Creeping Fraud
Uwe Reinhardt may be right to doubt, based on his own experience as a board member of both for-profit and non-profit hospitals, “that any hospital board or any hospital executive in the country would even dream of knowingly defrauding the United States government.” But that’s not how Medicare and Medicaid billing fraud and overpayment generally happens. Rather, as the the massive Columbia/HCA fraud of the 1990s illustrates, the role of hospital boards and executives in cultivating fraud is more likely to be the application of relentless and unrealistic pressure to increase profits, combined with lax oversight and indifference to how results are achieved. Under these conditions, fraud (and its systematic rationalization) is something that grows organically within a company.
Nor are such dynamics a thing of the past. Take, for example, the practice of “upcoding” — a form of diagnosis inflation in which procedures and patients are systematically assigned higher standardized Medicare reimbursement codes than they really warrant. To give an example that figured prominently in the HCA fraud, a hospital can double its reimbursement for a simple pneumonia patient by classifying the patient’s condition as a complicated respiratory infection. Silverman and Skinner (2004) identified a starkly greater incidence of such upcoding among for-profit hospitals compared to non-profits during the heyday of upcoding in the 1990s. And the Center for Budget and Policy Priorities cites Centers for Medicare and Medicaid Services findings that upcoding persisted in the last decade:
In reviewing data from 2000-2003, CMS found an increase in patients being categorized as needing higher levels of care, but did not find a corresponding change in patients’ underlying health status or in the average amount of home health care resources used to treat them. CMS concluded that some of the changes in how patients were categorized likely reflected upcoding. Further analyses revealed that since 2000, the observed case mix — an indicator of the characteristics of the beneficiaries being served by home health agencies, such as age, gender, and health status — increased by roughly 13 percent. However, more than 90 percent of this increase was a result of changes in documentation and coding practices rather than changes in patients’ medical needs.
In light of these findings, its easy to see how measures designed to maximize legitimate reimbursements can drift into systematic overcharging without any conscious decision by management or directors to cross the line. The internal controls that Reinhardt decries as burdensome and unnecessary cost centers are in fact a necessary immune system in economic organisms that are metabolically inclined toward fraud. While these costs (and those of Senator Coburn’s absurd secret inspector corps that the President has sadly embraced) can’t reasonably be avoided in the existing fee-for-service Medicare regime, perhaps further progress toward outcome-based reimbursement in the direction set by the Senate health care bill can move us in that direction.
Medicare Advantage Payments Illustrated
My post earlier today explained the difference between administrative and competitive pricing systems. The administrative pricing system I study (a lot) is that for Medicare Advantage (MA) plans. To present some of my work on such plans at seminars and conferences this year I cooked up some graphs (below) that illustrate the relationship between traditional Medicare costs and administratively set MA payments in a way I’ve not seen before. Those very familiar with the MA payment system can skip to the fourth paragraph (beginning with “Onward … “).
Health care wonks know that an individual enrolled in MA costs Medicare more than (s)he would if (s)he enrolled in traditional fee for service (FFS) Medicare. MedPAC and CBO have both estimated that MA plans are paid about 12% to 14% more than FFS Medicare (depending on year). Both organizations have recommended cutting MA payments, and the House, Senate, and President’s health reform proposals would do so, though in different ways.
Before explaining the graphs, I need to mention one technicality. Other than certain entities with special relationships with Medicare (like CBO and MedPAC), researchers do not have access to the exact amounts Medicare pays each MA plan per month for covering a beneficiary. What is public, however, is the “benchmark payment rate.” That’s the maximum monthly amount a plan can receive for an average risk beneficiary. The difference between the benchmark and the actual payment is not large on average; it’s a few percentage points. So, for research purposes it is common to use the benchmark as a proxy for payment. Given the close correspondence of the two, conclusions based on one versus the other are unlikely to be qualitatively different.
