One of the principal cost-cutting reforms that both the House and the Senate health care bills would enact is to reduce unnecessary spending on Medicare Advantage. This is explained below.
Ezra Klein of the Washington Post described the problem with Medicare Advantage in an article that he posted on October 15. He stated:
Essentially, it works like this: Congress allowed private HMOs to compete for Medicare patients under the rationale that they could offer better service at lower cost than the government. They couldn't. So Republicans in Congress began boosting their payments, to the point that Medicare Advantage gets paid 114 percent what Medicare gets paid to care for a patient. That leads to some fun perks, like free gym memberships and complimentary aspirin and band-aids, which in turn leads seniors to defend the program because they like their perks. But it also means a lot of unnecessary expense for taxpayers.
And it's important to remember that those free perks do not account for the whole of Medicare Advantage's overpayments. Rather, economists have estimated that for every extra dollar we pay the program, 14 percent is passed on to seniors and 86 percent goes to profits or other costs. In other words, we're getting only 14 cents of obvious value for every dollar of overpayment.
On November 21 Stephen Koff of the Cleveland Plain Dealer published an informative article on this aspect of health care reform. Like Klein, Koff states that the government pays a bonus to Medicare Advantage insurance plans that is 14% more than traditional Medicare plans, and that there is persuasive evidence that these extra payments are not being spent on additional medical care for Medicare recipients. Koff quotes Austin Frakt, a health care economist at Boston University who blogs at The Incidental Economist, as stating:
"So," he asks, do the extra payments for Advantage plans "produce little value to beneficiaries, as Obama claims, or are the benefits they fund important to maintain, as Republicans would have us believe? The balance of the evidence is on Obama's side. In fact, it is a landslide: for each dollar spent, 14 percent of the value reaches beneficiaries and 86 percent of it goes elsewhere (profit or cost)." Cutting the subsidies, he says, "should be a no-brainer."
In its August, 2009 study "Bending the Curve," the Brookings Institute stated that a key strategy for reducing the cost of medical care in the U.S. is to reform Medicare Advantage. The report states:
"Existing … overpayments for Medicare Advantage should also be reformed to improve incentives for lowering costs."
Specifically, the Brookings Institute proposed that the following three steps be taken to lower costs by promoting competitive bidding under Medicare Advantage:
• Set local benchmarks at the average of bids, with plans bidding below the benchmark keeping the full difference and plans above the benchmark collecting the difference in additional premiums.
• Establish a significant quality bonus for attaining measured quality standards, with the full bonus returned to enrollees in enhanced benefits.
• Consider a transition to including Medicare fee-for-service in the bidding system.
In a report issued September 29, 2009, assessing the Senate Finance Committee bill (the Baucus bill), the Brookings Institute gave the Baucus bill good marks on this score, noting that the bill:
"transitions to a Medicare Advantage competitive bidding system."
The bill currently before the Senate, the Patient Protection and Affordable Health Care Act, introduced in the Senate on November 18, 2009, by Majority Leader Harry Reid, retains this reform. The November 18, 2009 CBO report on the effect of the Reid bill on the federal budget estimates that, if enacted, the law would produce savings from Medicare Advantage programs in the amount of $118 billion over a 10-year period. The CBO report states that the bill would achieve these savings by:
Setting payment rates in the Medicare Advantage program on the basis of the average of the bids submitted by Medicare Advantage plans in each market, yielding savings of an estimated $118 billion (before interactions) over the 2010–2019 period.
The CBO report on H.R. 3962, the health care reform bill that was adopted by the House of Representatives achieved even greater savings under Medicare Advantage. In its October 29, 2009 report, the CBO stated that the House bill, if enacted, would reduce expenditures on Medicare Advantage by $170 billion over ten years. The report states:
Setting payment rates in the Medicare Advantage program on the basis of Medicare spending per beneficiary in the fee-for-service sector and changing the way that payments to Medicare Advantage plans reflect differences in the health status of enrollees, yielding savings of an estimated $170 billion (before interactions) over the 2010–2019 period.
I am not an economist – I don't even play one on television – but it makes sense to to me to eliminate subsidies that do not improve patient care. There are nearly 50 million Americans without any health insurance, and even more Americans who are underinsured. We cannot afford to throw money away on what amounts to a boondoggle for the insurance companies. Medicare Advantage should be preserved, but it should be made available on the basis of competitive bidding without additional government bonuses.
Visit Professor Huhn's website on health care financing reform for links to information about proposed legislation, studies and reports, public agencies, and private organizations concerned with this issue.
