• Medicare Advantage Cuts: Once More with Feeling

    Abstracting from the economics wonkery a bit, let me put research findings on Medicare Advantage (MA) payments plainly.

    Payment to MA plans has gone way up since 2003. Did the payment increase largely benefit beneficiaries or not? This is a current political and policy debate, about which much has been written in the media (both traditional and blogospheric). It turns out the answer is known and quantifiable. My work (with Steve Pizer and Roger Feldman) shows that for each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries (see also: findings brief).

    What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.

    So, do higher MA payments produce little value to beneficiaries, as Obama claims, or are the benefits they fund important to maintain, as Republicans would have us believe? The balance of the evidence is on Obama’s side. In fact, it is a landslide: for each dollar spent, 14% of the value reaches beneficiaries and 86% of it goes elsewhere (profit or cost).

    Cuts to MA should be a no brainer.

    • As a point of clarification, I noted that your study compared PDPs and HMOs. Did you also study Medicare Advantage PPOs?

      Many people I know have subscribed to Medicare Advantage PPOs without plugging the doughnut hole on prescription drugs because (1) such plans offer additional non-drug coverages beyond basic Medicare and (2) such plans are administered by companies these individuals are familiar with (for example, Blue Cross) rather than by Medicare, while (3) the individuals believe that self-insuring for the doughnot hole is a rationally preferable choice for them. In other words, their reasons for choosing Medicare Advantage PPO coverage are not primarily motivated by prescription drug concerns, and therefore a comparison with PDPs may not be too apt in their case.

      Furthermore, did your study conclude that Medicare Advantage PPOs offer very few benefits to subscribers for the sum of the subsidies provided by Medicare plus the premiums paid by the subscribers? That appears to be the innuendo raised by Ezra Klein in his reporting of your study — that Medicare Advantage HMO’s/PPOs/whatever provide only 14 cents of benefits per dollar received by the sponsor.

      • @Edward Young – The study did not include analysis of regional PPOs. One has to draw the line on complexity of analysis somewhere. As regional PPOs have very small enrollment (I think near 3% of all MA enrollees if memory serves) it did not make sense to add that complexity into the analysis. That is to say, incorporating them would not have had a significant impact on the final result since they’re plainly not that popular.

        This is just one of many detailed caveats that are described in the paper but which we (the authors and I) do not think have a substantial impact on the main result: that expansion of MA since 2003 produced very little consumer surplus per dollar spent. In contrast, Part D produced a large amount of consumer surplus per dollar spent.

        If you’d like a copy of the paper I could send it to you. (Send me a message through the contact form on this blog.)

    • When you say “What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.”, isn’t that last bit a rather important distinction that should be broken out? What portion of the $0.86 goes to providing additional benefits vs. insurer profits?

      It seems rather contradictory to say it pays for additional benefits and then say only “14% of the value reaches beneficiaries”.

    • You may want to do your research again, using more current data. Regional PPO’s make up a much higher percentage of medicare advantage membership. Most insurers have moved away from private fee for service to a PPO network.

      • @AB – I know it may seem contradictory but it isn’t. Quite precisely the consumer surplus to beneficiaries is, as we measured it, $0.14. What that means is that the government could have paid them 14 cents per dollar spent on average and they’d be no worse off. The other 86 cents does not benefit beneficiaries in this precise sense. There is nothing contradictory about it.

        @Sean – Please send me your source on regional PPO enrollment. Mine is this Kaiser Fact Sheet, which has data from 2009 (see bottom of first page, right column).

    • Thanks for your reply, but I don’t think that really explains it.

      What portion of the $0.86 is spent on additional benefits? Are you saying they could have purchased all of those same benefits themselves had they just been paid the $0.14 directly? If that is the case it makes sense, otherwise I don’t see how you can say a portion of the $0.86 is spent on the cost of the extra benefits but that does not provide value to the beneficiaries. One person’s “cost” is another person’s “benefit”. I’m all for spending less on MA. I’m not trying to defend the status quo here, just looking for clarification.

    • Thanks for the clarification, I understand what you mean now. The “economic wonkery” is what was missing, phrased in terms of consumer surplus it makes sense, without that it sounds as if you were making the contradiction I mentioned before, and I must have overlooked you very specifically saying consumer surplus in the original post. Essentially what this boils down to is that we’re overpaying providers for those additional benefits (with insurers skimming a bit off the top), which does not surprise me given the third-party payment and very low premiums/cost-charing in MA. I am a health actuary (no Medicare work but a number of my friends in the industry on the consulting side work almost exclusively on MA), and this would fit with my peripheral knowledge of that product.

