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Democrats Proudly Cut Medicare Benefits
Last week Congress cut benefits to Medicare recipients and liberal pundits applauded. Indeed, Paul Krugman said this was "Kennedy's Big Day" and "the first major health care victory that Democrats have won in a long time." Of course, Krugman and the others who applauded this "victory" didn't say that they were cutting Medicare benefits - even though that is exactly what they were doing - instead they framed the victory as one over privatization and waste. Here's the story.
Medicare beneficiaries can enroll in Medicare's fee for service plan or they can choose Medicare Advantage joining, for example, an HMO. In the latter case, Medicare pays the HMO a rate per enrollee and the HMO competes to obtain enrollees by offering them a package of benefits and premiums.
Now what you will be told about Medicare Advantage is that it is more expensive than traditional Medicare. Thus the CommonWealth Fund says:
Private Medicare Advantage (MA) plans were paid an average 12.4% more per enrollee in 2005 compared with what the same enrollees would have cost in the traditional Medicare fee-for-service program...
That much is true. But why are MA programs more expensive? The answer, which one gets by innuendo and implication, is that Medicare Advantage programs are wasteful and the extra money is being pocketed by corporations.
The CommonWealth Fund says:
"...eliminating extra payments to private plans could save Medicare a projected $30 billion over five years." (italics added)
Paul Krugman says:
the fastest-growing type of Medicare Advantage plan, private fee-for-service, costs taxpayers 17 percent more per beneficiary than Medicare without the middleman. (italics added).
Robert Waldmann is least careful and in a comment on Tyler's article on means testing says
Cowen doubts that expanding the public share of health insurance would reduce costs. We have a test case medicare vs medicare advantage accounts. They cost, on average 12% more per patient...
Thus the message is that traditional Medicare is cheaper because it eliminates the middleman, doesn't involve private corporations, and is more efficient at lowering costs. None of this is true.
I'll give you the full story in a minute but let me first point to one clue that something is amiss. According to all of the above "enrollment in these plans has been growing rapidly" (Krugman). Now why would so many Medicare beneficiaries opt out of low-cost, efficient Medicare and into high-cost, inefficient MA plans?
While you puzzle over the clue let's cover the necessary background. Here is how the MA program pays a private provider (quoting the CBO).
Private plans that want to participate in the Medicare Advantage program must submit bids indicating the per capita payment for which they are willing to provide Medicare’s Part A (Hospital Insurance) and Part B (Supplementary Medical Insurance) benefits—and to take on the financial risk of doing so.
The government compares those bids with county level benchmarks that are determined in advance through statutory rules. The benchmarks are the maximum payment the government will make for enrollees in private plans; in most cases the plans’ bids (and the resulting payments) are lower than the benchmarks....
If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid.
So far you might think that Krugman et al. have a point. If the benchmarks are set too high and Medicare pays the plan its bid plus 75% of the amount by which the benchmark exceeds the bid then the plans could bid their costs and get extra payments. Now, I hope that many of you are thinking, What about competition? Good thinking! Indeed, if that was all there was to it, competition would push the bids below costs. But in fact to resolve our puzzle we need not rely on competition and economic theory because here is the kicker (quoting the CBO again, italics added):
If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid. Such a plan must return that 75 percent to beneficiaries as additional benefits or as a rebate of their Part B or Part D premiums.
Now the solution to our puzzle becomes clear. Why do beneficiaries choose MA plans?
...because such plans provide additional benefits beyond those available within traditional Medicare, including coverage for services not covered by FFS Medicare (for instance, dental services) and cash rebates of premiums or reduced cost-sharing.
In fact, the CBO estimates that the vast bulk of the increased payments to private providers flow to enrollees who get better benefits and lower payments. Indeed, in the case of HMOs enrollees benefit twice - first because the benchmarks are higher and second because, contra Krugman et al., the HMOs actually have lower costs than traditional Medicare! Thus the CBO writes:
In contrast, payments to HMOs averaged 10 percent above FFS costs...On average, HMOs offered extra benefits and rebates equal to 13 percent of FFS costs; those additional benefits and rebates reflected the difference between the benchmark (which averaged 10 percent above FFS costs) and the plans’ bids (which averaged 3 percent below FFS costs).
