Privatizing Medicare
Medicare Advantage increases Medicare costs and boosts private insurers’ profits.
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
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Few politicians are willing to touch entitlements, but Nikki Haley dared to do so. A new study shows her pitch to expand the Medicare Advantage program could lower costs and improve care. Avalere, a healthcare consulting firm, analyzed utilization rates in traditional Medicare versus Advantage plans. After adjusting for disease and demographics, Avalere found that fee-for-service utilization was 12% higher for skilled nursing homes and 37% higher for hospital inpatient care in 2019.
One reason is private insurers have a financial incentive to keep patients out of the hospital by improving adherence to treatments and coordination of care.
—Editorial Board, “Nikki Haley’s Medicare Advantage: A new study shows insurer competition reduces costs,” Wall Street Journal, Nov. 24, 2023.
It’s hardly surprising that the Wall Street Journal editors would endorse Nikki Haley’s proposal to expand Medicare Advantage, which allows seniors to receive Medicare benefits from private insurance companies. What the Republican presidential candidate had to say about the promise of Medicare Advantage curing what ails Medicare is hauntingly similar to the words Republican President George W. Bush used in 2003 to christen the launch of expanded Medicare Advantage, or private insurance Medicare. In his 2003 speech to the American Medical Association (AMA), Bush assured seniors that “the element of choice” would provide them with “low-cost and high coverage managed care plans” that put “the patient-doctor relationship [at] the center of good medical care.” And over the years, Bush’s promises were repeated to justify different Republican proposals to further increase the role of for-profit insurance companies in administering Medicare.
The ABCDs of Medicare
Medicare began insuring the health care of those 65 years and older on July 1, 1966. In 2023, Medicare covered about 65 million seniors. Traditional Medicare consisted of its hospital insurance, Part A, which covered hospitalization (and hospital-provided services) and Part B, medical insurance, which covered physician-provided services. Part B beneficiaries pay a monthly premium, with a discount for low-income seniors. Medicare pays Part A and Part B health care providers on a fee-for-service basis.
Part D was added to Medicare in 2003. It consists of voluntary prescription drug coverage plans. Enrollees pay a monthly premium to Medicare (with high-income enrollees making an additional payment). Medicare then pays the drug company a fixed amount per enrollee.
Medicare Part C is also known as Medicare Advantage—“a Medicare-approved plan from a private company that offers an alternative to Original Medicare for your health and drug coverage,” according to the Medicare.gov website. These plans include Part A, Part B, and usually Part D. Medicare in turn pays these private insurers a fixed sum for each enrollee in their plan.
But those promises never came to pass. “Medicare Advantage penetration,” as the Wall Street Journal calls it, surely did occur. The share of Medicare beneficiaries enrolled in these private insurance plans increased from 13% in 2004 to 33% in 2017, to roughly 50% in 2023. Nonetheless Medicare Advantage never lowered the cost of Medicare, regularly interfered with the patient-doctor relationship by denying coverage that traditional Medicare covered, and never made a demonstrable improvement in the quality of care. On the other hand, Medicare Advantage sure did boost insurance company profits.
Haley’s proposal would make it no different. But don’t take my word for it. A slew of independent health care studies, as well as studies by the inspector general of Health and Human Services and by MedPAC, which advises Congress on Medicare issues, show that Haley’s claims about the benefits of privatizing Medicare, which the Wall Street Journal editors readily endorsed, just aren’t the reality.
Lower Utilizations Rates Mean Less Health Care
Let’s begin with the Avalere study that the editors use to support Haley’s proposed expansion of Medicare Advantage. You might first want to take a look at the guide to Medicare in the sidebar, “The ABCDs of Medicare,” on the next page.
Alavere, a group funded by the American Health Insurance Plans (a trade association for health insurance companies), found that in 2019 the utilization rates for skilled nursing homes and for hospital in-patient care of Medicare Advantage beneficiaries were substantially lower than those of traditional Medicare beneficiaries.
