• The Meaning of “Efficiency” (Another MA Post)

    Some have argued that Medicare Advantage (MA) HMOs provide benefits to Medicare beneficiaries at lower cost than could be provided by traditional fee-for-service (FFS) Medicare. Though one could argue whether or not this is a correct interpretation of findings in the March 2009 MedPAC report, let us assume that it is true.

    Does it mean Medicare HMOs are more efficient than FFS? No, because they experience favorable selection. If I get to insure healthy people and you get to insure sick people I guarantee my costs of coverage will be lower than yours. That doesn’t make me more efficient.

    Does it mean that Medicare HMOs efficiently provide value to beneficiaries? No it does not. Even if they buy medical goods and services with relatively lower cost than FFS Medicare that does not imply that they provide substantial value to beneficiaries. That’s what the 14 cents per dollar result is all about: taxpayers pay $1 toward Medicare HMOs and beneficiaries get 14 cents of value out of it. That’s not efficient because we could make the beneficiaries just as well off giving them the 14 cents and using the remaining 86 cents for other things.

    Put it this way: Your uncle Sam spends $1,000 to buy you a very fancy computer. He had a coupon only he could use so he got it for 5% less than anyone else could have purchased it. But you didn’t really want a computer and don’t value it much. You’d only have bought that same computer with your own money if you could have purchased it for $140, or 14 cents per dollar it actually cost.

    Turns out, your uncle Sam wasted quite a bit of money. Still, you’ve got the fancy computer so would you complain? What about your brother who has no computer at all? Or your aunt who worked hard to earn the $1,000 that her husband just blew on your new computer? How efficient is this outcome? How much did your uncle’s 5% coupon really save? What would you expect the computer manufacturers to say about this?

    • Thanks for your previous responses to my comments under another post of yours. While I’m not competent to deal with the full text of your study itself, and therefore haven’t weighed into it, the abstract, together with your post above and other posts of yours, have helped me clarify my question to you.

      Basically, my question differs from the public policy question of the utility of MA subsidies. Rather, it is a sort of consumer-related policy question, should the government require MA insurers to add a warning label to descriptions of their plans stating, in effect, that if you subscribe, only 14 cents of your premium will be used for benefits to you.

      People tell me they subscribe to MA plans primarily for expanded coverages beyond what basic Medicare provides, and to some extent because they believe basic Medicare billing is not user-friendly. Because they believe that at least some of the additional MA coverages cover catastrophic risks not fully covered by basic Medicare, they believe that they have no choice but to purchase some form of MA or Medigap coverage. Within the universe of MA plans, very rational choices are offered in regard to ordinary medical services that might involve a few thousand dollars per year, trading off premium dollars versus levels of co-pays and deductibles, or trading off premium dollars versus prescription drug doughnut hole coverage, but all MA plans are perceived as providing , in exchange for basic premium dollars, significant umbrella insurance against catastrophic risks not covered by basic Medicare. (It is one thing to self-insure against the prescription drug doughnot hole and another thing to self-insure against major illness).

      People I know also choose MA PPOs over MA HMOs because they believe that at least some of the PCPs and specialists at Boston teaching hospitals whose patients they are before retirement don’t participate in MA HMOs and may not accept basic Medicare alone. If this is factually accurate, then such subscribers are comparing the extra out-of-pocket premium dollars for the PPO versus the value to them of being able to see Dr. X rather than another doctor.

      So my questions to you are, based either on your study or on other data available to you:

      1. Does only 14 cents of the subscriber’s premium dollar go for what a lay person would consider to be a benefit to them?

      2. Do MA plans (or Medigap plans) provide substantial additional coverage against catastrophic risks?

      3. Is it difficult for a lay person to navigate through Medicare billing procedures?

      4. Do MA PPOs offer more physician choice than MA HMOs or basic Medicare at, for sake of illustration, the senior practitioner level at MGH or B&W?

      Thanks for being willing to weigh in on comments on your posts — many bloggers don’t bother.

      • @Edward Young – Your comments and confidence are flattering. So far I am willing to reply to comments if and when I have something to say. I don’t know everything about Medicare or health care (or everything about anything really). With that in mind, I’m afraid I cannot answer all of your questions:

        1. The 14 cents is what I said it is. I cannot say any more. Others have done actuarial analysis of Medicare benefits. The bottom line is beneficiaries get a good deal. The government pays something, the insurers get some profit, they use some for marketing and administration, but a great majority of it (I believe) is spent on benefits. My point is just that beneficiaries don’t value the benefits much. They’re delighted to get them and they should be. But they wouldn’t buy them at any where near the price it costs taxpayers to provide them. I can’t say this again or in any other way.

        2. Off the top of my head, I don’t know.

        3. My guess is, yes it must be quite complicated for a lay person.

        4. In general the ordering of access to physicians ought to be FFS (most), PPO, HMO (least). For MGH or B&W I have no idea.

    • I was in an all-day training with Humana the other day and they made a point to tell us (independent insurance agents) how they are paid by CMS. They explained how the 2003 Medicare Modernization Act changed payment methods with the “Medicare Risk Adjustment Program”.

      Here’s how it works, according to Humana:

      -Member claims and diagnoses are submitted to CMS weekly from the MA companies.
      -CMS gives each member a score based on diagnosis.
      -the sicker a person is, the higher their score, and the more money the company receives from CMS to provide care.
      -A person aging-in with no claims receives a default score.
      -Payment cycles run Jan. to June and July to Dec.