      • @AB – Glad we sorted it out. I new we could. I admit I could have been more helpful in the original post, but it came after another attempt or two to get the main point across on my blog and elsewhere. My aim was to get it down to a talking point so others could pick it up and run with it (though I linked to more information which covered the bases).

        I would have gotten to the sticking point sooner had I known you were an actuary. An actuarial view and a welfare economics view of the value of a benefit are, as we now both see, two different things. That’s always helpful to keep in mind when one is crossing the disciplinary boundaries.

    • Thanks for the feedback! But for us non-economists, can you address the public policy implications of your study? Specifically, two implications from Ezra Klein’s take on your study:

      1. If the subsidies for Medicare Advantage were to be removed or reduced today, in what proportions wouid the diminution in subsidies be ultimately borne by (A) providers, (B) sponsoring insurance companies, and (C) subscribers (either in the form of reduced benefits or increased premiums for their current benefits, or both)? Also, would the pool of participating doctors be reduced (i.e. shifting the most in-demand doctors away from Medicare Advantage subscribers to other categories of patients?

      2. Is it accurate to argue that eliminating Medicare Advantage subsidies is a no-brainer, because Medicare Advantage plans are a rip-off, offering subscribers only 14 cents of benefits for every dollar of premium and/or subsidy?

      Many of my friends who are old enough to participate in these plans believe that government underwriting of part of their cost is a current Medicare benefit that is proposed to be taken away from them and that the plans (for which they have chosen to pay substantial premiums after careful research into the feature-by-feature comparisons available on Medicare’s website) provide meaningful and cost-effective supplemental benefits to basic Medicare coverage.

      • @Edward Young – Here are the best answers I can provide quickly:

        Re: Your 1. The MA over-payments (relative to FFS) account for an annual $48 increase in Part B premiums (source CBPP). I would expect MA availability and non-drug benefits to retrench back to what they were circa 2003 when MA payments were much closer to FFS cost than they are today. Drug benefits may suffer, but not much, as they are paid through Part D and not through MA payment rates (money being fungible makes this a bit murky). Providers will lose a bit of volume, again back to 2003 levels (all other things equal, which they are not). That’s not a very precise answer but my study wasn’t about this so I can’t say much more without another study (I welcome funding!).

        Re: Your 2. Yes.

    • Thanks for the prompt response.

      So on point 2, you’re saying that not just increased subsidies since 2003, but also every dollar of MA premium from dollar one, goes 14 cents to things that benefit the subscribers and 86 cents to things that don’t benefit subscribers?

      • @Edward Young – The study was of an economic welfare analysis of the effects of the Medicare Modernization Act, which passed in 2003. So, everything is relative to 2003 levels.

    • Since Medicare establishes the max allowable for a procedure, THEY must be responsible for the 14% extra charges. The 14% extra is probably an administrative fee that offsets the cost of CMS that is eliminated with Medicare Advantage. The MA advantage provider is picking up all of this admin burden.
      AARP and others made big profits picking up the 20% supplemental secondary business. They want to do away with MA plans and turn the clock back.
      The MA proves that private enterprise can supply a product more efficiently then the government.

      • @donald smith – How is it efficient to spend a dollar of taxpayer money on coverage that beneficiaries receiving it only value at 14 cents? It would be far cheaper just to pay the 14 cents. As a taxpayer I’m not satisfied with this level of efficiency.

    • Can someone explain to me how Medicare Advantage (MA) plans are paid? I commented somewhere that Humana is explaining their increased payments are due to changes from the 2003 Medicare Modernization Act. But apparently “Medicare Risk Assessment” is just part of the formula for payment, and it sounds like it shifted the risk to Medicare from insurance companies – and added to the cost of MA plans for Medicare.

      But how does the bidding process work? I’ve read an explanation, but it’s above my insurance agent comprehension level. I think I”ve read that HMO plans bid below what Medicare sets as a base level for payment. And if they bid at 98% the plan can be zero premium and offer addition benefits. Is that because they will be paid 100% of the level Medicare set? And if a plan’s bid is higher than the Medicare base amount, the plan has to charge for the difference?

