Medicare Advantage Isn’t Reducing Health Care Costs
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The Fiscal Times
April 16, 2014

Bowing to election-year and industry pressures, the Obama administration this month quietly rescinded cuts to the Medicare Advantage program and boosted subsidies to insurers.

If the administration, and Congress for that matter, were serious about attacking health care costs, this was a turn into a blind alley.

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Medicare Advantage (MA) is a private, fee-for-service and managed care program within Medicare. Instead of traditional Medicare, in which patients can go to any doctor and be charged for every visit, more MA benefits are provided, although the doctor networks may be restricted.

While the original intent of MA, or “Medicare Part C,” may have been to reduce health care costs through more supervised care, the program has been heavily subsidized by taxpayers. The subsidies for insurers participating in the program have been a continuing source of profits for the industry, which has lobbied fiercely to protect their handouts.

A provision in the Affordable Care Act (ACA) called for cutting the Part C subsidies by 2 percent this year. But intense lobbying by the health insurance industry pressured the administration to not only roll back the cuts, but increase the subsidies by 0.4 percent — the second consecutive year the payments have been boosted.

The ACA’s proposed cuts amounted to paring some $200 billion from the program, which was vigorously opposed by America’s Health Insurance Plans, an industry trade association. Some 16 million Americans are covered through MA, or roughly 30 percent of all Medicare patients.

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The industry’s aggressive defense of MA was so comprehensive that it launched a “Coalition for Medicare Choices,” which it heavily funded and claimed was a “grassroots” senior’s group representing 1.5 million beneficiaries. This was the industry group’s claim:

“More than 14 million seniors have chosen to enroll in a Medicare Advantage plan because of the better services, higher-quality care, and additional benefits these plans provide. Seniors will see the impact of any new payment cuts in late October 2014, when they begin enrolling in their 2015 Medicare Advantage coverage. Another round of payment cuts would mean seniors learning that out-of-pocket costs are higher, benefits have been cut, provider access is restricted, and choice of plans is more limited.”

A Step in the Wrong Direction
Was the MA industry funding worth preserving in a time in which overall growth in health care costs is still unsustainable?

All told, MA has proven to be no bargain for taxpayers among Medicare’s cornucopia of offerings. MA patients are paid more per enrollee than those in traditional Medicare, reports the Associated Press.

Moreover, the U.S. Government Accountability Office (GAO) found last year and in a 2010 study that Medicare may be overpaying MA insurers by as much as $3.2 billion.

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The reimbursement is based on a complex coding system involving per-patient “risk scores.” Overall, the GAO found overbilling in MA that showed that the program was consistently more expensive than traditional Medicare:

“In updating the analysis from its January 2012 report, GAO estimated that cumulative Medicare Advantage (MA) risk scores in 2010 were 4.2 percent higher than they likely would have been if the same beneficiaries had been enrolled continuously in Medicare fee-for-service (FFS).”

The ACA sought to equalize the amount paid to MA patients with payments made to traditional Medicare beneficiaries. The heath care law also sought to reduce provider costs across the board in Medicare, penciling in some $716 billion in program cuts, most of which were not directly imposed on patients.

Putting MA on an even playing field with financing traditional Medicare was seen as a sound fiscal strategy by the authors of the ACA. Although some of the recent slowdown in health care spending can be attributed to a sluggish economy, it was largely good news for Medicare.

In an outlook prepared by the Congressional Budget Office in February, the easing of Medicare spending was seen as “broad and persistent,” growing at about 6 percent annually over the next decade. That’s a positive trend as some 71 million baby boomers qualify for Medicare by 2024.

So when the administration put in place a plan to trim MA subsidies, critics of Medicare spending initially applauded the move. After all, MA wasn’t paying for itself, and, despite the government's generous subsidies to insurers, total costs rose because of added private benefits, administrative and marketing expenses.

A handful of private insurers would be unlikely to gain the same economies of scale enjoyed by traditional Medicare in terms of provider pricing.

As the more-expensive cousin of Medicare, MA was due for a fiscal haircut. While MA patients had more choices in terms of plans and options, the government wasn't saving money in program expenses. According to a 2012 MedPac report, “traditional FFS Medicare has lower administrative costs while offering beneficiaries an unconstrained choice of health care providers.”

The MedPac study also found troubling signs that MA providers weren't making the grade in health care quality measures. Regional preferred provider organizations and FFS programs “performed relatively poorly in measures of improvement or decline in physical and mental health status.”

Many of the most pronounced criticisms of MA, though, are lost in election-year rhetoric of cutbacks in a program impacting senior citizens. Fiscal restraint got shouted down in favor of re-election campaigns.

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Journalist and speaker John F. Wasik has written 14 books on subjects that range from wealth to ecology to retirement. He writes for Reuters and contributes to Forbes, The New York Times and other publications.