Medicare Advantage and the ‘Theft’ of $156 Billion

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In a Dec. 27 lead editorial, “Government Advantage,” the editorial writers of The Wall Street Journal wrote:

Amid the larger ObamaCare meltdown, seniors are discovering their choices are fewer, costs higher and coverage poorer too. Liberals fear the increasing popularity of Medicare Advantage, and they’re starting to gut this market alternative to their original health care entitlement before the sand runs out on President Obama’s second term. About 14 million people or 28 percent of Medicare beneficiaries choose Advantage over the government option, which is why the Affordable Care Act steals about $156 billion from the program - even as enrollment has surged 30 percent since 2010.

A theft of $156 billion should catch one’s attention, especially if government is the thief. It warrants a closer look.

For starters, what is the time frame of this $156 billion “theft”? Greater clarity on this point would have been helpful, lest readers think that this is an annual figure. In fact, it is the sum of projected future annual cuts off projected future total payments to Medicare Advantage plans over the decade 2013-2022 (see line 8 of Table 2, page 5 in this Congressional Budget Office projection).

That point aside, what the Affordable Care Act has done to the Medicare Advantage plans lies, like beauty, in the eyes of the beholder.

The story begins with the Medicare Prescription Drug Improvement and Modernization Act of 2003, which revamped the manner in which Medicare paid private health plans for Medicare beneficiaries who chose them in lieu of traditional Medicare. The program, called Medicare Risk when it was established in 1982 and rechristened Medicare+Choice in 1997, was reborn as Medicare Advantage.

I described and discussed the complicated administrative payment algorithm prescribed for Medicare Advantage by that law in a previous post. Those interested in the modus operandi of the payment system for Medicare Advantage before the Affordable Care Act of 2010 can read an official description by the Medicare Payment Advisory Commission of Congress (known as Medpac), dated October 2008. A description of the current payment system is also available.

Suffice it to note here that, on average, the payment method prescribed by the 2003 law, which took effect in 2006, has cost taxpayers substantially more per Medicare beneficiary who enrolled in a Medicare Advantage plan than these beneficiaries would have cost taxpayers in traditional Medicare. That is because Medicare has paid private plans more per beneficiary than these beneficiaries would have cost in traditional Medicare.

For the most part, these extra payments have not landed in the private plans’ profits. Instead, the plans have been required to offer Medicare beneficiaries either added benefits for those extra payments or reduced premiums for the Part B and Part D coverage that Medicare beneficiaries are required to buy under Medicare Advantage plans or traditional Medicare.

But the extra payments and the added benefits did give the private plans a competitive advantage compared with traditional Medicare in the market for enrollees. In effect, the 2003 law rewarded Medicare beneficiaries opting for a private health plan with more tax-financed benefits than were available to similar beneficiaries choosing to stay in traditional Medicare and even forced the latter to help finance the bonus granted the Medicare Advantage enrollees through higher out-of-pocket Part B premiums. That may not seem equitable, but it appears to have been the lawmakers’ intent.

Certainly the Medpac commissioners - a group of savvy policy analysts and private stakeholders in American health care - have deemed this payment method unfair. As they noted (see Page 252) in their March 2009 report, referring to Medicare Advantage as M.A. and traditional Medicare as F.F.S.:

In 2009, payments to M.A. plans continue to exceed what Medicare would spend for similar beneficiaries in F.F.S. M.A. payments per enrollee are projected to be 114 percent of comparable F.F.S. spending in 2009, compared with 113 percent in 2008. This added cost contributes to the worsening long-range financial sustainability of the Medicare program. … In aggregate, enhanced benefits [offered by the M.A. plans] are funded by the taxpayers and all beneficiaries (whether they belong to M.A. plans or not), rather than being funded through savings achieved as a result of plan cost efficiencies. In addition, a portion of the value of enhanced benefits consists of funds for plan administration and profits and not direct health care services for beneficiaries.

Similarly, in their 2010 report, the Medpac commissioners noted: “In 2009, Medicare spent roughly $14 billion more for the beneficiaries enrolled in M.A. plans than it would have spent if they had stayed in F.F.S. Medicare. To support the extra spending, Part B premiums were higher for all Medicare beneficiaries (including those in F.F.S.).”

The commissioners added (see Page 260) that the Centers for Medicare and Medicaid Services

estimated that the Part B premium was $3.35 per month higher in 2009 than it would have been if spending for M.A. enrollees had been the same as in F.F.S. … The Commission supports financial neutrality between F.F.S. and the M.A. program. Financial neutrality means that the Medicare program should not pay M.A. plans more than it would have paid for the same set of services under F.F.S. Currently, Medicare spends more under the M.A. program than under F.F.S. for similar beneficiaries. This higher spending results in increased government outlays and higher beneficiary Part B premiums (including higher premiums for beneficiaries in F.F.S.) at a time when both the Medicare program and its beneficiaries are under increasing financial stress.

Prompted no doubt by these repeated recommendations from the nonpartisan Medpac, the drafters of the Affordable Care Act introduced the following changes in the payment formula for Medicare Advantage:

(a) Gradually moving the overall average (risk-adjusted) payments per beneficiary to the Medicare Advantage plans toward neutrality with traditional Medicare;

(b) Gradually reducing payments to the plans in counties with high per-beneficiary costs under traditional Medicare (on the theory that economies there should be more easily achievable for the private plans), but lifting the payments above per-beneficiary costs under traditional Medicare in low-cost counties;

(c) Within those constraints, rewarding the plans explicitly with higher payments for higher, measured quality.

Now, one can easily understand why The Wall Street Journal editorial writers, given their ideological predilections and the point they sought to make, would not mention the extra payments hitherto made to Medicare Advantage plans and simply portray the payment change under the Affordable Care Act as theft.

On the other hand, one can also easily see why designers of the Affordable Care Act saw in their new payment formula not a theft from the Medicare Advantage plans nor their destruction through “fiscal starvation,” as The Wall Street Journal portrays it, but, like the commissioners on Medpac, a leveling of the playing field in that competitive market.

I share that view.