      I’ve been thinking that HMO’s are less expensive for Medicare, but is this true? They may bid 98% but do they still get paid the 100%? I’d like to undertand this as I’ve been defending HMO’s as the good guys. Perhaps it just means that HMO’s might survive the cuts that are coming to Medicare Advantage because they have some room to cut benefits.

      • @Denise – You’re close. MA plans get to keep 75% of the difference if bids are below the benchmark. So when they bid at 98% they get 99.5%. One could argue that this means they’re more efficient (by 0.5 percentage points) than FFS Medicare. But that would be overlooking some obvious ways in which they are not–ways that swamp that tiny difference. For further reading on this exact point see one of my prior posts.

        For more reading on MA and its payment system see my prior post summarizing it and this very good MedPAC paper.

    • Austin, I have just a couple more questions about how HMO’s are paid.

      If, as you say, the HMO’s are getting 99.5% of FFS Medicare, does the risk adjustment push that number up or down? So are they likely getting more than 100% of FFS?

      I’ve looked at the kff.org Medicare Advantage tracker but I’m wondering if there is a site that provides details on payments to Medicare Advantage companies. For example, CareMore Health Plans in California says they get 86% of FFS for their special needs HMO plans for Diabetics. This sounds pretty impressive and I’m wondering if info is available to the public and researchers to back up such claims.

      I’m particularly interested in our HMO Medicare Advantage plans here in Tucson, AZ. I woudl really like to know how they are paid.

      Thanks for your hlep.

      • @Denise – That 99.5% vs. 100% comparison is for an average risk beneficiary. Risk adjustment will move payment up or down depending on demographic and diagnosis factors on which it is based.

        Payments are not public, nor are bids (at a firm or plan level). The best work on this is MedPAC. All their reports are public on their website and are excellent sources for details on all things pertaining to Medicare payments. Here’s the chapter of the latest one on MA:

    • I never will be satisfied with getting 14 cents worth of medical care for every dollar spent, so as a taxpayer this IS a no-brainer.

      But as a Medicare Advantage beneficiary, I’m more concerned about how losing those alleged 14-cent dollars is going to drain my bank account than in whatever real or imagined saving is wrought by the change, whatever it actually is. What benefits will Medicare recipients now have to pay for with 100-cent dollars, and why do we keep hearing loud and clear how obvious a good move this is, while hearing next to nothing about what we’re losing?

      And about that 14-86 breakdown — are we allowed a pinch of doubt? Even in the inflated money worlds of Big Health Insurance and Big Pharma, 86 percent profit seems an over-enthusiastic estimate. Not impossible, granted, but these are numbers that sound as if they were pumped up to make a modest point into a no-brainer.

    • You say you “never made any claims about profit.”

      I’m willing to accept that as, in all likelihood, true if you say so, even though I don’t quite understand it. But it doesn’t address the reason for my comment, which is to learn the answer to this rather urgent question: What will Medicare Advantage enrollees lose if or when we lose our “Advantage” plans? What will it cost us if this “no-brainer” change is implemented?

      • @Mort Persky – Some will lose their plan, some will lose access to any MA plan, many will face lower benefits and higher cost sharing. My study shows what would happen if we turned the clock back to 2003, and it puts this all on a monetary footing. Reducing MA availability and benefits to 2003 levels will be the equivalent to beneficiaries losing 14 cents per dollar of federal spending. That is, it is exactly like the federal government finding a dollar’s worth of savings and 14 cents of it comes out of the pocket of Medicare beneficiaries.

        Nobody can say in any absolute objective sense that this is the right thing to do. In my opinion it is the right thing to do given the urgent needs of tens of millions of Americans with no insurance at all. In this sense of basic fairness it is a “no brainer.” Can’t we say that the 2003 level of MA benefits were sufficient? Why or why not?

    • I’m an insurance agent in Tucson, Arizona and 40% of seniors here are enrolled in Medicare Advantage plans. Most have never known anything but their Medicare HMO. The vaste majority of seniors I’ve worked with could not afford a Medicare Supplement ($200/month) plus a Part D drug plan ($35 per month).

      Over the last three years, the Medicare Advantage plans here have been raising co-pays for doctor visits, hospital stays, and outpatient surgery. In 2010 most plans will require seniors to pay up to $2,100 for seven days in the hospital. This may not sound like much to you, but many of the seniors I”ve met are living on between $1,000 and $1500 per month Social Security payments. They cannot afford these higher co-pays and they will be put at tremendous financial risk if they have to go back to Medicare which requires 20% co-insurance.