But the Avalere study never says why Medicare Advantage has a lower health care utilization rate than traditional Medicare, especially for hospitalizations and nursing care. It is the Journal editors who attribute the difference to “private insurers hav[ing] a financial incentive to keep patients out of the hospital by improving adherence to treatments and coordination of care.” Medicare pays Medicare Advantage plans a lump sum per beneficiary, while traditional Medicare is paid on a fee-for-service basis. According to the editors, it’s the lump- sum payment that creates the incentive for Medicare Advantage plans to limit the care they provide.
But let’s get a couple things straight. The Avalere report did not establish a connection between Medicare Advantage’s lower utilization rates and increased efficiency or better health care services for their beneficiaries. The Center for Medicare Advocacy puts it this way, “There is no consideration given in the [Avalere] report that instead of efficiency, lower utilization could reflect stinting on appropriate, medically necessary care.”
It’s “a Crapshoot”
Diane Archer, the founder of the Medicare Rights Center, calls picking a Medicare Advantage Plan “a crapshoot.” The core of the problem, as she sees it, is “none of us can distinguish between good and bad Medicare Advantage plans,” as she told Social Security Works in a recent interview.
There are good Medicare Advantage plans and bad Medicare Advantage plans. And Medicare does rank the performance of Medicare Advantage Plans from one star to five stars. But even MedPAC, which advises Congress on Medicare issues, allows that the current rating system “can no longer provide an accurate description of the quality of care of Medicare Advantage [plans].” One thing is clear according to Archer, “if a Medicare Advantage Plan has three or fewer stars, you should run the other way.”
Picking the wrong plan can even be fatal. In a recent National Bureau of Economic Research paper, economist Jason Abaluck and his co-authors documented the large differences in the mortality rates of Medicare Advantage plans. They found that moving beneficiaries out of the bottom 5% of plans—the worst-performing ones—could save tens of thousands of elderly lives each year.
Even Medicare advice columns in the Wall Street Journal don’t unequivocally endorse signing up for a Medicare Advantage Plan. In his Wall Street Journal article, Neal Templin’s advice was: “Medicare Advantage plans are cheaper for seniors in good health.” In good health means you don’t go to the doctor a lot and you don’t go outside the plan’s network of health care providers. Also, some Medicare Advantage plans offer vision, dental, or hearing coverage.
There is a “big catch,” however, to use Templin’s phrase. And it gets even bigger as the medical needs of seniors who had been in good health increase. As we have seen, Medicare Advantage plans can delay health care or even deny coverage that would have been available to enrollees under traditional Medicare. Beyond that, health care outside of the plan’s network is often prohibitively expensive.
But can you enroll in a Medicare Advantage plan while you’re healthy, then switch to traditional Medicare when you need costly care? Archer’s answer is “yes, but you take a big financial and health risk.” Unless you live in Connecticut, Maine, Massachusetts, or New York, insurance companies are not required to sell you supplemental Medicare insurance, called Medigap, to cover your out-of-pocket costs, if you don’t initially enroll in traditional Medicare.
Archer’s bottom line is: “If you can afford supplemental coverage in traditional Medicare, you will be able to get the care you need.”
And there is plenty of evidence that Medicare Advantage plans do stint on necessary care. A recent U.S. Department of Health and Human Services’ Office of the Inspector General report worries that capitated (lump sum per beneficiary) payments create “the potential incentive for Medicare Advantage Organizations (MAOs) to deny beneficiary access to service and deny payments to providers in an attempt to increase profits.” And there is clear evidence of that incentive at work. The inspector general’s report found that MAOs denied 13.3% of authorization requests that met Medicare coverage rules and 18.1% of payment requests that met Medicare coverage rules.
Republican Senator James Lankford of Oklahoma told Politico that some hospitals in his state will no longer take Medicare Advantage plans because they “can’t afford the constant chasing from all the denials.” Also late in 2023, Becker’s Hospital Review reported that “hospitals are dropping Medicare Advantage plans left and right.”
Lower Costs for Whom?
