The Efficiency Consequences of Health Care Privatization: Evidence from Medicare Advantage Exits

By Mark Duggan, Jonathan Gruber, Boris Vabson
The National Bureau of Economic Research, October 2015
NBER Working Paper No. 21650


There is considerable controversy over the use of private insurers to deliver public health insurance benefits. We investigate the efficiency consequences of patients enrolling in Medicare Advantage (MA), private managed care organizations that compete with the traditional fee-for-service Medicare program. We use exogenous shocks to MA enrollment arising from plan exits from New York counties in the early 2000s, and utilize unique data that links hospital inpatient utilization to Medicare enrollment records. We find that individuals who were forced out of MA plans due to plan exit saw very large increases in hospital utilization. These increases appear to arise through plans both limiting access to nearby hospitals and reducing elective admissions, yet they are not associated with any measurable reduction in hospital quality or patient mortality.

From the introduction

The growing privatization of Medicare has been motivated by potential efficiencies from the Medicare management provided by private insurance companies. This is a particularly interesting topic in the context of Medicare Advantage, where private insurers provide coverage side-by-side with the government system.

… we find that there is a substantial rise in inpatient hospital utilization after MA plan exit. We estimate that previous MA enrollees see their utilization of the hospital rise by about 60%, when moving back to the traditional FFS plan. This estimate is comparable to the corresponding estimate of 65% from the RAND Health Insurance Experiment of the 1970s, which randomly assigned patients to managed care plans. The finding is robust to specification checks and appears to be long-lasting, so that it does not simply reflect pent-up demand that caused a temporary increase in utilization. The increases appear across all types of hospitalizations, but are particularly pronounced for elective visits. We also find substantial reductions in the average distance traveled to the hospital when patients exogenously switch from MA to FFS following plan exit. This suggests that the mechanisms for lowering costs under MA plans are both reduced hospital availability and greater restrictions on elective care.

From 3.3 Quality Impacts

To measure the quality of care at the hospital level, we turn to two sets of standardized measures from the CMS Hospital Quality Initiative database. The first set of metrics consists of process measures…

Using these measures, we do not see any consistent evidence of moving to higher quality hospitals, as seven of the nine measures are insignificant; further, one of the significant coefficients suggest higher quality (improved process for pneumonia) while the other suggests lower quality (worse outcomes for heart failure). Moreover, all of the coefficients are very small relative to mean values and precisely estimated, ruling out meaningful impacts.

We next turn to more direct process measures of outcomes created from our discharge data. One such measure, the 60-day hospital readmission rate… Another measure, preventable hospitalizations…

When MA plans exit, we find that both measures rise – that is, plan exit does not appear to be translating to more efficient care on net that is lowering readmissions or preventable admissions. The odds of readmission, conditional on an initial hospitalization, rises by about 15% among those initially in MA plans after plans exit. Meanwhile, the odds of a given hospitalization being preventable rises by 10%. By these measures, therefore, quality is falling for those initially enrolled in MA following the exit of MA plans.

Finally, we examine the impact on mortality… Both estimates are in fact positive, suggesting that plan exit leads to higher mortality, although neither estimate is significant.

The results from this section appear to indicate that there is a sizeable inefficiency in transitioning elders out of Medicare Advantage into the FFS program. Utilization of, and spending in, the hospital rises substantially, with no consistent indication of quality improvement (although travel to the hospital is greatly reduced). If anything, we find a reduction in quality, with readmissions, preventable hospitalizations and mortality (the last insignificantly) increasing after the shift out of managed care plans.

From the Conclusions

The role of private players in public insurance is the subject of a central debate in U.S. public policy. This debate is perhaps most heated around the role of Medicare Advantage plans. Advocates claim that the higher efficiency of such private options should push the government towards expanding the role of managed care plans. Opponents point to the sizeable positive selection faced by these plans (and their high baseline reimbursement, even independent of selection) to claim that they are over-reimbursed and are costing, rather than saving, government dollars.

