Medicare Advantage and Favorable Selection

by Reihan Salam

Austin Frakt has summarized the findings of a new Health Services Research article by Michael A. Morrisey, Meredith L. Kilgore, David J. Becker, Wilson Smith, and Elizabeth Delzell:

The figure tells us that in every year for the 1999-2008 decade, Medicare beneficiaries switching out of MA to traditional (aka, fee for service or FFS) Medicare were much costlier relative to beneficiaries that remained in FFS. Also, relative to those in FFS Medicare, beneficiaries switching into MA were less costly.

And so:

The clear implication is that studies that take MA bids as reflective of plan costs for an average beneficiary are overstating the potential savings of premium support. A substantial portion, if not all, of the degree to which MA bids are below FFS costs may be due to favorable selection.

One wonders if the findings of Morrisey et al. bolster the case for phasing out Medicare FFS, as doing so would mitigate the adverse selection dynamic as MA plans would be competing against each other rather than the traditional program. A potential problem with this approach, however, is that Medicare FFS has very real advantages in sparsely-populated rural areas and in areas in which providers have concentrated market power.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.