Politics & Policy

Medicare Disadvantage

Pres. Barack Obama and his Democratic allies say they are interested in creating a new “public option” for working-age Americans in order to keep insurance companies “honest.”  Their intent, they insist, is not a full government takeover but a “level playing field,” with no regulatory favoritism or taxpayer subsidies. In theory, the best plans, public or private, would win in this kind of competition.

Twenty-five years of experience with Medicare contradicts this theory.

Since the mid-1980s, Medicare beneficiaries have been allowed to enroll in private insurance plans that offer the Medicare benefit package or more. The program has had various names over the years — “risk contracting,” “Medicare+Choice,” and now “Medicare Advantage”but the basic idea has remained the same: Senior citizens should have the option to get their Medicare coverage from a private insurer as well as from the traditional, government-run fee-for-service program.

From the beginning, though, the program has faced a vexing question: What should the payment rate be for the private plans?

The only way to really find out is through a functioning market, which is what former Democratic senator John Breaux tried to establish when he was chairman of a Medicare commission in the late 1990s. His plan for Medicare reform, called “premium support,” would have relied on competitive bids from plan sponsors to determine payment rates. The government would have paid for a fixed percentage of the average bid, with beneficiaries paying the balance. Seniors selecting less expensive plans would pocket the savings. In this kind of structure, plan sponsors would know that if they set their premiums too high they would lose enrollment to more aggressive competitors.

What happened to the Breaux plan? The Clinton administration killed it. And when the Bush administration tried to push it again in 2003, Democrats in Congress and the AARP (along with Republicans afraid of their attacks) again derailed it.

Now, the Obama administration and Sen. Max Baucus (D., Mont.) say they are the ones who want fair competition within Medicare. Sen. Baucus’s proposal, approved by the Senate Finance Committee, would set Medicare Advantage payment rates based on competitive bids starting in 2011. But there’s a big difference from the Breaux plan. Sen. Baucus wants to exempt government-run fee-for-service from the competition. So even when private insurers could offer substantially less expensive coveragewhich they often can, even though price controls confer a huge price advantage on the governmentbeneficiaries could still enroll in the unmanaged, inefficient fee-for-service program at no additional cost to themselves. That’s not competition. The only effect of the Baucus plan would be to push millions of seniors out of private insurance and back into the government-run program — which is, of course, the goal.

It is understandable that many Democrats fear a true level playing field.  Private-plan competition has worked to hold costs for the new prescription-drug benefit 40 percent below expectations. Beneficiaries are happy with their private-plan coverage, and the government is saving money. Only politicians have lost anything — namely power and control.

Absent a genuine market, the only way to pay Medicare Advantage plans is with regulated pricing. House Democrats argue that rates should be tied to what it costs to provide coverage in fee-for-service. But that payment structure creates its own perversities. Medicare per-capita costs in Portland, Oregon, at least as measured by the government, are less than half of what they are in fraud-riddled Miami. Tying Medicare Advantage payments to the traditional program’s costs would punish Portland-area seniors for the absence of fraud where they live. That’s what the House bill does: It cuts Medicare Advantage payments by more than 25 percent in the Portland area while leaving payment rates in south Florida practically unchanged.

Medicare desperately needs reform, but the Democratic plans wouldn’t fix the program and, in fact, would make real reform more difficult to achieve. They would simply cut benefits to seniors enrolled in Medicare Advantage and hand more control over to the federal government, which hasn’t been successful in slowing costs despite nearly a half century of trying. The only answer is cost-conscious consumer choice and vigorous price competition. Medicare Advantage lays the predicate for that kind of reform, which is perhaps why Democrats are trying to gut it.

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