Critical Condition

NRO’s health-care blog.

Reduced Medicare Benefits Will Increase Cost of Private Insurance


As noted elsewhere, much of the “savings” in the so-called reform legislation are fictional, because the government has never succeeded in rolling back physicians’ Medicare Part B fees. Medicare Part B fees already run about 20 percent lower than the fees that private insurers pay, and any further cut-backs would sentence seniors to a catastrophic lack of access to physicians.

However, the government will undoubtedly be successful in driving private insurers out of the Medicare Advantage program, threatening about 11 million seniors’ access to this valuable alternative. The key difference between Medicare Advantage and traditional Medicare is that the latter operates according to a Soviet-style, centrally determined schedule of fees, set by the U.S. government. No wonder it has failed to restrain costs, while also failing to satisfy providers. An increasing number of high-profile providers are reducing their availability to Medicare patients.

Most Medicare Advantage plans, on the other hand, are offered by private insurers that negotiate contracts with providers. Now, the current framework of insurers negotiating “networks” with providers is far from efficient, but it’s surely a heck of a lot better than price-fixing by the central government.

Critics have focused on the “extra” $12 billion or so that the government pays Medicare Advantage plans, which it would not spend if the beneficiaries were covered by traditional Medicare. However, these “extra” payments have a social benefit (besides increasing the quality of care that Medicare beneficiaries receive): They reduce the “hidden tax” that the government levies on the privately insured. Because government plans, such as Medicare, do not reimburse adequately to cover providers’ costs, they cause providers to shift those costs to private plans. Those plans, of course, pass the costs on as premiums.

This hidden tax is currently running at about $49 billion annually: four times greater than the “extra” payments to Medicare Advantage plans. As I discuss in a new study, eliminating Medicare Advantage will increase the hidden tax, as well as sentence seniors to increasingly limited medical care.

John R. Graham is director of Health Care Studies at the Pacific Research Institute.


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