Opinion Column

Medicare Advantage: You Get What You Pay For

The Obama administration seems worried. In an election year, any change to Medicare that adversely affects beneficiaries is a political liability for incumbents. And big changes to Medicare are coming, beginning with Medicare Advantage, the program that provides private insurance alternatives to traditional fee-for-service Medicare, the program’s public option.

Last Monday, private insurers that offer Advantage plans submitted their 2011 bids, estimates of the cost of providing a fixed set of basic Medicare benefits next year. It is through this annual bidding process that the generosity of coverage and level of cost-sharing for each plan is established. With 2011 government payments to plans fixed at 2010 levels by the new health overhaul law, it is likely that beneficiaries will pay more to get less from Advantage plans next year. The bids will reveal how much.

According to the Wall Street Journal, in advance of the bid deadline, Department of Health and Human Services Secretary Kathleen Sebelius sent a letter to insurance companies warning them not to dramatically increase premiums or cost-sharing of Advantage plans. If they do, they run the risk that Sebelius will reject their proposals.

Despite the secretary’s threat, it’s inevitable that Advantage plans will adjust their premiums and cost-sharing upward in the long run, if not in the short run. Over the next few years, the new health law gradually reduces Advantage payments from today’s generous levels that are about 15% above fee-for-service costs. The lower levels will depend on local costs and plan quality.

That’s good news for taxpayers, even if it isn’t welcome news to Medicare beneficiaries. According to the Congressional Budget Office, the reduction in plan payments is expected to save over $100 billion in the next decade. The lower spending on Advantage plans inevitably will lead to reductions in plan availability. Some beneficiaries will have access to fewer plans, some to none at all, a fact illustrated by a Health Care Financing Review paper I co-authored.

Our earlier paper in the International Journal of Health Care Finance and Economics indicates that even where plans continue to be offered, their benefits will be less generous as government payments decrease. Though beneficiaries will object to the loss of benefits, they actually don’t value those benefits anywhere near their full cost to taxpayers. In a study published last year, also in the International Journal of Health Care Finance and Economics, we found that for the benefits provided by each additional dollar paid to Advantage HMOs since 2003, beneficiaries would have paid just $0.14 out of their own pocket. In monetized terms, a dollar saved makes a Medicare beneficiary worse off, but by far less than one dollar.

This relatively poor return of value on taxpayer dollars is why I support reductions in Advantage payments. The administration and congressional Democrats have chosen the right path for Advantage payment policy. Having done so, they are now faced with a political problem. How can they avoid the potential ire of disgruntled Medicare beneficiaries? It will be hard, if not impossible.

Sebelius’ letter is a good try. It’s an attempt to bully plans into self-subsidizing their products or finding creative ways to hide the reduction in generosity this year. If she succeeds, then she’ll have achieved a short-term political victory. But she’s facing an uphill battle.

In the long run, there’s no getting around the fact that Advantage plans will shrink in generosity and availability. Anything else would defy a fundamental law of economics that also happens to be a fundamental law of politics: you get what you pay for.

Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at The Incidental Economist.