Onward … The first graph, immediately below, plots monthly per beneficiary benchmark payment rate versus per beneficiary FFS cost (both in year 2000 dollars) for 2008. Each datum is a circle that represents a single U.S. county, of which there are about 3,100. The area of each circle is proportional to the total county MA enrollment. The 45-degree line indicates what the payment rate would be if it were set to FFS cost (as recommended by CBO, MedPAC, and the House health reform bill).
The first thing to notice about the 2008 plot is that every county benchmark exceeds FFS cost (the centers of all circles are above the 45-degree line). Moreover, many of them exceed the FFS cost by a lot. This is a visual representation of the additional cost to Medicare of MA enrollees. The second thing to notice is that for FFS costs above ~$550, the data points seem to follow a line that is parallel to the 45-degree line (explained below). The final thing to notice is the clustering around benchmark payment rates of about $550 and $625 for FFS costs below about $550. These two effects–above and below the FFS cost $550 mark–can be explained by the manner in which benchmarks are set.
By statute, benchmark payment rates are a complex function of many things. The key is that since 1997 the function is not directly related to local, current year costs. In each county, the benchmark is the maximum of eight or so various intermediate “candidate benchmarks” (for lack of a better term). Most of the candidate benchmarks are, in one way or another, tied back to historic (not current) county-level FFS costs, trended forward using Medicare’s overall (national) cost inflation rate. This accounts for the linear (45-degree line) trend in the foregoing figure above $550 in FFS cost. (Clearly benchmarks are related to local, current year FFS costs. The plot is not complete randomness. But since local, current year FFS costs are also observable to the researcher, one can control for it.)
Large urban areas with populations of over 250,000 people are subject to a minimum urban floor rate. Other less populated areas are subject to a minimum rural floor rate. These account for the clustering at $550 (due to rural floor) and $625 (due to urban floor) for FFS costs below about $550. The actual benchmark is the county-level maximum of all the various candidates, which explains, in broad terms, the rest of the structure of the graph.
The choice of year isn’t that relevant here. The general structure of the foregoing graph is the same in 2009 and for several years prior to 2008. Go way back to 2001, however, and things look a bit different (see the following figure). Notice that in 2001 some payment rates are below FFS costs (the 45-degree line). Also, notice that the effect of the urban and rural floors is less pronounced.
In general, data in the 2001 graph are shifted downward and leftward relative to the 2008 figure. Though both are adjusted to 2000 dollars, they are done so using the CPI-U, not medical inflation. The latter has grown more quickly than the former so 2008 payments and costs are higher than those for 2001, even accounting for general inflation. It is also worth noting that the 2001 figure are actual payments. Though the vertical axis is labeled as “benchmark,” such a thing didn’t exist in 2001. However, as mentioned, the difference between benchmarks and payments is small.
The differences between the 2001 and 2008 figures can be explained by a combination of changes in payment rate methodology (I won’t go into it, though urban and rural floors existed in both years) and the emergence of private fee for service plans (such plans are explained in a prior post). PFFS plans emerged in 2001 but didn’t become popular until after 2005. They have expanded rapidly in urban and rural floor counties, causing those features to be more pronounced in the 2008 graph as compared to the 2001 graph. More than any other plan type, PFFS plans are responsible for the increase in costs of the MA program over this time period.
In conclusion, the fact that MA payments are set administratively (by statute) and partly in ways divorced from local, current year cost explains why per beneficiary MA payments exceed those of FFS Medicare and why the difference between the two has been growing over time. These are not new revelations. But the graphs above make obvious the effects of what is otherwise an inscrutable payment system.
The Health Reform Vampire
The seemingly endless debate among Democrats about whether or not to include a public plan in health care reform finally ended in December with the exclusion of a public plan from the Senate’s bill. Now, unfortunately, it seems that the public plan may be coming back from the dead. Twenty-two senators have signed a letter urging Majority Leader Reid to include a public plan in the Democrats’ health reform legislation, expected to pass the Senate via reconciliation if 50 votes can be found to support it.