That could be written more clearly but what they are saying is that Medicare pays HMOs 10 percent more than they would pay for an enrollee in traditional Medicare but the HMOs offer the enrollee 13 percent more worth of extra benefits and rebates. In other words, the HMOs pass on to the enrollee all of Medicare's "extra payments" plus some. (Note that this is exactly what one would expect in a competitive market.)
Now, I am not saying that higher Medicare payments are a good idea. But I dislike the fact that politicians are being lauded for fighting "wasteful privatization" when what they are really doing is cutting medical benefits for the elderly.
Posted by Alex Tabarrok on July 21, 2008 at 07:41 AM in Medicine | Permalink
Comments
1) Excellent post. Highly informative.
2) In politics everything will be spun to high heaven. Forget the doublespeak, always and everywhere focus on the result; otherwise you will go insane.
Posted by: at Jul 21, 2008 8:34:13 AM
partisan!
Posted by: paul at Jul 21, 2008 8:42:48 AM
Even more important, where did the money go? The answer is to doctors. So Medicare beneficiaries were cut in order to keep payments to doctors from being cut.
This is the opening round in many future battles between segments of the health care system as the Federal goverment has to wrestle with the deficits that rising health care costs are creating.
Social Security surpluses that balance those deficits will run out in the next 4-8 years, causing the overall deficit to rise past $1 trillion...and beyond.
Posted by: John Bailey at Jul 21, 2008 8:45:04 AM
Classic race to the bottom. The way the liberals will "lower" healthcare costs is by "lowering" benefits.
The most efficient way to keep "healthcare costs" done is to have tyrants in Washington rationing care.
Posted by: Jay at Jul 21, 2008 9:02:53 AM
Agreed that this is a lot of useless hand-waving on the Dems' part. However, I have yet to read a viable, palatable solution to healthcare from conservatives other than the "let them eat cake" variety.
Posted by: meter at Jul 21, 2008 9:15:36 AM
Great post, Alex. Maybe the folks from Tyler's post yesterday can explain to you that competition doesn't work in medicine.
Posted by: Bob Murphy at Jul 21, 2008 9:18:53 AM
...and I wonder if the people using these plans had...higher than average incomes...
Just a thought.
Posted by: Tyler Cowen at Jul 21, 2008 9:27:04 AM
A warning to anyone reading this post: anyone who says they are going to "give you the full story" isn't, as Medicare is quite complicated. While getting into all the reasons why this post does not capture what is really going on would require pages and pages, think about these two things:
1. If private coverage is truly cheaper than government coverage, why was private enrollment shrinking rapidly prior to the subsidies for private coverage? Are seniors not interested in saving money? (Note that this was in an environment prior to risk-adjustments, so private plans were on average insuring a much healthier group of individuals.)
2. If the goal is to provide extra benefits and not just a subsidy to private insurers, why not increase benefits for public as well? (Answer, the private plans would again fade away.)
Private insurers are very good at exploiting selection issues and payment mismatches. They have always enrolled the healthiest individuals, and exploited county-by-county payment mismatches. That does not make them cheaper.
Posted by: es32 at Jul 21, 2008 9:34:49 AM
The companies offering the 'Medicare Advantage Plans" are for profit entities. If you subtract out profits from the total medicare payments to these plans you will find substantially less money flowing to patient care than non Advantage plan medicare recipients.
Posted by: peter at Jul 21, 2008 9:47:36 AM
Great points, but there's another component of it that I'm not sure you considered. MA providers can screen for patients, so they can reject the sickest (and most expensive) patients. It's plausible that the reason that they are able to come in under the county benchmark (despite being more wasteful than Medicare) is because all the expensive sick people can't get Medicare Advantage.
Posted by: another alex at Jul 21, 2008 10:56:17 AM
Quick response to another alex. Don't forget that Medicare pays more the sicker the patient, i.e. payments are risk-adjusted so in fact it is not clear that an HMO makes less on a sicker person.
Posted by: Alex Tabarrok at Jul 21, 2008 11:41:04 AM
If the private plans are more efficient then why do they need any extra subsidy in the first place?
Posted by: a student of economics at Jul 21, 2008 11:45:07 AM
My wife is a physician who must deal with the new managed care firms for medicaid in Ohio. It is a nightmare for her and her patients. They refuse to allow routine medical tests. They increasingly refuse to cover medications. She is spending more and more of her time on the phone fighting with people with limited training about how to teat various medical conditions.
