November 15, 2019

Today’s Economist: Uwe E. Reinhard: The Complexities of Comparing Medicare Choices


Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

The roughly 50 million Americans covered by the federal Medicare program have a choice of receiving their benefits under the traditional, free-choice, fee-for-service Medicare program or from a private, managed-care Medicare Advantage plan. The private plans have a steadily increasing number of enrollees — currently 13 million, or 27 percent of beneficiaries.

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A fundamental question that has engaged health-policy researchers and commentators for some time is whether coverage of Medicare’s standard benefit package under Medicare Advantage plans is cheaper or more expensive than it is under traditional fee-for-service Medicare.

The answer is yes.

At the risk of going over ground already covered in Economix and in the scholarly literature on the subject, this answer may warrant some explanation.

The latest round in the debate over the question was begun in August 2012 by Zirui Song, David M. Cutler and Michael E. Chernew in their paper “Potential Consequences of Reforming Medicare Into a Competitive Bidding System.” In that paper, the authors explored how much more above their regular Part B premiums the elderly would have had to pay in 2009 to either a Medicare Advantage plan or to traditional Medicare if the much-debated Ryan-Wyden plan for Medicare had been in place that year.

That plan would have established a Medicare Exchange — a federal version of the insurance exchanges envisaged under the Affordable Care Act — on which Medicare beneficiaries could have chosen among private health plans that would compete with traditional Medicare on the same terms, that is, on the same competitive platform.

Each private plan would have had to offer a benefit package that covered at least the actuarial equivalent of the benefit package provided by the traditional fee-for-service Medicare. Medicare’s contribution (or “premium support”) to the full premium for any of these choices, including traditional Medicare, would have been equal to the “second-least-expensive approved plan or fee-for-service Medicare” in the beneficiary’s county, whichever was least expensive. That premium support payment would have been adjusted upward for the poor and the sick and downward for the wealthy.

Drs. Song, Cutler and Chernew estimated that on the basis of a national average the second-lowest bids actually submitted by private health plans in the various counties and regions in 2009 were 9 percent below the comparable average per-beneficiary cost of traditional Medicare.

Close to 70 percent of the beneficiaries in 2009 would have had to pay more than their traditional Part B premiums to stay in traditional Medicare. About 90 percent of beneficiaries in private Medicare Advantage plans in 2009 would have paid more than they actually did in that year.

These figures suggest substantial savings for United States taxpayers, although not for beneficiaries. Mindful of the beneficiaries, the authors ended their paper with reservations about the Ryan-Wyden plan, rather than an enthusiastic endorsement.

In an acerbic comment on that paper, published in The Weekly Standard, James C. Capretta and Yuval Levin saw in the authors’ numbers strong support for Ryan-Wyden or similar market-driven plans and sharply took the authors to task for their interpretation of the data.

But so far the Ryan-Wyden plan is only theory. In fact, as is by now widely known, enrollment of Medicare beneficiaries in private Medicare Advantage plans actually has cost taxpayers considerably more than it would have cost had the same beneficiaries stayed in traditional fee-for-service Medicare. As the Medicare Payment Advisory Commission, or Medpac, observes in its March 2009 report to Congress (see Page 252):

In 2009, payments to MA plans continue to exceed what Medicare would spend for similar beneficiaries in FFS. MA payments per enrollee are projected to be 114 percent of comparable FFS spending in 2009, compared with 113 percent in 2008. This added cost contributes to the worsening long-range financial sustainability of the Medicare program.

These extra payments to Medicare Advantage plans in 2009 have been estimated at $11.4 billion.

How, then, is one to reconcile these contradictory claims over the likely benefits from competitive bidding for Medicare’s business by private health plans?

The answer can be found in the bureaucratic arrangement enacted as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

Remarkably, the Republican authors of that bill in the White House and in the Congress — usually self-proclaimed champions of market-driven competition – eschewed that approach in favor of a statutory, administrative algorithm so complex as to defy description within the space of this post (for details see this Commonwealth Fund document).

Most likely, the bureaucratic route was chosen at the behest of private insurers that would have insisted that a truly competitive approach required traditional Medicare to be treated as just another health plan competing with private plans on identical terms. In the process, however, the industry managed to extract from Congress remarkably generous terms.

Under those terms, Medicare’s benchmark for a county or region is not based on competitive bids at all but is administratively set with appeal to the average spending per beneficiary in traditional fee-for-service Medicare in the county or region in which a beneficiary resides, albeit with a variety of adjustments that push the resulting county or regional benchmarks considerably above per-beneficiary spending under traditional Medicare. Austin Frakt neatly illustrates the resulting benchmarks graphically.

In this system, the private plans do submit premium bids for a statistically average (“standard”) beneficiary in the relevant county or region, and for Medicare’s standard benefit package. These so-called standard bids are the actual bids used in the Song, Cutler and Chernew analysis.

If a Medicare Advantage plan submits for a county or region a standard bid above Medicare’s relevant benchmark, the plan is paid by Medicare a “base rate” (for the statistically average beneficiary) equal to that benchmark. It means, of course, that the plan is paid more than the relevant per beneficiary spending under traditional Medicare. The Medicare Advantage plan must then collect the difference between its bid and the benchmark from the enrollee (on top of the Part B premium the enrollee must pay in any event).

