• Why vouchers and Medicare don’t mix

    My latest Kaiser Health News column is out today. It explains why the current Medicare voucher program (aka, Medicare Advantage) hasn’t helped save the program money, with obvious implications for Paul Ryan’s proposal. The reasons are probably not what you think. Here’s a taste:

    [T]oday … monthly payments to Advantage plans are, on average, 13 percent above fee-for-service Medicare costs. … Originally, private Medicare plans were paid 95 percent of per beneficiary fee-for-service costs. …

    Then Congress began to ratchet up payments … Ironically, traditional Medicare payment regulatory reforms–like the prospective payment of hospitals and home health agencies–have been more successful (even if not anywhere near successful enough) in mollifying the rate of growth in the program’s costs. …

    Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technically and politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.

    For the rest, hop over to KHN.

    Related to this, is my prior column on competitive bidding in the Medicare Advantage program.

    Share
    Comments closed
     
    • I don’t necessarily like Ryan’s plan, but there is a huge difference between MA and what he is proposing. There’s not really much similarity there at all, other than they both use private insurers. The big difference is that Ryan is proposing

      As for whether it will save money, it is designed so that the vouchers do not increase as fast as the growth in health care costs. Maybe you don’t think Congress will allow that to happen, and they’ll vote to modify the vouchers so they grow faster and we don’t save any money. But that is the same argument opponents of PPACA used about the Medicare cuts. If you don’t think Congress will allow Ryan’s plan to work, why would you think Congress will cut Medicare costs by 30 percent over the next 3 years?

      • @AB – You did read the whole column, right? It sorta seems like you missed my point.

        “There’s not really much similarity there at all, other than they both use private insurers.” — That’s the key to the whole argument, the additional layer of privatization has political consequences and leads to higher government costs, despite the original intention of lower costs.

        “it is designed so that the vouchers do not increase as fast as the growth in health care costs. Maybe you don’t think Congress will allow that to happen, … If you don’t think Congress will allow Ryan’s plan to work, why would you think Congress will cut Medicare costs by 30 percent over the next 3 years?” — Who are you talking to? I’ve never been satisfied with the cost control provisions of the PPACA. That’s why I write about cost control problems all the time.

        However, as the column made clear, there is a huge political difference between a government program and a government program with private contractors. Why do you think Medicare Advantage has a cost problem? Did adding another pro-cost increasing force help? The evidence suggests not. Tell me how insisting that payments will be reduced because Ryan says so should be taken as more convincing evidence. We’ve seen this “privatization does it better and cheaper” claim before in Medicare Advantage. It’s not working.

        I’ve advocated competitive bidding in the MA program. Now if that could be implemented and sustained I’d have a lot fewer objections to the program.

    • ehh, unfinished sentence there in the first paragraph, started to write it and found it unnecessary because you know plenty about MA. Disregard

    • Aren’t you missing one little detail? Medicare Advantage plans cover more services than traditional. It’s fair enough if you want to say they should get no more reimbursement than traditional Medicare (I agree). But let’s not pretend that it is some mystical “rent seeking” forces at play. Cars with air conditioning cost more than those without. If we’ve guaranteed a car to beneficiaries, okay we shouldn’t be adding air conditioning at no additional cost to them. But let’s not pretend that we don’t understand why the car with air conditioning costs more. Or worse, not even mention it as a possible factor.

      • @Stephan, Brian – I think one can add a lot of detail to the story, but the column isn’t about everything. It’s about the following simple facts: (1) MA is the successor of a privatized arm of Medicare under which plans were paid 95% of FFS costs. (2) The promise was that this idea–a voucher plan–would save taxpayer money. (3) Since then payments to MA plans have gone way up (under presidents of both parties). They are not saving the taxpayer money.

        What do we conclude? Can MA or any voucher program be made to be cheaper? Sure, in principle. (I’d do it via competitive bidding. Congress hasn’t gone for that either. It was in the Senate bill and replaced by reconciliation.) But why didn’t it work in MA and what will make it work next time? If the goal is taxpayer savings, why not do it the proven cheaper way (which isn’t cheap enough, but is far cheaper than MA)? The answer must be that it isn’t about saving taxpayer money at all. If that’s it, then say so. But then, what do we do about exploding Medicare costs?

    • So the implication is that private companies that produce profits or even accumulate capital are just another layer of costs? Is the logical conclusion then that government is always cheaper and more efficient because it doesn’t require profit or risk capital? And that government, absent a consumer making choices to find the best value, will always be the most efficient at improving cost effective delivery of services?