I am in favor of competition. But the incentives in this system encourage firms to sign up as many clients as they can, and then strictly resist access to care.
I always hated when HMO's would say that 95% of clients were happy with the HMO. But if you surveyed people who had a serious medical condition in the past year the approval numbers would have seen a dramatic drop. Regretfully you don't always know how bad your insurance is, until you try to make a claim.
Posted by: DanC at Jul 21, 2008 12:13:46 PM
"If you subtract out profits from the total medicare payments to these plans you will find substantially less money flowing to patient care than non Advantage plan medicare recipients."
Peter are you speaking of accounting profits or economic profits?
Posted by: Jay at Jul 21, 2008 12:29:50 PM
Take care, this post is by Alex not Tyler.
Posted by: spencer at Jul 21, 2008 12:58:09 PM
Being on a Medicare HMO I can tell you the coverage is great and little cost for the average member. On traditional medicare the co- pays and deductibles can be quite high. A HMO is less expensive for those on limited income while the cost is roughly 95% per enrollee when compared to traditional Medicare.
Posted by: Roxie Pruitt at Jul 21, 2008 1:02:30 PM
Quoting from a Feb. 28 GAO report: "GAO found that MA plans projected they would use their rebates primarily to reduce cost sharing, with relatively little of their rebates projected to be spent on additional benefits," and "MA plans projected they would allocate, on average, about 9 percent of total revenue ($71 PMPM) to nonmedical expenses, including administration and marketing expenses; and about 4 percent ($30 PMPM) to the plans’ profits. About 30 percent of beneficiaries were enrolled in plans that projected they would allocate less than 85 percent of their revenues to medical expenses."
The Medicare Advantage rebates are used primarily to provide participants assistance with their out-of-pocket expenses, which is unfair since all Medicare beneficiaries should participate equitably in relief from the financial burden of cost sharing. For providing this unfair benefit, MA plans waste valuable resources on administration, marketing and profits. We should quit paying the Medicare Advantage plans for running this shell game that is cheating the taxpayers.
Posted by: Don McCanne at Jul 21, 2008 1:13:01 PM
*correction*: Change all references to the OMB to the CBO.
Posted by: john at Jul 21, 2008 1:20:12 PM
As I'm sure Alex realizes, Krugman's happiness about this change in the law is not because of a general enthusiasm for cutting Medicare benefits. I would guess it's because he thinks that we should have single-payer health insurance, and that extra-generous payments to private MA plans serves to both enrich the plans and to futher entrench private insurance, which by his lights is a step in the wrong direction. The fact that some (most? certainly not all) of these extra-generous payments gets passed through in the form of more generous services for enrollees doesn't change this basic fact, and moreover it's not clear that the extra services provided to consumers through this mechanism are a good use of that money.
Posted by: David J. Balan at Jul 21, 2008 1:37:03 PM
Of course Alex fails to point out that the democrats were also voting to increase payments to doctors that the Bush administration had tried to cut. That may have been much more why the Democrats were cheering than the impact on the insurance companies.
Posted by: spencer at Jul 21, 2008 2:02:55 PM
The spending is wasteful unless they can prove old people live longer under the MA programmes.
If the old people live just as long, but have 13% more money spent on them, it's a waste of whatever more it costs!
Only an idiot would confuse expenditures and results.
Posted by: Andrew at Jul 21, 2008 2:07:37 PM
'Republicans: Doh! Why didn't we think of that first!?!'
Posted by: Lord at Jul 21, 2008 4:53:34 PM
One thing not clear in this is whether total medical care spending in FFS is less or only the government's portion of it. Does the 12.4% include FFS copays?
Posted by: Lord at Jul 21, 2008 5:00:34 PM
The truth is that "cheaper" more socialzed medicine systems pay their doctors less.
OECD average doctor income is half that of the US.
The difference in doctor pay is much larger than existance of marketing or profits in per capita medical costs.
Posted by: mr econotarian at Jul 21, 2008 5:05:23 PM
Tyler wrote:
...and I wonder if the people using these plans had...higher than average incomes...
... and I wonder if all of the people who directly benefited by this latest act of Congress are among the most highly compensated in American society.
Just a thought.
Posted by: RW Rogers at Jul 21, 2008 5:05:47 PM
