Medicare Advantage payment rate cuts

The New York Times Editorial Board supports cuts to Medicare Advantage (MA), as prescribed by the Affordable Care Act. As the editorial points out, there is a lot of howling about those cuts this year, not only from insurers, but from both Republican and Democratic policymakers. I’m sure MA enrollees would prefer payments to plans not be cut either. MA has been a good deal for them too.

Over the past decade, enrollees in Medicare Advantage have received lots of extra benefits, thanks to unjustified federal subsidies to the insurance companies. Now they will have to do with somewhat less, unless the insurers are willing to absorb the cuts while maintaining benefits.

We’ve done a great deal of blogging about MA payment rates here at TIE, though not recently. For now, I’ll focus on the “lots of extra benefits” that MA enrollees have received. How valuable were they to those enrollees? Not very.

My work, published in 2009 with Steve Pizer and Roger Feldman, showed that for each additional dollar spent by the federal government (taxpayers) on the program since 2003, just 14 cents of it could be attributed to additional value to beneficiaries. What do I mean by “value” here? I mean that beneficiaries would have been just as happy receiving 14 cents as receiving a dollar’s worth of those extra benefits. Or, they’d have taken 15 cents on the dollar and been happy to forgo the extra benefits altogether. Clearly taxpayers could have saved a lot by just paying those 15 cents directly to beneficiaries!

If 14 cents per dollar went to beneficiary value (formally, consumer surplus), what do we make of the other 86 cents? That went to the insurance companies. In part it is accounted for by the costs of the additional benefits (which is different than their value to beneficiaries, obviously), and in part it is captured as additional insurer profit (producer surplus).

A limitation here is that our study is now out of date. I can’t say with confidence that beneficiaries are only receiving 14 cents on the dollar of value from extra MA benefits today. But I would bet a great deal that a substantial fraction of each taxpayer dollar spent does not show up as value to beneficiaries.

It remains true that cutting payments will be painful for insurers and disliked by beneficiaries. They’re getting a great deal! But it is at taxpayers’ expense. What’s the right MA payment rate, after all? (Hint: Consider competitive bidding.)


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