Ezra Klein discusses the political advantages and disadvantages of adding a public plan to the bill. Very briefly, it could make the bill more popular, especially with the Democratic base, but it could confuse and slow down a process that has already taken way too long. Jonathan Cohn provides more detailed reporting here and draws essentially the same conclusion with more emphasis on the worry side. These political reads seem mostly right, but they both express ambivalence because they say a public plan would improve the bill on policy grounds while reducing the chances of success in the end. However, while the political benefits may be real, the policy value of a public plan is likely to be an illusion.
As I wrote in a column last May with Bryan Dowd and Roger Feldman, the real-world implementation of a public plan is unlikely to deliver the lower costs and improved efficiency imagined by its proponents. Drawing on years of experience with Medicare policy, we observed that public plans (like Medicare) are too subject to political meddling from Congress to be effective purchasers of services from well organized groups like doctors, hospitals, and equipment manufacturers. These providers, enthusiastically enabled by members of Congress, routinely overturn or block efforts by Medicare administrators to use sensible acquisition procedures like competitive bidding. There is no reason to think a new public plan would be any more successful against these forces than the old one has been. This is the most important reason why the Congressional Budget Office estimated almost no budget impact for the public plan included in the House bill.
As we begin the make or break push to pass health reform, resistance will be strong and the degree of difficulty is high. The public plan divides the Democratic caucus and alienates important interest groups including hospitals and physicians. It sucks the life out of the reform effort without holding any realistic prospect of worthwhile policy change. It may look attractive to some at first glance, but relationships with the undead never work out well in the end.
“Attribute Substitution in Early Enrollment Decisions into Medicare PDPs,” Frakt, Pizer (2007)
A few years ago my colleague Steve Pizer and I were funded to study new plan options that became available to Medicare beneficiaries in 2006, chief among them stand-alone prescription drug plans (PDPs). PDPs quickly became the most popular means within Medicare for beneficiaries to obtain drug coverage (the other option being Medicare Advantage plans that offer drug benefits). However, PDPs were not uniformly more popular. There was (and is) some geographic variation in their popularity.
We were interested in understanding what factors were associated with geographic variation in PDP enrollment. That is, why were PDPs more popular in some regions than in others? Standard economics models to investigate such a question would include measures of price (premium), competition, and demand and supply factors. We developed such a model and then did something a little unusual.
On a lark, we threw in the percent of a county’s electorate that voted for Bush in 2004. Interestingly, this turned out to be very strongly and positively correlated with proportion of beneficiaries in a county who enrolled in a PDP. Why would this be? For an answer (or a hypothesis really) we turned to behavioral economics and wrote up the results in a 2007 Health Economics paper titled “Attribute Substitution in Early Enrollment Decisions into Medicare Prescription Drug Plans.”
The key notion from behavioral economics upon which our hypothesis hangs is that of “attribute substitution.” Attribute substitution is a form of intuitive thinking in which readily accessible attributes of an object are used as proxies for the less accessible attributes relevant to a rational decision. In the case of PDPs, we hypothesized that beneficiaries might have substituted the recommendations of respected political leaders for the less accessible calculations of expected financial values of Medicare plans.
To put it bluntly, perhaps some beneficiaries heard Bush and others in his Administration touting the benefits of the new drug plans. Finding it otherwise difficult to make their own independent assessment of the relative merits of various coverage options, beneficiaries may have substituted officials’ enthusiasm for PDPs for their own prediction of its benefits. That’s a type of shortcut many of us make: we rely on the “expert” advice of others we trust rather than do our own analysis. In this case, there is geographic variation of degree of trust in the Bush Administration, which we operationalized as proportion of 2004 Bush vote.
