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Are Medicare Advantage Plans Overpaid and Corrupt?

Medicare Advantage consists of private plans in which Medicare beneficiaries can choose to enroll. They were made more popular by the Medicare Modernization Act of 2003, which also introduced Medicare’s drug benefit (Part D). If not for Medicare Advantage, beneficiaries would be stuck in the traditional Medicare Part A (physician) and Part B (hospital) plans, where the federal government determines how much to pay providers according to bureaucratic formulae. It’s sort of like Gosplan, the old Soviet economic pricing and planning mechanism.

To escape this fate, one third of Medicare beneficiaries now choose Medicare Advantage plans. Obamacare (“the ACA”) was supposed to squeeze those seniors out of their plans in order to finance Obamacare. However, when the time came, the Administration balked. Meghan McCarthy of Morning Consult explains this “Potomac Two-Step“:

The approach, two years in a row, has been that CMS issues a proposed rate in February with very tough reductions, a proposition that rallies insurers and members on both sides of the aisle to vehemently oppose the cuts. After much hand-wringing and commenting, the administration arrives at a much friendlier number in the final release.

Medicare Advantage plans are popular for a number of reasons. Most importantly, they provide better care than traditional Medicare. Joseph Newhouse and Thomas McGuire review this in an academic journal. It is ably summarized by Austin Frakt in the New York Times UpShot blog:

Medicare Advantage plans — private plans that serve as alternatives to the traditional, public program for those that qualify for it — underperform traditional Medicare in one respect: They cost 6 percent more.

But they outperform traditional Medicare in another way: They offer higher quality.

The quality argument is hard to combat, but some try nevertheless. Thomas Huelskotter, writing at ThinkProgress, goes way back to a 2002 article which reviewed the performance of HMOs in the old Medicare + Choice market during 1997 through 2001. However, this was not the same market as the current Medicare Advantage market, which was reformed and re-launched as a consequence of the 2003 law. In the 1990s, many Americans, including those in employer-based and other private health plans, resisted and eventually rejected the limits of managed care as practiced at the time.

And how about that estimated overpayment of 6 percent? Medicare Advantage’s critics claim that it is difficult to measure differences in quality outcomes between traditional Medicare and Medicare Advantage, and they are surely right. However, they have no problem promoting the amazingly precisely estimated overpayment of 6 percent – although that estimate also relies on adjusting actual costs for beneficiaries’ health status, age, place of residence, etc.

Further, Medicare Advantage has positive spillover effects. In Massachusetts, Medicare Advantage’s increased uptake is associated with lower hospitalization costs in traditional Medicare (likely because providers re-organize their care delivery for all Medicare beneficiaries, not just those with Medicare Advantage). This somewhat reduces the overall costs of Medicare.

This is not to say that Medicare Advantage is perfect. Other research indicates that less than half the value of the increased payments is passed through to Medicare beneficiaries. Most of it is captured by insurers. This is not surprising: Because taxpayers are funding the benefit, beneficiaries are not motivated to demand as much value as is being paid for.

As with any government program, there is some fraud. Fred Shulte of the Center for Public Integrity has concluded that some Medicare Advantage plans overbilled $70 billion in seven years, which they achieve by “upcoding” — reporting to the government that their beneficiaries were sicker than they actually were.

However, fraud and overcharging are also rampant in traditional Medicare, amounting to an estimated $60 billion per year, of which only $4.3 billion is recovered. This is despite an aggressive audit program that suffers from bureaucratic inefficiencies common to government operations.

Medicare Advantage fraud is often ambiguous. For example, some plans are eager to send physicians on house calls to patients, hoping to diagnose a condition for which they can overcharge Medicare. The typical government response, of course, would be to forbid Medicare Advantage plans from covering house calls.

There is a better way to further reform Medicare Advantage to ensure payments are responsible and reduce fraud: Give patients more control of the money spent on them. Similar to that which we recently recommended for Obamacare’s proposed “copper plans” in the health-insurance exchanges, Medicare should give some Medicare Advantage subsidies to seniors directly, through Health Savings Accounts, instead of giving one hundred percent of the taxpayers’ contribution to insurance companies.

NCPA Health Care Blog


John R GrahamJohn R. Graham is a Senior Fellow at the Independent Institute as well as NCPA. As an expert on individual choice and limited government control over medicine, Graham speaks frequently on health reform on radio and television, and at meetings in the United States, Canada, and Europe.

 

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