Central to this debate is the question of whether MA plans actually deliver care more efficiently. Our paper contributes to the literature on this point in two important ways. First, we make use of data that tracks the treatment of both traditional Medicare (FFS) recipients and MA enrollees. Second, we make use of exogenous variation in MA availability, arising from county-level exit of MA plans. Using these empirical advantages, we document sizeable increases in hospital inpatient utilization along many dimensions when MA plans exit a county. Hospital inpatient utilization rises by 60%, and total charges by more than 50%. We find that MA insurers may achieve this by reducing the use of the hospital for elective and emergency cases, and also by increasing the distance that a patient needs to travel to the nearest hospital. Moreover, we find no evidence that this is accompanied by reduced quality of care for Medicare patients when enrolled in MA; quality indicators, if anything, deteriorate when MA plans exit.

… our results suggest that there are large efficiencies from ensuring that at least some managed care option is available to enrollees. This could occur through a premium support system of the type discussed in CBO (2013), which would set up competitive exchanges through which private plans could compete with the government option. Alternatively, the government could establish a monopoly MA provider for each area, and auction off the number of MA slots for the area, in that way minimizing the reimbursement of MA plans while ensuring MA plan availability.

We will likely hear more about this study. The reports will certainly say that private Medicare Advantage (MA) plans provide greater efficiency and lower costs by reducing unnecessary hospitalizations and elective care. We may even hear that they do this while increasing quality and reducing mortality. With a more careful analysis of this article and with additional thought input, these conclusions do not seem to be warranted.

This study was of hospital utilization in regions where the sole MA plan picked up stakes and left the region. Why would a plan pull out of a region? Simply because the business prospects did not seem favorable (code language for not enough profits).

These plans were successful in reducing access to hospitals, partly by using hospitals that were a greater distance away, requiring greater travel for patients. They were also able to use managed care techniques (prior authorization, etc.) in a manner that reduced elective and emergency admissions. Even though the MA plans were paid more than what was being spent on traditional fee-for-service (FFS) Medicare patients, it still wasn’t enough, and they bailed out.

After the plans left, the patients were hospitalized at a greater rate, and costs went up. The authors of this study suggest that these hospitalizations occurred because the FFS Medicare program is not as efficient in preventing them as were the private MA plans. But couldn’t this be explained by the business success of MA plans in preventing patients from having care that was appropriate? Isn’t it more likely that chronic conditions – ubiquitous in this group – became worse and thus more expensive through the neglect imposed by the MA plans?

The authors try to dismiss this possibility by looking at measurements of quality and mortality. They report that “quality indicators, if anything, deteriorate when MA plans exit.” Yet from the CMS Hospital Quality Initiative database, they report, “we do not see any consistent evidence of moving to higher quality hospitals, as seven of the nine measures are insignificant; further, one of the significant coefficients suggest higher quality (improved process for pneumonia) while the other suggests lower quality (worse outcomes for heart failure).” By these measures, there was no quality difference.

On the other hand, they report that hospital readmissions and preventable hospitalizations both rose after the MA plans exited. They interpret this as evidence of lower quality in the traditional FFS Medicare program. But every clinician knows that readmissions and preventable hospitalizations represent a sicker patient population. Rather than being evidence of poorer quality it is much more likely that this is further confirmation of the well established adage that Medicare Advantage patients go into the plan healthy and come out sick.

They use mortality estimates that are not statistically significant to suggest that plan exit leads to higher mortality. Even if the data were powered to show an increase in mortality, is it not true that sicker populations have a higher mortality rate?

This study has the same flaws as many other studies being produced today that are supportive of the private insurance industry. They look at only a minuscule portion of potential outcomes of health care. They show that the differences of what they did measure are almost or sometimes even completely negligible. Then when drawing conclusions between the choices of whether additional care is inefficient or is beneficial, they choose the conclusion that supports the private insurance industry, even if it is a non sequitur.

In their conclusion, they suggest that the “large efficiencies” from the managed care option warrant consideration of the premium support proposal that would privatize Medicare (convert it into a market of private plans). A better interpretation of their data, based on what is best for the patient, rather shows us that we should end the experiment with private Medicare Advantage plans since they prevent patients from receiving care that they should have.