We found that elasticity of PDP enrollment with respect to the Bush vote to be 0.14 (a 10% change in Bush vote is associated with a 1.4% change in PDP market share). To obtain a sense of the relative importance of this effect, we calculated the change in PDP enrollment due to a one-standard deviation change in each of the independent variables in our model separately. We found that the effect of the Bush vote is larger than the effect of other variables that are generally accepted to be important and relevant factors associated with enrollment decisions: premium, level of beneficiary educational attainment, county urban/rural status, provider density, income, and diagnosis based risk score.
So, an administration’s enthusiasm and popularity can have a significant impact on the early response to a new program. That’s a fairly intuitive result, and it is nice to see it is supported by the data. This paper was an interesting walk through a small tract of behavior economics. It is something I’d like to pursue further but not something for which I’m funded. So it will likely be a long time before I try anything like this again.
“Predicting Risk Selection Following Major Changes in Medicare,” Pizer, Frakt, Feldman (2008)
In 2006 stand-alone prescription drug plans (PDPs) became a new source for prescription drug coverage for Medicare beneficiaries. PDPs weren’t just new to Medicare, they were a new type of insurance product in general. No such thing had previously existed in the commercial market. Since level of prescription drug use is relatively easy for an individual to predict there was good reason to worry that PDPs would fail due to severe adverse selection. In a paper by Steve Pizer, me, and Roger Feldman we predicted the likely selection experience of PDPs and found that they could weather the degree of adverse selection they would experience (Pizer, Frakt, Feldman. (2008). Predicting Risk Selection Following Major Changes in Medicare. Health Economics 17(4).)
Some background is warranted to explain the paper’s findings in detail. Adverse selection occurs when an insurance product is purchased by individuals who are on average more risky than expected. The insurer sets the product’s premium based on the expected level of risk (expected claims). If actual risk of those who purchase the product is higher (adverse selection), the product is at risk of failure since it does not have enough revenue to cover claims.
Adverse selection is the reason stand-alone drug plans didn’t exist before. Prescription drug use is not like use of other health services in that it is very predictable. Individuals generally know their pattern of drug use much more accurately than they know if they’ll be hospitalized, for example. Therefore, to insure the expenses of drug use is a dangerous game. It is very likely that only individuals with high expected use will purchase stand-alone drug coverage. The insurer will experience adverse selection, raise its premiums in response, thereby driving out the relatively lower risks, and experiencing selection more adverse. This is the classic insurer death spiral.
For this reason, Medicare’s drug program (Part D) includes a variety of measures that reduce the amount and consequences of adverse selection. One is a late enrollment penalty. Others include risk adjustment, risk sharing, and reinsurance. In addition, PDP premiums are subsidized at a rate of 74.5% (of basic coverage, not including enhancements), making a PDP a good value even for beneficiaries with relatively low drug use.
In the paper, we predicted that PDPs would experience adverse selection. In fact, drug expenditures for PDP enrollees were predicted to be 78% higher than those for Medicare HMO enrollees. However, we also found that the PDP market would likely be able to absorb the degree of adverse selection that we predicted they would experience: on the whole the PDP market will be stable. Death spirals, if they occur, are likely to be seen only for plans that offer extensive enhanced benefits (such as the Humana Complete plan that entered the market in 2006 with full brand name coverage in the gap–it subsequently raised premiums and dropped brand name gap coverage.)
Careful readers may have noticed that I used terms like “predicted” and “likely” in the foregoing paragraph. Why didn’t we use actual enrollment to see what plan selection experience has been? We couldn’t. The data weren’t available at the time of the study. Moreover, they’re still not available. The only way to estimate PDP selection experience is to simulate it based on models of beneficiary decision making among other plan types for which data are available. That’s precisely what we did.
