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?

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