      I recently received a call from a man who is on Social Security disability and receives $1,100 per month. He only has Medicare and ended up in the hospital for ten days. Medicare has a $1.068 deductible for hospitalization but then he had to pay 20% of all the doctor fees while he was in the hospital. He says he has over ten thousand dollars in bills which he cannot pay. And now he needs further treatment but has been told he has to put up his 20% of the cost of the treatment and tests he needs. Of course he doesn’t have this kind of money so he just gets sicker and sicker. I told him to see if he can qualify for Medicaid because of his medical bills. If he can get on Medicaid (although his Social Security income is $200 dollars above the Medicaid threshold), Medicare would be his primary insurance and the state Medicaid program would cover the 20%. – if he can get approved.

      What a great country!

    • One more thought….crunching numbers and discussing policy at the 30,000 foot level is one thing. But seeing seniors living on very limited incomes and how vulnerable they are is quite another thing. Medicare alone is not good coverage. Medicare Advantage, if done properly, can be the right fit for seniors on limited incomes. I know Democrats want to get insurance companies out of the Medicare business – but I hope they don’t do this at the expense of seniors who have very limited resources.

      • @Denise – No question many beneficiaries are made better off because of MA, as are insurers and agents like yourself. But there is a cost to taxpayers. Moreover, from a taxpayer perspective it may not be the most efficient way to deliver benefits. Reasonable people can disagree about this. But now we’re faced with a problem. How do we weigh the needs of the uninsured non-elderly, sometimes poor, even sick and disabled, who fall through the cracks against those of the elderly who enjoy quite good coverage? Resources are finite. Spending $1 to achieve $0.14 worth of utility does not strike me as a good balance. We can do better.

    • So where are the plans to protect the seniors in Arizona who have never known anything other than Medicare HMO’s? With large numbers of seniors living barely above the poverty level, who is advocating for them? Actually, I believe HMO’s have been shown to be a good way to deliver care for seniors. CareMore in California has chronic illness MA plans and they are delivering care for 86% of the Medicare FFS in California.

      As an insurance agent, I can make money selling Medicare Supplements. I’m a Democrat and I believe Republicans force-fed Medicare Advantage to benefit insurance companies. As well, I see Part D as a big conspiracy to force seniors toward MA plans that include the drug plan.

      I have been inclined to disparage MA plans because each year they put more costs onto seniors. But the more I hear number crunchers talk about 14 cents benefit …and tough luck for the 40% of seniors in Tucson who are on MA plans….well… that doesn’t sound like my Democratic party. And I just hope that in our desire to screw the insurance companies (and that’s okay with me) we don’t also screw the large numbers of seniors who are living on the edge and need help.

      Here’s another thought: If the healthcare reform includes plans to subsidize people who need help paying health insurance premiums, what about subsidizing seniors? Without MA plans (a subsidy), millions of seniors are going to need subsidies for their healthcare costs.

      • @Denise – There are several public health care subsidy programs for the elderly: Medicaid is one (aged is a qualifying category), the drug benefit low income subsidy program, and a variety of others. You have a lot of passion and a lot of questions. May I suggest the Kaiser Family Foundation website as an excellent source of information: http://kff.org/ . Meanwhile, health reform legislation includes closing the Part D doughnut hole, something that will help many seniors. This isn’t as much a case of generational warfare as some would have you believe. It is far more about using federal dollars wisely.

    • I am very aware of those assistance programs. I have met many seniors who are unaware of the LIS and Medicare Cost Sharing programs. I carry with me an application for these programs through the state of Arizona and help these seniors fill them out. People living on less than $900 per month get Medicaid. In Arizona there is one MA plan for people who live on less than $1200 per month and it has been a lifesaver for my limited-income clients. I was talking to a couple the other day who live on $1500 per month and they have too much social security money to get this help. The husband has been ill and in the hospital. In 2009 his co-pay was $900. Next year, if he is hospitalized again the same plan co-pay will go up to $2,000. This is not good, but it’s better than if they had only Medicare.

      The MA HMO’s in Tucson went through the downturn in 2000, but several plans stayed around. That will happend again I suppose. I will help my clients change plans or find some kind of coverage they can afford. I just hope there will be some decent coverage for them – besides just Medicare, which is not enough.