Using Medicare Current Beneficiary Survey data, we developed a model of Medicare beneficiary insurance decisions based on plans that existed in 1998-2001. Those plans include HMOs, Medigap supplements, and traditional fee for service (FFS) Medicare. The characteristics of choices available today are included among the choices that existed in 1998-2001, only mixed up in different ways. That is, there were choices then (HMOs) and now (still HMOs) that restrict provider choice. There were choices then (FFS, Medigap+FFS) and now (FFS, FFS+PDP, FFS+Medigap+PDP) that do not restrict choice. There were choices then (some HMO and Medigap plans) that offered drug coverage and the same is true today (some HMOs and all PDPs).
By estimating beneficiary response to the characteristics of options in 1998-2001 it is possible to predict their response to new options with the same characteristics bundled differently. That’s, more or less, what we did in the paper. Someday, when the data are (finally) available, we’ll be able to re-estimate our model and see the extent to which predictions of beneficiary decision making differ in the pre- versus post-Part D era.
Is Medicare for “More” a Step toward Medicare for “All”?
One of the new approaches for resolving the political debate over the public option is a return to an old idea: allow certain 55-64 year old individuals to buy Medicare coverage. Is this increase in the population that could be covered by Medicare a step toward Medicare for all, an idea supported by some single payer advocates?
The short answer is probably “no,” though it depends on the details of the legislation. The longer answer begins with an examination of Medicare’s dual role. First, and mostly, it provides coverage for 65+ year-old individuals, often called “retirees” or “the elderly” (neither term is ideal). From this perspective, stepping down the minimum age of eligibility certainly looks like a dramatic expansion and seems to set the precedent for future age-based increases in eligibility. I think this is not the correct view of what is likely to pass.
Then there is Medicare’s other role. It provides coverage for certain eligible individuals with disabilities or chronic illness, independent of age. This is probably the right way to view the type of Medicare expansion currently being considered. It is very likely that only individuals meeting certain criteria palatable to the insurance industry will be eligible for expanded Medicare. My guess is that it will be individuals with access to the exchange(s), individuals unable to obtain coverage elsewhere (the medically uninsurable), or both.
That is, Medicare for the 55-64 age range will probably only be available to those who meet certain tests of neediness, which is closer to the way it operates for disabled individuals than for the elderly. In effect, Medicare will likely be a dumping ground for bad risks, risks that the insurance industry is happy to transfer to the federal government.
This version of Medicare for more will not lead to Medicare for all, it may only lead to Medicare for all bad risks. That’s also why it may pass.
Later: Sam Stein confirms the Medicare expansion might serve as a high risk pool (h/t Ezra Klein).
It Takes Power to Bend the Curve
With growing health care costs the main fiscal threat, insurance options with no power to tame them should play no role in the future U.S. health care system. Oddly, some Democrats are arguing simultaneously for the inclusion of one such powerless option (a rather weak form of public plan) while pushing for the exclusion of another (a type of plan that currently exists under Medicare).
With respect to the public option Ezra Klein is right. The way in which a public option could bend the health care cost curve downward is principally through the pricing power a strong version could have with respect to providers, not through its effect on the insurance market. It is being sold as a way to discipline insurers because Americans by-and-large are comfortable vilifying insurance companies. But it is really providers–doctors and hospitals–and the prices they negotiate with insurers that play the greatest role in health care costs.
But in its current or likely ultimate form, the public option is so watered down it will be powerless with respect to providers. In that sense it won’t help with costs and therefore isn’t worth fighting for, which leads to Ezra Klein’s other idea for liberal Democrats to consider: the public option’s value in a political trade may be higher than its intrinsic worth. Perhaps it is time for the public option to go.
If I had mantras throughout this season (these seasons) of health reform one would be, “look to Medicare” and the other, “it’s about market power.” Of course Medicare has loads of power in its hugely popular traditional fee for service (FFS) option. With that power a lot can and likely will be done to bend the curve through FFS payment reforms. But what of the other arm of Medicare, known as Medicare Advantage (MA)? In what way does it or can it use market power to act as a counterbalance to providers? Can it be reformed to actually reduce wasteful health care spending?
