James Capretta, a fellow at EPPC who also works with the Economics 21 team, has written a fascinating column on Medicare Advantage that is well worth your time. Capretta’s column follows a column in which Austin Frakt, a blogger at The Incidental Economist and a friend of The Agenda, offered a critique of Medicare Advantage that he used to criticize Rep. Paul Ryan’s call for voucherizing Medicare:
Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technically and politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.
So, it’s really no surprise that Advantage plans have not, to date, been part of a Medicare cost control solution.
For Capretta, the key issue is to create a level playing field between Medicare FFS and Medicare Advantage. Unfortunately, that seems far off:
The Obama administration’s preferred approach to Medicare Advantage payment “reform” — rejected at the last minute by Congress in favor of more formulaic cuts — reflects the same bias. Private insurers would have submitted bids in competition with each other, with the average bid used to set regional benchmark rates. The benchmark would then establish a payment ceiling for all private plans competing within the same geographic area. But it wouldn’t have constrained Medicare fee-for-service. In regions where fee-for-service was more expensive than the average private plan, beneficiaries could have enrolled in the more expensive “public option” at no additional cost above the statutory part B premium. [Emphasis added.]
Capretta observes that “more tightly controlled Medicare Advantage HMOs provide Medicare benefits for just 97 percent of the cost of fee-for-service” despite a number of handicaps:
And these HMOs win on costs despite the huge advantages fee-for-service enjoys in today’s arrangements. Fee-for-service is the default option for enrollment. If a beneficiary does nothing, that’s where they end up. There’s no advertising budget necessary. In addition, much of the administrative costs of running the fee-for-service program, such as revenue collection by the Internal Revenue Service, is not built into the premium paid by the beneficiaries. Most importantly, fee-for-service is able to dictate the prices it will pay to medical service providers. Private plans have no such option. They must negotiate contracts with their networks and get hospitals and physicians to agree to a fee schedule. Moreover, in many parts of the country, private plans are forced to pay premium rates to compensate hospitals and physicians for the losses they incur on their Medicare fee-for-service business.
But even with these advantages, fee-for-service is still more expensive than Medicare Advantage HMOs, which probably explains why fee-for-service’s advocates are so adamantly opposed to the kind of direct and transparent price competition that a move toward a defined contribution approach in Medicare would bring about.
The central goal of health reform has to be constraining the growth of Medicare expenditures, and not just because of the impact on the federal budget. As Capretta explains, the pathologies of Medicare FFS distorts the broader health system, making it difficult if not impossible to impose spending discipline on providers:
Medicare fee-for-service is the number one reason the nation suffers from dangerously fragmented and uncoordinated care. It pays any licensed provider of medical services a fee for rendering a service to a Medicare patient, no questions asked. Every provider is paid the same, regardless of how well or badly they treat their patients. To cut costs, Congress has always found it easier to impose arbitrary, across-the-board payment reductions than to steer patients away from some hospitals or physicians who provide low value at high cost.
To his great credit, Frakt is very open to engaging in a dialogue on how to create a Medicare voucher system that works.