Medicare’s Private Option
It points to the broader health-care solution: the market.


James C. Capretta

The administration and its allies complain that MA growth has been fueled by overpayments to health-care providers, and that was their justification for including large MA cuts in Obamacare. Of course, these cuts were also useful in transferring resources out of Medicare to pay for Obamacare’s large subsidies to expand health-insurance coverage for those under age 65. According to the Congressional Budget Office, Obamacare’s MA cuts will total more than $150 billion over ten years, including $14 billion in 2015 alone.

It is certainly true that MA plans are paid rates that exceed the costs of the traditional Medicare program in many parts of the country. But this is due to the anti-competitive structure of Medicare. The default option in Medicare is enrollment in the government-run fee-for-service insurance program. Enrollees pay the same national premium, regardless of the cost structure of the local program or the alternative private options. The government also imposes regulated payment rates on doctors and hospitals, whereas MA plans must negotiate contracts with their networks of providers. In addition, many Medicare enrollees have an employer plan that ensures they will pay no cost at the point of service for their care.

All of these features distort competition between the traditional program and MA plans. So far, instead of removing the distortions and leveling the playing field, Congress has decided to set payment rates for MA plans that make them attractive to enrollees.

But the fact that Medicare pays MA plans above the costs of the traditional program does not imply that MA plans are less efficient. In fact, they are not. According to the Medicare Payment Advisory Commission, or MedPAC, MA plans are able to deliver the Medicare package of benefits for about 96 percent of the traditional program’s costs. And MA HMOs are even more efficient, providing Medicare benefits at just 92 percent of the traditional program’s costs. MA plans use the higher payments from the government to provide additional benefits to their enrollees, including lower deductibles and cost-sharing requirements than those of the traditional program.

The Obama administration is well aware of these facts, and it is adamantly opposed to true competition in Medicare — that is, providing beneficiaries the same fixed level of support regardless of what coverage option they select. Under such an arrangement — known as premium support — if the traditional program costs more than an MA plan, beneficiaries would have to pay the added premium themselves. Several studies have confirmed that a truly level playing field would lead to large-scale migration out of the government-run fee-for-service option and into the privately administered MA plans.

But in order to create a Ryan-like level playing field, it is critical first to have a vibrant private option in Medicare that will lay the foundation for genuine competition. This is why the current skirmishing over MA payment rates is so consequential. The Obama administration is determined to proceed with the planned cuts in Obamacare, and to add to them with administrative decisions that would cut MA rates still further. Oliver Wyman, a consulting firm, has estimated that the MA cuts the administration is seeking for 2015 (more on that below) would reduce MA rates by 5.9 percent, on top of the 4 to 6 percent cut already implemented in 2014. The MA plans would have no choice but to adjust to these cuts by scaling back coverage and raising premiums and cost-sharing requirements for their enrollees. The cumulative effects would raise annual costs for MA enrollees by as much as $1,700.

To their credit, Republicans in Congress have seized on these cuts as a political issue and plan to make them a central theme in the 2014 midterm elections. The Obama administration would like to characterize the reductions as cuts for the insurers offering the plans, but the seniors enrolled in the plans know better, because they have experienced changes in their costs when the government has cut payments to MA plans in the past. There are indications that political pressure is already building. Nineteen Senate Democrats recently signed a letter complaining to the Obama administration about the cuts. If put to a vote in Congress, the cuts almost certainly would get canceled or significantly scaled back.


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