    • “Tell me how insisting that payments will be reduced because Ryan says so should be taken as more convincing evidence. ”

      I’m not saying that is more convincing evidence. I’m saying that if you find it unlikely that Congress would allow the vouchers to grow so slowly, it is equally unlikely that they’ll stick to the Medicare cuts in PPACA. I don’t think MA is a good example of what would happen with Ryan’s plan, as I don’t find the two very similar.

      “We’ve seen this “privatization does it better and cheaper” claim before in Medicare Advantage. It’s not working.”

      All privatization is not equal, which is the main point I was trying to make.

      My second point was that in my opinion I think it’s more likely that the vouchers would actually be allowed to grow slower than health care costs than the 30% Medicare cuts under current law will actually take place.

      Since you seem to agree that those Medicare cuts are unlikely, we really could have used that skepticism before PPACA passed (which would have included pointing out the fantasy of the so-called deficit reduction in the bill). The same people so quick to jump all over Paul Ryan’s plan are the same ones who were so supportive of PPACA. I just wish we could have more consistency in the reporting on issues of health care reform (this not directed at you personally) from left-of-center pundits.

      • @AB – I get it. You’re venting, but not at me. Fine. Now that you’ve done it, let’s move on to the substance.

        As for me, my views are more nuanced than you may want them to be. Sorry. I like the PPACA for reasons other than cost control. I’m glad it passed. I like MMA for a bunch of reasons too. Yet, I don’t think either are perfect, far from it. And I’ve said so, many times. It’s a work in progress. Nothing is black and white.

        I have spent most of my career studying Medicare Advantage so I have pretty strong, empirically based, reasons for my views. It’s a voucher program. So is Ryan’s. both were (or would be) undertaken with a promise of savings due to sub-FFS level subsidies. Tell me exactly how they are different in a meaningful way?

    • Austin – thanks for the reply. I agree that a voucher plan could save money, but certainly would not guarantee it (though that’s not the gist I came away with from your original post). I’m not suggesting that you explore every detail in a short column. But I think failing to mention – even in one sentence – the difference in benefits between MA and traditional is misleading.

      I would also second the contention by AB that “if you find it unlikely that Congress would allow the vouchers to grow so slowly, it is equally unlikely that they’ll stick to the Medicare cuts in PPACA.” I have been strenuously making the argument about that the needed Medicare cuts – Don Berwick or not – won’t happen.

      • @Brian – I disagree that point needed mentioning. However, were I to mention it, it would not place MA plans in a more favorable light with respect to efficiency of their use of taxpayer money. One must be careful to distinguish taxpayer value and beneficiary and/or plan value. I refer you to my work, with colleagues:

        Pizer SD, Frakt AB, and Feldman R, “Nothing for Something? Estimating Cost and Value for Beneficiaries from Recent Medicare Spending Increases on HMO Payments and Drug Benefits,” International Journal of Healthcare Finance and Economics, 9(1) (March 2009):59-81. [mentioned in many posts: 1, 2, 3, 4]

    • Sure, your views may be nuanced, but to my knowledge this is the first and only column you’ve written about Paul Ryan’s plan and in it you go after his claims of cost control because you think they are unlikely to happen. I don’t recall similar skepticism about the claims of deficit reduction and cost control in PPACA. Maybe my memory is failing me, but I definitely do not remember it. You say that you like PPACA for other reasons, but do you like it even at its true cost?

      “Tell me exactly how they are different in a meaningful way?”

      I’d say giving a voucher directly to people to buy their own insurance rather than paying the plan is a pretty meaningful difference. Also, MA is practically designed to pay more than traditional FFS given the way the benchmarks are set, while Ryan’s plan is designed to pay less and would require explicit congressional action to increase the payments. One could argue that that congressional action is nearly certain to happen, but there is still a very meaningful difference between the two programs.

      • @AB, Brian – You’ve both articulated your points well and I understand them. I’ve responded to the best of my ability given my own views and the time I can devote to comments. On some things we agree, but not on everything. What remains are largely areas of opinion, emphasis, semantics, and policy implications. Therefore, I don’t think additional rounds of back-and-forth in the comments is likely to change my mind or yours or reveal any further relevant facts on these matters. So, we should draw this to a close.

        However, cost issues in Medicare Advantage and pertaining to the PPACA will continue to be relevant, both to my work and in the policy debate. Therefore, I will come back to these issues and blog on them more fully, though I cannot say precisely when. Stay tuned.