      The Part D donut hole fix is a sellout to the pharmaceutical companies. If seniors could buy their drugs in Canada they’d be better off. Better yet, the government should be able to negotiate much lower prices for drugs. Part D is a burden for low-income seniors who don’t qualify for LIS.

      I use the kff.org site to find stats on the numbers of MA enrolless in states like California, Arizona, Pennsylvania, Oregon, Rhode Island. One our of every three seniors in these states is in an MA plan. So lots of folks will be affected by MA cuts. That should make for interesting politics.

      As I wrote earlier, I’m a liberal Democrat and I never liked MA plans as much as I do now that I’ve started debating this issue on various blogs. I’m not worried about protecting an income source and I do not like insurance companies. But I know too many seniors who are going to be hurt by the changes. Managed care is the answer to Medicare’s problems so I think we should be looking for ways to make managed care work financially for everyone concerned.

    • One more thing: Seniors who qualify for LIS (low income subsidy) don’t have a donut hole. The House and Senate bills propose changing the asset requirements but not income levels. They should raise the income level for this help, in my humble opinion.

    • The $0.14 figure is based the researchers’ model of “insurance choice to simulate willingness to pay” for new benefits according to the HCFO “findings brief” mentioned above. What does that have to do with the actual value of the care and improved choices and quality of care that seniors actually receive in these plans? I understand that MA plans reimburse doctors more than Medicare and therefore should provide more physcian choice and perhaps better quality care to seniors. Furthermore, wouldn’t MA plans reduce the Medicare cost shift problem? Any research on this?

      • @Roger – This has to do with the value (consumer surplus) beneficiaries receive from the additional MA benefits. That is one, but not the only, measure of value. Where MA plans reimburse above FFS rates may not actually lead to greater choice. HMOs must establish networks and extract payment concessions in doing so. What’s the cost shift problem you refer to? If it is the same one I’ve been blogging about then you probably know I’m a skeptic.

    • I have read some of your posts on cost shifting and I thought you felt that it is real. It is real at Mayo clinic. They lost over $800 million on Medicare last year and I am sure the private patients are picking up the slack.

      My point is that under MA plans, doctors may take on more patients under MA than they would under traditional Medicare because of higher reimbursements that are closer to private network rates. That would imply that they aren’t substituting private patients for traditional medicare patients but actually covering more Medicare patients in total. Thus Medicare Advantage is actually paying closer to the true cost of care for their subscribers and not shifting cost onto private plans. That may be a good thing or bad thing depending on your point of view. Obviously fixed Medicare reimbursements are the biggest distortion in the marketplace.

      My belief about competition is that in order to increase it you must reduce barriers to entry and the threat of external market dislocations and regulations. If subsidies under MA aren’t high enough to bring more competitors in the marketplace it isn’t that the subsidies are too low. The MA programs are very popular and they offer much more in terms of care coordination and management under these plans.

      I have trouble believing the meager 0.14 welfare expansion numbers when costs per enrollee were relatively similar. Furthermore, there are other benefits to MA plans as mentioned above and by others. I read the “findings brief “and without a lot more detail on the nature of the modeling, it would be hard for me to see how you can compare “average subsidies per beneficiary” in the drug plan versus the “the cost to convince one more HMO” to enter a market. Additionally, as far as the welfare differences are concerned, what were the components of this difference and do the actual data bear out the modeled results. Is the model predictive of results of more current data after the program has been in existence for a longer period of time?

      Lastly, if consumers are selecting MA plans over drug plans and they are very popular and the insurers are competitively bidding and setting premiums, what is the problem if the costs per enrollee are very similar? If subsidies for MA are excessive relative to the drug plan, competition should increase services and value to seniors in the plan. I am missing something here.

      • @Roger – “I am sure the private patients are picking up the slack.” You’ve assumed your conclusion.

        You seem very interested in the details of the paper. May I suggest you read it? I cannot rehash it all on the blog. (My coauthors and I have already spent years conducting and refining the work and responding to numerous comments by reviewers.)

        What you are missing is that for $1 of government payment (taxpayer dollars) consumers receive the value of $0.14. That’s free to them so why should they complain? (Rationally they should not.) But it is costing a lot and drives up Part B premiums for all beneficiaries as well. This is rather inefficient.

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