Medicare’s payment to the plan for a particular enrollee, however, is not just the “base rate.” The actual payment quite properly reflects the individual beneficiary’s actuarial risk. That multiplicative adjustment is clearly illustrated in Figure 1 of this Medpac publication, where it is called “CMS-HHS Weight.”

On the other hand, if a Medicare Advantage plan’s bid is below Medicare’s relevant benchmark, then that plan is paid its bid plus a fixed percentage of the difference between its bid and the benchmark, a so-called rebate. Most of that rebate must be spent by the plan on added benefits not in Medicare’s standard benefit package, although some undoubtedly flows into profits.

For 2012, the fixed percentage for the rebates ranges from 67 to 73 percent, depending on a quality rating score. After 2014, the fixed percentages will be 50, 65 and 70 percent, depending on the plan’s quality rating.

The table below, a reproduction of Table 12-3 of the March 2012 Medpac Report to Congress, exhibits the nationwide averages of the Medicare benchmarks, the standard bids by plans and the projected payments to plans under this complex “bidding” system. The different types of plans (health maintenance organizations, preferred provider organizations and private fee-for-service plans) were described in an earlier post. Special-needs plans concentrate on patients requiring home care or other special care. Employer plans are offered by particular employers.

Medpac, Medicare Payment Policy, Report to Congress, March 2012

It is seen that all Medicare Advantage plans together and especially H.M.O.’s do appear to bid less on average than per-beneficiary spending under traditional Medicare. That would seem to justify the argument that, on average, under genuine competition Medicare Advantage plans as a group would be cheaper than traditional Medicare.

These differentials — here two percentage points for all Medicare Advantage plans and five percentage points for H.M.O.’s — are a bit misleading, however, because the traditional Medicare spending figures include add-ons that are not part of providing health care to Medicare beneficiaries. Traditional Medicare makes payments for graduate medical education and so-called disproportionate share payments to hospitals that treat a disproportionate share of Medicaid patients or uninsured patients. Private Medicare Advantage plans do not have to make such payments.

There is the additional suspicion that even after risk adjustment, the private Medicare Advantage plans still benefit to some extent from favorable actuarial risk selection.

So the question remains: Is coverage of Medicare’s standard benefit package under private Medicare Advantage plans cheaper or more expensive than it is under traditional fee-for-service Medicare?

Readers now know why the correct answer is yes.

Whether Congress will ever have the temerity to foist upon vendors to the Medicare program truly raw price competition remains an open question. Traditionally vendors to government have preferred administered prices, for reasons evident in the table above.

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Economic View: Too Much Wishful Thinking on Middle-Class Tax Rates

Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.

That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis.

Republicans and Democrats agree on the nature of the problem, but they embrace very different solutions. My fear is that both sides are engaged in an excess of wishful thinking, with a dash of mendacity.

If Republicans had their way, they would focus the entire solution on the spending side. They say that reform of the entitlement programs can reduce their cost. The so-called premium-support plan for Medicare, from Paul D. Ryan, the 2012 Republican vice-presidential candidate, would let older Americans use their health care dollars to buy insurance from competing private plans. (Interestingly, it’s similar to the system envisioned for the nonelderly by President Obama’s Affordable Care Act.) The hope is that competition and choice would keep health care costs down without sacrificing quality.

The premium-support model may well be better than the current Medicare system, but its supporters oversell what it would be likely to accomplish. The primary driver of increasing health care costs over time is new technology, which extends and improves the quality of life, but often at high cost. Unless the pace or nature of medical innovation changes, this trend is likely to continue, regardless of structural reforms we enact for Medicare.

Democrats, meanwhile, want to preserve the social safety net pretty much as is. They balk at any attempt to reduce this spending, including even modest changes like altering the price index used to calculate Social Security benefits. They focus their attention on raising taxes on the most financially successful Americans, contending that the rich are not paying their “fair share.”

Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should.

Here are some facts, so you can judge for yourself:

In 2009, the most recent year for which data are available, the richest 1 percent of Americans paid 28.9 percent of their income in federal taxes, according to the Congressional Budget Office. (That includes income taxes, both individual and corporate, and payroll taxes.) Members of the middle class, defined as the middle fifth of households, paid 11.1 percent of their income in taxes.

Some of this difference in tax rates is attributable to temporary tax changes passed in response to the recent recession. But not all. In 2006, before the financial crisis, the top 1 percent paid 30 percent of their income in taxes, compared with 13.9 percent for the middle class.

These data suggest that the rich are not, as a general matter, shirking their responsibilities to support the federal government. To me, the current tax system looks plenty progressive. Others may disagree.

One point, however, cannot be disputed: Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done.

Which brings us back to the middle class. When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans. This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.

To be sure, the path ahead is not easy. No politician who wants to be re-elected is eager to entertain the possibility of higher taxes on the middle class. But fiscal negotiations might become a bit easier if everyone started by agreeing that the policies we choose must be constrained by the laws of arithmetic.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to Mitt Romney in the 2012 presidential campaign.

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