What Medicare Beneficiaries Want

Igor Volsky reports James Capretta as saying,

Can you imagine … a more colossal waste of money, then to just say to a certain group of seniors, ‘we’re going to mail you another $250 check'[?]… [M]any of them [Medicare beneficiaries] are going to get letters in the mail, from their insurers saying, ‘sorry, we have to change your benefits because ObamaCare has passed and it has cut our reimbursement rates.’

That $250 check he’s talking about is to reimburse Medicare beneficiaries for out-of-pocket drug spending in the program’s drug benefit coverage gap (also called the “donut hole,” a range of drug spending for which beneficiaries pay the full cost of drugs). Those reimbursement rate cuts he’s talking about are reductions in government payments to Medicare Advantage (MA) plans (some details here). MA plans are currently paid 15% more than it costs traditional Medicare–the program’s very popular “public option”–to cover a beneficiary’s care (pretty graphs illustrating this here).

The wonkiest of readers with good memories will recall a result of one of my papers (with Steve Pizer and Roger Feldman) about which I blogged several times last year: for each taxpayer dollar spent on increased Medicare HMO benefits since 2003, beneficiaries have received 14 cents of value. (Before you go assuming that means insurance companies are pocketing 86 cents of profit, go read my prior post.)

That’s a pretty poor return of value on taxpayer spending. Thus, cutting payments to private Medicare plans makes sense. And that’s exactly what the ACA does. Some of the saved money is being funneled into increasing Medicare drug benefits, in particular closing the coverage gap. Is spending the money on drug benefits more efficient than on HMOs?

That’s a question I’m studying. I don’t have a full answer. But the paper I cited above that found a 14 cents on the dollar benefit from increased HMO spending also says something about Medicare drug benefits. We showed that Medicare beneficiaries found the introduction of a Medicare drug benefit to be highly valuable, to the tune of $1.25 of consumer welfare per tax dollar spent. That’s about nine times more efficient than increased HMO benefits ($1.25/$0.14 is about 9).

Based on what I know now, I think it is likely Medicare beneficiaries really do value the $250 reimbursement for donut hole expenses more than the loss of MA benefits associated with lower payments to private plans. Of course, beneficiaries would rather have both increased drug coverage and increased MA benefits. But with limited taxpayer resources, providing more of the former at the expense of less of the latter is consistent with the evidence on relative efficiency.

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