If so, the first step is cutting the government payments to MA plans back to where they belong. Currently MA plans are paid about 112% of the cost FFS Medicare would incur to provide coverage. Once upon a time such plans were paid 95% of average FFS costs. At first glance it isn’t obvious why cutting MA payments will help. Here’s how: the greatest source of recent MA cost growth has been due to the surge in popularity of a certain sub-type of MA plan known as private fee for service (PFFS). PFFS may not be well known, but it is the poster child for how an insurance market with little power over providers wastes a lot of money. My published research shows that cuts in payments will decimate the PFFS plan type.
PFFS plans came into existence and were given favorable treatment at the urging of special interest groups, some of which had the ear of former speaker Dennis Hastert. Over the last five years they’ve grown from near non-existence to about 20% of total MA enrollment. They’re the highest paid MA plan type, sucking down payments nearly 117% of average FFS costs (five percentage points higher than MA plans are paid on average). PFFS plans offer the least generous benefits, and they do absolutely nothing to control costs. They do not manage care and, most importantly, they do not negotiate with providers. In contrast MA HMOs, while also overpaid, are paid less than PFFS plans, and they do manage care and negotiate with providers. PFFS plans are a hemorrhage and should play no role, indeed by their nature cannot play a role, in the future of health care cost control.
If the Democrats have their way, they will not. The Senate voted twice last week to retain provisions in its health reform bill to cut payments to MA plans that will nearly eliminate the PFFS plan type. If there is to be any chance of bending the cost curve, removing the Medicare option that is powerless to do so makes perfect sense. Meanwhile, continuing to fight for a powerless public option is hard to justify.
A Taxpayer Refund: Return Private Fee for Service
In a prior post I suggested that about 3 million of the current 10 million Medicare Advantage (MA) enrollees might lose access to MA plans if taxpayer-funded payments to those plans are cut to the extent proposed in current health reform legislation. Most of those losing such access are enrolled in a plan-type known as private fee for service (PFFS). My recent work with Steve Pizer and Roger Feldman suggests that PFFS plans will be virtually wiped out by such a payment cut, sending their roughly 2.3 million beneficiaries elsewhere for coverage.
PFFS plans do almost nothing the MA program was designed to do. They do not manage care. They do not control costs. Because they do not establish networks, as HMOs do, they do not serve as a counterweight to provider consolidation. They are not required to offer an option that includes a drug benefit, as MA HMOs are. They pay providers the same rates as traditional FFS Medicare. The extra benefits they offer are less generous than those available from HMOs. In short, they are paid handsomely, well above average FFS costs, to serve as enhanced FFS products. In effect, they are subsidized Medigap. MedPAC has repeatedly recommended, and CBO has scored, cuts in payments to PFFS plans, as would occur under health reform.
Who decided to craft a subsidized Medigap-like product in the form of PFFS, and when? The push began in 1997 by the National Right to Life Committee, which was concerned that Medicare HMOs would ration care. Then, in the final hours of the 109th Congress, outgoing Speaker Dennis Hastert slipped a provision into a 2006 tax and trade bill that favored PFFS plans over others. The provision permitted beneficiaries to preferentially switch coverage into PFFS plans long after the open enrollment period expired. Hastert’s efforts were applauded by Aon, whose subsidiary Sterling Life was the first carrier to market PFFS plans. Subsequently, PFFS plan enrollment took off.
Though a few special interest groups strongly supported the growth of PFFS plans, there was no deliberative debate about whether they make sense and deserve the degree of taxpayer largess and relative freedom from MA requirements they enjoy. John McCain’s recent proposal to strip the MA cuts from the Senate’s health reform bill renews the debate over MA payment cuts. This is, finally, a debate over PFFS in disguise. Cutting payments to MA plans would nearly eliminate the PFFS plan type, but have a considerably smaller (though greater than zero) effect on enrollees of MA HMOs.
Taxpayers didn’t order PFFS plans, and they cost a fortune. They’re like an expensive “gift” that keeps on taking. “Returning” them and using the “refund” for other purposes makes eminent sense.