      What do you think of this explanation? Humana says the MA plans are just getting what was legislated (and the poor insurance companies were forced to take more money). And they say they don’t make more money if they have healthier members because of this payment system.

      • @Denise – It is well known that risk adjustment is marginal, accounting for only ~10% of the variation in costs. There is still plenty of room for gaming and selection.

    • Regarding Austin’s questions above:

      2. Do MA plans (or Medigap plans) provide substantial additional coverage against catastrophic risks?

      Austin is confusing Medicare Advantage with Medigap. A Medigap plan fills the gaps in Medicare, which is an insurance plan where the patient pays 20% of the bills (plus a $1,068 hospital deductible). When you buy a Medigap plan F (aka: Medicare Supplement), Medicare pays 80% of the bill and the Medigap plan pays 20%. Therefore, you have no bills.

      Medicare Advantage plans (aka: private Medicare plans) cover Medicare benefits differently than “Original Medicare”. The enrollee in these plans agrees to the plan’s terms which are co-pays for a hospital stay; co-pays for a skilled nursing stay; co-pays for doctor visits; co-pays for lab tests, x-rays, CT scans.

      These co-pays vary from company to company. A plan with a zero premium will probably have higher co-pays. A plan with a premium should have lower co-pays. Most Medicare Advantage plans now have a MOOP (maximum-out-of-pocket) for each year. So if you are diagnosed with cancer, your copays for treatment would end when they hit, say $3400. MOOPs vary by company and plan. Some are $5,000.

      The best coverage is Medicare plus a Medicare Supplement/medigap. Prices in Arizona are pretty good for these plans. The AARP Med Supp is $120/month in AZ but $175/mo in CT. But then you need to add a Part D plan which is $35-$45/mo. So, in Connecticut you’d pay about $200 per month for complete coverage.

      In Connecticut you can get a Medicare Advantage plan which includes a drug plan for $109/month. Co-pays are very low: $100 per hospital stay; $10/doctor visit…….with most doctors and all hospital in the state in the network.

      32% of Medicare beneficiaries in AZ are enrolled in Medicare Advantage. In CT it’s only 10%. California: 36%; PA: 36%; FLA: 28%. These states have pretty high enrollment in MA plans: 1.5 million in California and almost 1 million in Florida.

      Do you think Senators and Congressmen from these states are going to tell all these seniors that their Medicare has to change? I’m sure that will go over well. I’m not saying it shouldn’t change, but it’s hard to take away benefits people have had for a long time.

      • @Denise – Look again. I wasn’t (am not) confused about MA and Medigap. I know well the differences between them, and I’ve written about them on my blog and in my scholarly publications. Nevertheless, thanks for the explanation for the benefit of other readers (really, it is so nice to see readers helping readers–I hope to see more of that).

        What I don’t know (and didn’t see an answer to in your comment) is what has the best catastrophic coverage. I.e. what are average coverage limits (monthly, quarterly, yearly, lifetime), if any? I could study this and find out but right now I don’t know.

    • Sorry, Austin. I normally deal with insurance agents or insurance company representatives who don’t get into the detailed analyis you obviously do. I read the abstract of your article on how Medicare Supplements cause people to use more Medicare services and, therefore, push up costs to Medicare. I’m just an insurance agent and I must admit I had never thought of that.

      If Medicare co-pays were designed to hold people back from getting too much medical care, the Medicare Advantage model now makes more sense to me.

      The idea that people seek out more medical care if it won’t cost them much is kind of a new concept to me. I suppose you’re right, but I hate the idea that we must penalize people so they will stay away from care.

      I may have misunderstood your question about catastrophic coverage, but in my side of the business my understanding is that a Medicare Supplement Plan F would prevent catastrophic costs. A person with a plan F is generally completely covered for Medicare-covered costs. There is no lifetime limit for Med Supps. Of course, there are many other costs associated with serious and chronic illnesses that are not covered by Medicare.

      I am interested in your analysis, but I think what you’re pursuing is much deeper than what I’ve learned as an insurance agent working with Med Supps and Medicare Advantage.

      • @Denise – No problem. What I was trying to point out with “look again” was that the catastrophic coverage question was Edward Young’s, not mine. But you answered it, and I couldn’t without looking it up, which I didn’t. Medigap Supplements have no lifetime limits. You can’t get any better catastrophic coverage than that, with respect to what they cover.

        As for health care use being in part dependent on OOP cost: that’s classic moral hazard, a standard concept in insurance. The Rand health insurance experiment is the classic study on this. To overly generalize, they found that greater OOP cost led to less use but had no significant impact on health outcomes. (This is, of course, controversial.) If true, or even mostly true, it suggests a lot of overuse of care that could be reduced by having folks face more of the cost. That’s what consumer-driven health care is about, in part.

        So that’s a quick summary, with enough buzzwords and pointers that you (or other readers) could learn more by Googling about.

        Thanks again for your contributions to the discussion. They’ve been valuable and complement what I have to offer.

    • “Nevertheless, thanks for the explanation for the benefit of other readers (really, it is so nice to see readers helping readers–I hope to see more of that). ”

      Yes, thank you both, Austin and Denise. This has been extremely helpful.

      More than that, it’s been so civil — is this really the Internet? Can public policy issues be discussed in a reasonable, constructive manner? The Atlantic Monthly bloggers like Andrew Sullivan have created ironic awards for the week’s angriest, most hyperbolic, most mendacious posts on the blogosphere — this board has been such a refreshing contrast!