Obama’s Medicare Half-Truth

Obama was called a liar during his recent address to a joint session of Congress. Actually, on another point he was not fully truthful about the implications of cuts to Medicare. Obama repeated that his health reform plan includes payment cuts for private Medicare Advantage (MA) health plans:

The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies — subsidies that do everything to pad their profits and nothing to improve your care. … So don’t pay attention to those scary stories about how your benefits will be cut… That will never happen on my watch. I will protect Medicare.

Obama’s claim that the cuts will trim insurer profits but not Medicare benefits was meant to calm nervous seniors. As I and others have pointed out the proposed cuts will in fact reduce benefits to some degree, contrary to the President’s assertion. But seniors, in general, should not be concerned. First, only about 23% of Medicare beneficiaries are enrolled in an MA plan.

Second, there will be very little loss in consumer surplus due to MA payment cuts. Estimates from my 2008 International Journal of Healthcare Finance and Economics paper (co-authored by Steve Pizer and Roger Feldman) suggest that the consumer surplus loss associated with cuts in payments to MA plans will be only 14 cents per dollar saved. The study on which our paper was based was funded by the Changes in Health Care Financing and Organization (HCFO) Initiative of the Robert Wood Johnson Foundation and is summarized in a HCFO Findings Brief.

In this case, consumer surplus is the dollar value that Medicare beneficiaries receive from the benefits provided by their chosen health plan. This is estimated by examining the detailed choices seniors actually make and then calculating what they would be willing to pay, on average, for particular bundles of benefits. It turns out that the additional benefits and flexibility created by recent increases in MA payment rates simply weren’t worth very much to seniors. By comparison, the consumer surplus loss per dollar saved associated with eliminating prescription drug plans, something no one has proposed, would be nine times larger.

Despite Obama’s rhetoric, the truth is that under his plan a small fraction of Medicare beneficiaries will lose their MA benefits and/or face higher costs. However, the potential savings are enormous and research shows that the benefit cuts needed to achieve them will not be terribly missed. While Obama’s statements about Medicare cuts are not strictly true, in practice they will turn out to be mostly true.

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