The Advantage of Medicare Advantage (at Great Cost)
Medicare Advantage (MA) plans are a good deal for Medicare beneficiaries, though not for taxpayers. For the premium charged, they offer the most generous benefits and lowest cost sharing of any Medicare plan type or supplement. That’s why beneficiaries will miss them when they exit the market (to the extent they will) in response to cuts in government payments (to the extent they materialize). But, as I’ve written before, the plans are overpaid and the benefits, while of value to beneficiaries, are economically inefficient. There are better ways to spend some of the taxpayer dollars paid to MA plans.
However, in this post I’ll look at what the loss of MA plans would mean for beneficiaries. In particular, I’ll address the question: how much more in premiums would the average beneficiary pay if he no longer had access to an MA plan and instead bought enhanced coverage for Medicare benefits from other plan types?
This is a relatively simple question to answer. The average premium for an MA plan for the non-drug benefits it provides is about $30 per month [1, 2] (numbered references at end of post). The average premium for an MA plan for the drug benefits it provides is about $20 per month [2]. The average premium for a stand-alone prescription drug plan (PDP) is about $38 per month [2, 3]. The premium for an average Medigap plan (taking into consideration the different types of Medigap plans and the degree of enrollment in each) is about $120 per month [4]. All of these figures are above the standard Part B premium ($110.50 per month in 2010) [1].
Consider a beneficiary enrolled in an average drug-offering MA plan and paying about $50 per month for it ($30 for non-drug benefits and $20 for drug benefits under the plan). Suppose he loses access to MA plans because they withdraw from the market, perhaps due to a reduction in government payments. To purchase on the individual market drug and non-drug coverage above that offered by FFS Medicare, he would need to buy a Medigap product at $120 per month and PDP coverage at $38 per month, or a total of $158 per month. That’s an increase of $108 per month in premium over what he had paid for an MA plan. Switching from a non-drug MA plan (at $30 per month) to a (non-drug) Medigap plan (at $120 per month) would be a $90 monthly increase.
Those are big increases. But let’s keep this in perspective. They’d only apply to a small fraction of Medicare beneficiaries, most of whom are enrolled in private fee for service (PFFS) plans. First of all, I’m considering MA enrollees, which comprise about 23% (about 10 million) of all 45 million Medicare beneficiaries. Of those, most will not lose access to an MA plan. Based on my prior work and the literature (notably [1,4] and this spreadsheet described in a prior post) I expect something like one-third of current MA enrollees (i.e. about 3 million beneficiaries or 7% of all Medicre beneficiaries) will lose access to an MA plan if payments are cut to the level of average FFS costs. Two-thirds of those (2 million) are enrolled in PFFS, the plan type that is the most costly to taxpayers and does the least to control health care spending (in a subsequent post I’ll elaborate on PFFS, though I’ve posted on such plans before).
To be sure, all this is a bit simplistic. Average figures, which I’ve used, don’t reflect the tremendous variation in premiums (especially for Medigap products). Also the foregoing doesn’t recognize the differences in benefits across plan types. However, in general an MA plan is a far better deal than any other plan type because it is highly subsidized with taxpayer dollars. It is easy to see why MA enrollees would be unhappy losing these benefits. They really gain a tremendous advantage from the program. On the other hand, it is easy to see from equity or efficiency perspectives why it makes more sense to cover the uninsured with taxpayer dollars before continuing to pay for enhancements to Medicare Advantage benefits.
References
[1] Kaiser Family Foundation, Medicare Advantage 2010 Data Spotlight: Plan Availability and Premiums, November 2009.
[2] Frakt and Pizer, A First Look at the New Medicare Prescription Drug Plans, Health Affairs Web Exclusive (May 23, 2006): w252-w261. (Summarized in a prior post.)
