In a new NBER working paper, Katherine Baicker, Michael Chernew, and Jacob Robbins estimate the extent to which Medicare Advantage (MA) induces changes in other parts of the health care market.
More than a quarter of Medicare beneficiaries are enrolled in Medicare Advantage, which was created in large part to improve the efficiency of health care delivery by promoting competition among private managed care plans. This paper explores the spillover effects of the Medicare Advantage program on the traditional Medicare program and other patients, taking advantage of changes in Medicare Advantage payment policy to isolate exogenous increases in Medicare Advantage enrollment and trace out the effects of greater managed care penetration on hospital utilization and spending throughout the health care system. We find that when more seniors enroll in Medicare managed care, hospital costs decline for all seniors and for commercially insured younger populations. Greater managed care penetration is not associated with fewer hospitalizations, but is associated with lower costs and shorter stays per hospitalization. These spillovers are substantial – offsetting more than 10% of increased payments to Medicare Advantage plans.
I’ll spare you the methodological details (instrumental variables, again) except to mention that some of their analysis focuses on five states, Florida, New York, California, Arizona, and Massachusetts, which account for almost half of all MA enrollees. Based on their estimates,
increasing MA monthly payments by $100 (about one standard deviation) would increase the share of beneficiaries in MA by just under 5 percentage points, or from an average of about 35% in 2009 in the counties represented in the 5-state  sample to about 40%, increasing the number of enrollees by about 400,000 in these states. This would increase total MA spending by $100 per month for the existing and new enrollees, or almost $5 billion in total for these states. Overall costs of hospital care is estimated to go down by something like 2% when MA penetration increases by 5 percentage points, off a base of total hospital costs for the [traditional Medicare] population remaining in these states (after the implied shift to MA) of just under $30 billion, or about $600 million. Hospital costs for those in [traditional Medicare] would thus go down by upwards of 10% of the increase in spending on MA.
However, the 2% reduction in hospital care cost also applies to the commercial market, so the estimated, system-wide savings are larger than estimated in this example. (Why didn’t the authors provide the system-wide savings figure?) Still, it’s unlikely that additional MA payments are fully offset by spillovers.
Prior TIE coverage of related work on Medicare HMO spillovers is here. That post explains why you can’t keep raising MA payments forever and expect large spillovers. There is some maximal payment rate that optimizes them, beyond which paying more doesn’t return as much in spillover goodness.
At some point all the practice pattern changes have been wrung out of the system and there’s no more spillover juice left. Where’s the threshold? I don’t know. Nobody does.
That post also includes some of the background I was too lazy to write again for this post. The paper itself also has a nice discussion of spillover mechanisms. It’s worth a read if you have access to it.