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.

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