MA Cuts: Now with Economic Wonkery

Commenters all over the blogosphere are not understanding consumer surplus and how it relates to my finding (again, with Steve Pizer and Roger Feldman) on Medicare Advantage (MA). So, let me explain it.

I stated that, according to our work, the increase in benefits from MA plans since 2003 is valued by beneficiaries at 14 cents per federal dollar spent on them. Then I said the other 86 cents in part pays for the cost of those benefits. Some people have claimed this is a contradiction. It is not.

The 14 cents is consumer surplus (which is explained elsewhere on this blog). There are two interpretations that may help:

  1. Beneficiaries would be no worse off receiving the 14 cents in cash instead of the extra MA benefits.
  2. Beneficiaries would be willing to spend only 14 cents for the extra MA benefits they receive. (In both cases “extra” here means beyond those provided in 2003.)

Meanwhile it really does cost the government $1. That other 86 cents is not a benefit, in the consumer surplus sense.

This is straight forward, standard, well established, vetted, and accepted economics. It could not have been published in the journal in which it appeared if this were not the case.

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