Whatever Medicare Advantage plans did to reduce costs, they have not created a dime’s worth of savings for the Medicare program. Medicare has never spent less per enrollee on Medicare Advantage beneficiaries than it has per enrollee on traditional Medicare beneficiaries. As MedPAC has documented, since 2004 Medicare spending on Medicare Advantage beneficiaries has exceeded that of traditional Medicare each year by at least 1.5% and by as much as 12%. In 2019, spending on Medicare Advantage enrollees was $321 (or 3%) higher per person than if the enrollees had been covered by traditional Medicare. Physicians for a National Health Program found the overpayments to Medicare Advantage plans to be yet larger. They estimated that in 2022 Medicare overpaid Medicare Advantage providers by a minimum of 22% and potentially as much as 35%. Those higher payments over the years have placed considerable stress on the Medicare trust fund.
The traditional fee-for-service model for Medicare spending establishes the benchmarks for determining Medicare Advantage payments per enrollee. But three systematic distortions push up the amount Medicare spends on Medicare Advantage patients above the cost of the health care patients receive and what Medicare pays for traditional Medicare patients. First, beneficiaries who join Medicare Advantage plans are generally healthier and therefore less costly than those in traditional Medicare. Second, less healthy and more costly patients move out of Medicare Advantage into traditional Medicare, where they are not restricted by networks. The final factor is that, despite being less sick on average, Medicare Advantage patients typically have charts with a larger number of diagnoses than the charts of patients enrolled in traditional Medicare. More diagnoses usually push up a patient’s risk score, and that inflates the payments Medicare Advantage insurers receive per enrollee (this phenomenon is known as “coding intensity”). MedPAC estimated that “between 2007 and 2023, Medicare Advantage higher coding intensity generated nearly $124 billion in excess payments.”
Those overpayments widened the gross margins (the amount by which total premium income exceeds total claims costs per enrollee per year) that insurance companies made on their Medicare Advantage plans. The Kaiser Family Foundation, an independent provider of health policy research, found that the gross margin of insurance companies’ Medicare Advantage plans was $1,730 per enrollee in 2021. That was at least double the margins of individual/non-group plans, fully insured group/employer plans, and Medicaid-managed care plans. In March 2023, two members of the Senate Finance Committee, Senator Elizabeth Warren and Senator Jeff Merkley, wrote to each of the chief executive officers of the seven health insurance companies that cover 70% of the Medicare Advantage market, asking questions about the source of their outsized margins, which have led to skyrocketing profits. Their letters read in part: In 2022, the seven major Medicare Advantage health care insurers—UnitedHealthcare, CVS/Aetna, Cigna, Elevance Health, Humana, Centene, and Molina—brought in revenues of $1.25 trillion and reported total profits of $69.3 billion, a 287% increase in profits since 2012. But rather than investing in benefits for patients, these seven health insurers instead spent $26.2 billion on stock buybacks.
None of this was news to the Wall Street Journal editors. At the end of 2023, the Journal published an article warning that “payments from the government are going to be less favorable starting next year (2024).” It added that “the changes came after insurers were accused of gaming the system by overcharging the government through coding practices that overstated patient sickness.”
More Medicare Benefits for More Seniors
Sheared of its free-market ideology, Haley’s proposal to save Medicare from insolvency amounts to nothing more than restricting the medical care of all Medicare beneficiaries as much as Medicare Advantage plans have already. Beyond its cruelty, not a dollar of this cost-cutting will generate savings for Medicare. Instead, it will further boost the profits of insurance companies that are already grossly overpaid through their Medicare Advantage plans.
We can surely do better. Proposals that would reduce the overpayment of Medicare Advantage would generate savings for Medicare instead of boosting the profits of private insurers. Correcting for Medicare Advantage overpayments due to coding intensity alone would reduce Medicare spending by somewhere between $198 billion and $385 billion over 10 years, according to the Congressional Budget Office (CBO).
And those savings can be put to good use to get more Medicare benefits to more seniors. In 2019 the Democratic-controlled House of Representatives passed a bill that would have added comprehensive dental, hearing, and vision coverage to traditional Medicare coverage. At the time, the CBO estimated that the additional benefits would have increased Medicare spending by $358 billion over the next 10 years. The high estimate of the savings from correcting for coding intensity just about covers that. In addition, offering dental, hearing, and vision coverage would persuade more seniors to enroll in traditional Medicare instead of Medicare Advantage, yielding yet more savings for the Medicare program.
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