Medicare Advantage – An Advantage to Whom?

The Obama Administration has proposed further cuts in payments to Medicare Advantage (MA), the subsidized private insurance option for Medicare eligible seniors. This plan has come under fire from both sides of the aisle, but past evidence has suggested that paying private insurers to cover Medicare enrollees is more expensive than traditional fee-for-service Medicare run by the government. The higher rates that the government pays to MA insurers have allowed some extra benefits for MA enrollees in the form of additional services or reduced cost sharing. However, it is unclear what proportion of spending on MA is passed on to MA enrollees in the form of cost savings, what proportion is captured by the insurance companies, and what proportion is passed on to a third party such as healthcare providers or advertisers.

The payment level for MA plans is county-specific and set by a statutory formula that depends partly on the county-level fee-for-service rates that Medicare pays to providers. In order to encourage insurance companies to participate in the program, there is also a payment floor, a minimum payment countrywide. In 2001, the payment floor was increased 10.5 percent in counties within metropolitan areas containing at least 250,000 residents but kept the same below that threshold. Wharton School economists Mark Duggan, Amanda Starc, and Boris Vabson analyze differences in otherwise similar counties on either side of this threshold to compare changes in insurer participation, enrollee benefits, and enrollee satisfaction that are due to the MA payment changes.

Unsurprisingly, they find that the increased payment in counties subject to the payment floor induces additional insurers to enter the MA market. The 10.5 percent increase in base payments, from $662 to $732, is associated on average with an additional 1.9 insurers participating in the market in each county. In turn, counties with higher payments to MA plans also have, on average, an additional 7.0 percentage point increase in enrollment in MA HMO and PPO plans.

These results seem in line with efficient, competitive markets; an increase in demand results in an increase in supply. However, to be consistent with this concept, we should also see full or substantial pass-through of the extra spending to beneficiaries. If the market is truly competitive, then firms will have to compete with each other by increasing consumer surplus through greater benefits, quality, or reduced out-of-pocket spending to attract additional customers.

However, when the researchers analyze differences in benefits, quality, and costs to MA beneficiaries in the markets affected by the higher baseline, they find little evidence of increased consumer surplus. To estimate the effect of the increased payments, the authors use a linear regression with a dummy variable for counties affected by the higher floor, along with a number of other controls. They find that there is no statistically significant estimate indicating that higher base payments lead to lower enrollee spending on premiums, cost-sharing, or out-of-pocket prescription drug costs. Enrollee self-reported satisfaction with their plans, self-reported health status, and utilization data provide no evidence of increased satisfaction or higher rates of utilization. This indicates that consumers are not receiving additional benefits or quality while enrolled in MA plans (at least not to the extent that survey data and utilization measures can measure these differences.)

Taken together, the results lead the authors to determine with a confidence of 95 percent that at least 55 percent of the increased MA payments are not making it into consumers’ pockets. This is inconsistent with perfect competition and raises the question of how MA insurers are able to induce increased demand for their services. The researchers further find that an additional $100 in the government benchmark payment is associated with a $5 increase in insurer spending on advertising. This means that instead of offering additional benefits to attract customers, insurers advertise to entice Medicare beneficiaries to opt into their private plans. Beneficiaries are not necessarily receiving a superior product, but the government is paying more for their coverage. As a final piece of analysis, the authors attempt to use the change in insurer stock price to quantify the proportion of increased spending captured by the insurance companies themselves and estimate that insurers themselves capture 22 percent of increased payments.

Altogether, the authors find relatively little evidence of increase in benefits to consumers through Medicare Advantage. While their analysis does not consider specific benefits added, the underlying consumer sentiment about individuals’ MA plans along with utilization and outcome data do not suggest that consumers largely prefer MA to traditional Medicare. The authors’ analysis suggests that MA insurers are able to induce increases in enrollment in a large part via advertising, and that insurers themselves also capture a significant portion of increased payments. This calls into question the efficiency of contracting with private firms to provide Medicare benefits to seniors. While seniors are benefitting in some way from the extra benefits provided by MA, it would likely be more beneficial to seniors if the government simply increased benefits in traditional Medicare.

Article Source: Mark Duggan, Amanda Stark, and Boris Vabson, “Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program,” NBER, Working Paper, March 2014.

Feature Photo: cc/(jennyjo71)