[3] Kaiser Family Foundation, Medicare Part D Spotlight: Part D Plan Availability in 2010 and Key Changes Since 2006, November 2009.
[4] Frakt, Pizer, Feldman, Payment Reduction and Medicare Private Fee-for-Service Plans, Health Care Financing Review, 2009 Spring;30(3):15-24. (Summarized in a prior post.)
“Controlling Prescription Drug Costs,” Frakt, Pizer, Hendricks (2008)
This post summarizes a 2008 article I coauthored with Steve Pizer and Ann Hendricks titled “Controlling Prescription Drug Costs: Regulation and the Role of Interest Groups in Medicare and the Veterans Health Administration” (Journal of Health Policy, Politics and Law 33(6), December).
Federal statute authorizes private plans offering a drug benefit under Medicare to negotiate with drug manufacturers for volume discounts, and it prohibits Medicare as a whole from doing so. While the prohibition on direct negotiation by Medicare has received considerable attention there is another important limitation imposed by law on the administration of the Medicare drug benefit: a minimum number of drugs in each class must be included on formularies (some classes must be open to “all or substantially all” drugs on the market).
Some have pointed out, correctly in my view, that providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings Medicare would also need the ability to exclude drugs from its formulary. This ability to tighten the formulary would provide the leverage to negotiate bargains.
Medicare’s inability to negotiate prices and to freely restrict drugs from its formulary is in stark contrast to another large public provider of prescription drug benefits, the Veterans Health Administration (VA), which negotiates directly with drug manufacturers and obtains very low prices.
This raises two interesting questions. First, why is Congress comfortable with the VA prescription drug benefit but not willing to authorize something similar under Medicare? Second, given the limitations on Medicare, is there a lower-resistance path to getting VA-like drug prices for more Medicare beneficiaries? Both questions are addressed in our “Controlling Prescription Drug Costs” paper, and the answer to the first question suggests one to the second.
The paper explains the differences between the two drug benefit designs by observing that Congress acts as an agent for multiple interest groups. We conclude that important limitations on the Medicare drug benefit probably arose from the advocacy of drug manufacturers and retail pharmacies, among others. Relative to Medicare policy, these interest groups are less involved in VA policy.
This suggests a practical approach to reducing the cost of providing a prescription drug benefit. A drug program that is more directly under the VA’s purview but that builds on the financing structure of the new drug-only Medicare plans may not immediately arouse the kind of effective interest group opposition that typically restricts the options of Congress with respect to Medicare. Moreover, a drug program of this kind is likely to receive the combined support of Medicare and VA beneficiary advocacy groups, which increases the political cost to opposition relative to policy proposals that receive the support of only one or the other of these groups. We develop this idea in more detail and show that a combination of VA and Medicare could achieve improved access and lower costs for some Medicare-enrolled veterans.
In particular, a VA-Medicare prescription drug plan (PDP) could be made available to certain Medicare-enrolled veterans. Such a plan has the potential to provide a rich drug benefit to a large number of beneficiaries. Of the 43 million Medicare beneficiaries, about 10 million are also veterans. While about 3 million Medicare-eligible veterans already receive drug and nondrug benefits from the VA, the rest do not. A VA-Medicare PDP would be another prescription drug coverage option for these beneficiaries, one that likely would be more comprehensive and less costly than any other available to them.
The VA-Medicare PDP discussed in the article would offer advantages to both programs and beneficiaries. Much as Medicare currently subsidizes private drug plans (whether employer offered or individually purchased), Medicare could subsidize the VA-Medicare PDP on a per-beneficiary basis. These funds would permit the VA to broaden the numbers and types of veterans it serves. Since the VA receives steeper discounts for prescription drugs than Medicare drug plans do, the per-beneficiary subsidy could be set lower than for private plans, producing savings to Medicare.
A VA-Medicare PDP would not be implemented without challenges, which are acknowledged and explored in the article. Of course, above all, it is political considerations that make prospects for this kind of integration uncertain.
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