By Ken Terry, David Muhlestein
Health Affairs Blog, March 11, 2021
Recently, a number of health policy experts have suggested that the best route to universal coverage might be to expand Medicare Advantage (MA) rather than enact Medicare for All—in other words, a private-sector instead of a government solution.
What We Know About Medicare Advantage
We know that MA enrollment is growing much faster than that of traditional Medicare. By the end of 2020, more than 40 percent of Medicare beneficiaries were enrolled in MA plans, and the Congressional Budget Office has forecast that 47 percent of beneficiaries will be enrolled in these plans by 2029. In short, we’re witnessing the rapid privatization of Medicare.
Why is this happening? Simply put, MA plans offer beneficiaries a better deal than traditional Medicare. Instead of having to buy a Medigap plan (at an average cost of $172 per month) to cover costs that traditional Medicare doesn’t cover, as well as a Part D prescription drug plan ($46), MA enrollees pay only a small monthly premium ($40 on average in 2019), and 56 percent of enrollees pay no premium on top of their Medicare Part B premium. In many plans, they get some level of dental, vision, and hearing coverage, which is missing in traditional Medicare. here’s also a statutory annual limit on out-of-pocket costs, which is not part of traditional Medicare.
On the other hand, MA networks are restricted, and some are very limited. MA enrollees who become seriously ill may have to pay hefty fees to out-of-network providers.
Enrollment in MA plans tends to increase by the age of beneficiary up through the late 70s and then decreases beyond that point.
We know that Medicare pays MA plans slightly more per enrollee than it pays for comparable traditional Medicare enrollees, after accounting for quality bonuses and diagnostic coding intensity. This intensity represents the additional diagnoses that many physicians document for MA members but not for traditional Medicare beneficiaries. MA plans have a financial incentive to ensure that their providers record all possible diagnoses, since higher enrollee risk scores result in higher payments to the plan.
The close correlation of MA payments to traditional Medicare spending is built into the program. “Currently, all savings to the [Medicare] program that come from MA must be generated through FFS [fee for service] spending reductions,” noted MedPAC.
MedPAC further commented that MA plans are expected to be more efficient than traditional, or fee-for-service, Medicare, because they actively manage care and have an incentive to keep costs down.
We know that per-enrollee costs for MA are rising much faster than per-enrollee costs in traditional Medicare. In 2019, per-enrollee MA costs grew 6.3 percent, compared to 2.4 percent for traditional Medicare. This was the fourth year in a row that MA cost growth per member exceeded that in the traditional program.
We know that MA is dominated by a few large companies, and that it is a profitable line of business. At the end of 2020, the four largest MA companies accounted for more than 60 percent of total enrollment, and the 15 largest accounted for more than 80 percent. MA has also been very lucrative for many private health insurers. Researchers from the Commonwealth Fund found that between 2016 and 2018, annual gross margins in the MA market averaged $1,608 per covered person, roughly double the insurers’ margins in the individual and group commercial markets.
What We Don’t Know About Medicare Advantage
We don’t know how to explain the faster per-enrollee cost growth in MA compared to traditional Medicare. But if overall cost growth were to blame, why didn’t per-beneficiary spending rise just as fast under traditional Medicare?
We don’t know whether or not MA offers better quality of care for beneficiaries than traditional Medicare. A number of studies suggest that it does. Overall, however, a “definitive finding [that MA offers superior quality] is not possible with currently available data,” MedPAC stated in 2019.
Another marker of quality is whether Medicare beneficiaries remain in MA plans when their health deteriorates. On this basis, there is reason to question whether MA plans offer higher quality. One paper found that MA members who had been hospitalized at least once had a higher rate of switching back to traditional Medicare than did other MA enrollees. The same was true for users of home care and long-term nursing home care.
While MA plans save money for beneficiaries, we don’t know whether they create savings for Medicare. As noted, the plans are paid, on average, slightly more than traditional Medicare spends on similar beneficiaries in the same region.
According to health insurers, MA plans spend 20 percent to 40 percent less on care than traditional Medicare does. The question is, if these plans are being paid at above Medicare rates, where does the rest of the money go? Some of it is being invested in extra benefits and reduced or zero plan premiums. All of that comes out of the 50–70 percent of the difference between a plan’s bid and its CMS-determined benchmark that CMS rebates to the plan. For many plans, a meaningful share of the savings consists of profits; there are also administrative and other overhead expenses, but it is unclear what factors explain the whole gap between rebates and plan savings.
Out-of-network physicians also must accept traditional Medicare rates. A study of payments to physicians for mid-level office visits and electrocardiograms found little difference between MA and traditional Medicare rates. What’s unclear is how much MA plans pay in-network doctors in quality bonuses and shared savings—not to mention risk contracts. Considering that MA network doctors have incentives to manage care and to code every potential health issue, they likely are receiving something beyond a flat traditional Medicare payment. Anecdotal evidence indicates that these bonuses can be quite substantial in some cases.
MA plans include health maintenance organizations and preferred provider organizations, both of which use standard managed care techniques to varying extents. Whether tools such as prior authorization and utilization review result in skimping on necessary care is unclear. While there is evidence of lower use of services in MA plans, compared to traditional Medicare, that doesn’t mean that the omitted services are necessarily of high value.
In conclusion, it is not clear that Medicare Advantage for All would help bend society’s cost curve more than Medicare for All or other policy proposals. In fact, the current evidence suggests that MA plans have not saved Medicare any money relative to traditional Medicare. To the extent that they lower costs, the lion’s share of those savings seems to be flowing to insurance companies, partly in the form of profits. Policy makers should consider whether this is the direction in which they want health care financing to go.
By Don McCanne, M.D.
For those who might be considering that private Medicare Advantage for All is a better way to go than single payer Medicare for All, you need only to read the concluding excerpt above: “In fact, the current evidence suggests that MA plans have not saved Medicare any money relative to traditional Medicare. To the extent that they lower costs, the lion’s share of those savings seems to be flowing to insurance companies, partly in the form of profits.”
Why would we want to keep the private insurers in the loop? Shouldn’t our funds all be spent on patient care instead?
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