cuts are not strictly true, in practice they will turn out to be mostly true.

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    • I read your summary of the PDP vs HMO MAPD, and the findings in the study support my position regarding low-income seniors needing their Medicare HMO.

      The study…..”found that beneficiaries are more likely to select a PDP if they are better educated, in fair or poor health (heart problems, diabetes, Alzheimer’s or emphysema), have insurance through a spouse, have high lagged drug spending or high incomes. The researchers suspect that these types of individuals have the resources to purchase less restrictive coverage on their own. The results demonstrate that Medicare beneficiaries, who have health problems but have financial means, tend to select a PDP instead of an HMO.”

      I don’t need a PhD to come up with that conclusion. People who have more education have more money and they choose a PDP AND a Medicare Supplement. Leaving out the cost of the Med Supp makes this study questionable me. Low-income seniors cam’t afford a Med Supp PLUS a drug plan.

      The summary goes on to say that “The researchers determined that the addition of subsidized stand-alone prescription drug plans produced nine times as much value for beneficiaries per government dol¬lar as the increase in payments to HMOs.”

      What percentage of the 12,700 Medicare beneficiaries were living on $1,000 to $1500 per month? Sure, people with money who take medications are willing to pay for a PDP. This is because they NEED the PDP. And they can afford the PDP. AND they have their Med Supp. So they are all set, no matter what terrible illness might befall them. I recommend this kind of coverage to my clients. Unfortunately, the 76 year old lady in Yuma, AZ who called me the other day cannot afford a Med Supp AND a PDP. Her MA PPO premium is going up to $88 per month – but it does include a PDP that would cost $45 as a stand-alone, so maybe it’s not the rip-off I originally thought.

      I would also like to ask how much PDPs are subsidized and if the level of subsidy has changed over the last three years? Stand-alone PDPs were $15/ month in 2006. That was a good deal. In subsequent years the premiums went up to where they are now $35 for the AARP Part D, $42 for Humana. Last year, Health Net had the best priced plan at around $32/month. But for 2010 the Health Net premium will go up to $59. So has the subsidy changed?

      • @Denise – I confess that I have some trouble extracting your questions from your long comments. To the extent that they require additional original research on my part I will have to avoid them due to limited time.

        You must be quoting from the findings brief and not the study itself. The latter would provide a far more thorough explanation of the work and would explain, with references, all assumptions and limitations, including issues pertaining to Medigap.

        The subsidy rate for Part D has not changed. If prices have gone up that is due in large part to inflation in the underlying costs and/or competitive effects.