    • Austin – thanks again, but to clarify I’m not saying you should include the most basic reason for MA plans being more expensive in order to “cast it in a more favorable light.” I’m saying it’s just basic explanatory information. I have no argument per se with your work on value (I think we basically agree that MA is largely corporate welfare). But value is a different question than cost explanation. An additional $5,000 for air conditioning on a car may not be worth it, but if that’s the feature difference (and ultimately “value” is a subjective assessment anyway), you need to disclose that and not leave the impression that you are comparing apples-to-apples.

    • Stu’s First Theorem of Government

      Politicians + Other People’s Money = Rapidly Escalating Costs

      There are three ways to control Medicare Costs.

      1. Vouchers – politically next to impossible but almost technically perfect (M.A. is a great voucher program…for managed care companies).

      2. Pay Your Own Way – politically completely impossible but technically perfect.

      3. Utilization Management – politically difficult (“death panels”) but technically nearly impossible (rent seeking and our “keep alive at any cost” culture prevents this).

      If we are going to get serious about controlling entitlement spending we need a politician who is not afraid to say, “You can’t have everything you want from your medical provider if it’s being paid for by taxpayers.” Can anyone estimate the odds of that politician getting elected in the first place?

      There is one perfect healthcare system which consists of a completely free market in healthcare without CON, without licensing requirements and without third party payment. Individuals would spend as much as they want on their healthcare. Since taxpayers pay nothing for anyone but the really poor (those making below the poverty line) costs would automatically be kept in check.

      The odds of us getting a free market in healthcare are 0%. I’m afraid the next best system is single payer where taxpayers fund a certain minimum standard of care for every American citizen and if citizens want extra care they pay for it out of pocket.

    • There is a factual question at issue in all this back and forth, namely whether or not Medicare Advantage plans reduce or increase Medicare spending. The accountant’s comparison of Federal budget costs (MA once 95% and now 113% compared to original Medicare) is not an economist’s comparison. In fact, using a broad social welfare comparison, it is clear that MA plans save a great deal of money–mainly to enrollees who get catastrophic cost protection and reduced cost sharing without having to pay $1 or $2 thousand a year for a Medigap plan (many MA plans charge “zero premium” extra for catastrophic protection and drug coverage). As to the fisc, studies by Michael Chernew et al and Adam Atherly and Ken Thorpe provide strong research evidence that MA plans reduce the costs of original Medicare, and of Medicaid as well. The reduction may be as large as a 1% reduction in spending on Medicare Parts A and B by those not in MA for every 1% increase in MA enrollment in a geographic area. Thus, if MA penetration reaches 20% in a geographic area, these results suggest that spending on original Medicare in that area is 20% lower than it would otherwise have been, and that while the MA plan costs 15% more than the resulting cost level, it costs 5% less than the original cost level. I don’t think that there are enough research results yet to reach a final quantitative conclusion, but it is clear that the accountant’s comparison is fundamentally misleading by not taking into account the behavioral effects of increasing enrollment in plans that introduce cost-consciousness to both enrollees and providers. As to potentially harmful effects on low-income enrollees, there are insurance designs that largely solve that problem while reducing moral hazard. These include not only high deductible plans with free annual physicals and savings accounts that pay for maintenance medicines and other routine care, but also Part D plans with first dollar coverage of maintenance meds before the donut hole kicks in. [Use a search engine to find Michael Chernew et al, 2008, in Journal of Health Economics, and Adam Atherly and Ken Thorpe, 2005, report prepared for the Blue Cross and Blue Shield Association.]

      • @Walton Francis – I agree with you. Based on your encouragement, I’ve read and spoken to Chernew about the very work you cite. Folded into the analysis should be my own work that finds that a $1 increase in federal spending on Medicare HMOs led to an increase in beneficiary consumer surplus of only 14 cents (reference below). I’m all for economics analysis and spillovers should be considered. Perhaps, folding in all such issues, MA plans are not overpaid by 13%. But they may still be overpaid. The right way to get the best deal for taxpayers is a competitive bidding system that includes FFS. I’ll be writing more about just that soon.

        Pizer SD, Frakt AB, and Feldman R, “Nothing for Something? Estimating Cost and Value for Beneficiaries from Recent Medicare Spending Increases on HMO Payments and Drug Benefits,” International Journal of Healthcare Finance and Economics, 9(1) (March 2009):59-81. [mentioned in many posts: 1, 2, 3, 4]