Health Policy$ense

Medicare Advantage to Whom?

In a new NBER working paper, LDI Senior Fellows Mark Duggan, Amanda Starc and Boris Vabson ask the question, “Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program.”  Their answer is unequivocal:  mostly insurers (in the form of higher profits), not consumers (in the form of better coverage). They set the stage:

For most Medicare recipients, the federal government directly reimburses hospitals, physicians, and other health care providers on a fee-for-service basis. However, for 15.4 million recipients, the federal government instead contracts with private insurers and other organizations to coordinate and finance medical care as part of the Medicare Advantage (MA) program. This paper examines the MA market and asks a central question: how does the quality of private provision change as the generosity of the government contract increases?

Using variations in the payments to Medicare Advantage plans by county, they found that greater reimbursement induces more insurers to enter the MA market, creates more competition in a market, and increases the share of Medicare recipients enrolled in the program.

But these effects do not seem to benefit Medicare beneficiaries.  The study finds that less than one-fifth of the additional funding is passed on to beneficiaries financially, in the form of lower monthly premiums or reduced out of pocket costs.  There are no differences in the use of primary or specialty services, patient satisfaction, or self-reported health status.

Well, you might ask, how are plans increasing enrollment in the program if they are not competing on price or quality?  The researchers have an answer for that, too.   They found that greater payments to plans produce large increases in plan spending for advertising. 

Critics of the Medicare Advantage plan have seized upon these findings, calling Medicare Advantage, “a ripoff that fattens the health insurance industry.” Duggan, Starc and Vabson are more circumspect:

While we found no direct evidence that benchmarks meaningfully benefit consumers, such benefits could exist. Given that MA [enrollment] rates increase alongside reimbursements, a revealed preference argument would imply that MA is more valuable to consumers when the benchmark [payment] is higher. The impact on consumer surplus may also depend on the welfare consequences of advertising. Furthermore, higher benchmarks may improve treatment quality and health outcomes in ways that we are unable to measure. All of this notwithstanding, the measures of plan financial characteristics and quality that we use suggest that only about one-sixth of the policy-induced increase in plan reimbursement is captured by consumers.

They note that these results have implications for a key feature of the Affordable Care Act, which will reduce reimbursement to MA plans by $156 billion from 2013 to 2022. The reductions are scheduled to grow steadily over time, and further cuts have been proposed, prompting sharp disputes about the impact on Medicare beneficiaries.  While this study addresses the question, “Who benefits when government pays more?” it leaves open the current policy question, “Who is harmed when the government pays less?”