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Is Medicare Advantage Worth It?

The argument over Medicare Advantage is pretty simple: The program, which allows private providers to compete for Medicare patients, was supposed to cost as much or less than traditional Medicare. It actually costs 114 percent of what Medicare costs. Democrats want to eliminate those overpayments and force private insurers to live within Medicare's budget, given that they're taking Medicare's money. Republicans say that will cut benefits for retirees, which is something they're suddenly very concerned about.

On some level, Republicans are right: The reform will change some benefits for a small minority of Medicare's beneficiaries. But will it change it by very much? Austin Frakt, a health economist at Boston University, has studied whether the Advantage program is spending its windfall on patients or not-patients (profits, advertising, administration, and so forth). The answer? Not-patients, mainly.

Payment to MA plans has gone way up since 2003. Did the payment increase largely benefit beneficiaries or not? This is a current political and policy debate, about which much has been written in the media (both traditional and blogospheric). It turns out the answer is known and quantifiable. My work (with Steve Pizer and Roger Feldman) shows that for each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries (see also: findings brief).

What do we make of the other $0.86? That goes to the insurance companies but doesn’t come out “the other end” in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.

So, do higher MA payments produce little value to beneficiaries, as Obama claims, or are the benefits they fund important to maintain, as Republicans would have us believe? The balance of the evidence is on Obama’s side. In fact, it is a landslide: for each dollar spent, 14% of the value reaches beneficiaries and 86% of it goes elsewhere (profit or cost).

"Cuts to MA should be a no brainer," he concludes. This is a case, incidentally, where Republicans have lined up in favor of a wasteful government program, where their rhetoric relies on the inviolability of current and future Medicare benefits, and where they are opposing a reform that will improve the deficit over time. It almost makes you miss the purity of the Gingrich crew.

By Ezra Klein  |  September 29, 2009; 8:15 AM ET
Categories:  Health Reform , Medicare  
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The cited study includes the disclaimer "The researchers SIMULATED the welfare value of each of the two expansions. In this case, welfare for a particular beneficiary is the difference between what he or she would have been WILLING to pay for each insurance option and the actual premium. [...] Based on the MODELS they constructed, [...]"

So, some of the authors' conclusions have to be tempered with that disclaimer -- that the authors are talking in part about a simulated society and not about any actual, real-life experience or evidence.

In contrast, the non-simulated, evidence-based statement made by the authors is that "increased spending of either type ought to improve benefits and reduce premiums" In fact, even in its simulation-based conclusion, the cited study states "Our findings indicate that the addition of subsidized standard drug benefits to Medicare through PDPs was welfare-improving."

Posted by: rmgregory | September 29, 2009 9:08 AM | Report abuse

Why not increase direct payments to beneficiaries by enough to make them whole? That way the beneficiaries can't complain about benefit cuts, yet the govt saves money otherwise going to insurance companies. If the rate is 17% or 12% rather than 14%, adjust as experience is accumulated.

Posted by: fuse | September 29, 2009 9:10 AM | Report abuse

Once again this is why I think our politicians are completely incapable of holding down the costs of government healthcare. Even if a cut is reasonable the opposing side has too much incentive to try and hammer their opponents on the issue regardless of the merit. No politicians have enough incentive to hold the line on spending.

Posted by: spotatl | September 29, 2009 9:29 AM | Report abuse

25% of Medicare recipients have chosen Medicare advantage for the "14%" increase in costs indicating a very real value to recipients versus the simulation conclusion. If the proposed cuts occur, the CBO says this 25% will lost 50% of their benefits.
It also notes that the 25% choosing Medicare Advantage, at increased costs to them, are mostly from the poorest income bracket again indicating a real value as people made real life choices.
From a stats view, what kind of study groups costs and profits in one stat? This is one of the first Medicare programs which is actually under projected costs to the Feds.

Posted by: susano0612 | September 29, 2009 9:59 AM | Report abuse

Purity of the Gingrich crew? The only purity was that of the current conservative Republican movement: opportunism. No philosophy, no policies, no intention other than grabbing more power and distributing it to their lackeys (or masters).

"We don't want universal healthcare, but we want to maintain the overpayments to insurance companies."

Posted by: Jaycal | September 29, 2009 10:40 AM | Report abuse

It's certainly not a news flash that politicans are disingenuous. Republicans usually want to reduce entitlements, but now they want to maintain subsidies to Med Advantage. While Obama claims that a tax is not a tax and that we can reduce health care spending by providing gov't coverage to more people.

Par for the course.

Posted by: mbp3 | September 29, 2009 11:19 AM | Report abuse

Lets have a real level playing field: (1) Change the name of Medicare Advantage to Medicare Private Option; (2A) All plans receive the exact same subsidy (remove the extra government payments to the Medicare Private Option of 14% per recipient. Or, (2B) distribute the 14% currently paid to the private insurers among all recipients, increasing benefits with the redistribution. This could close the Medicare Part D (drugs) donut hole).

Under this 'truth in labeling plan', call the new Public Option: "Medicare Optional Choice for Non-Seniors." (Part E of Medicare).

Posted by: JimPortlandOR | September 29, 2009 11:28 AM | Report abuse

"But why are are taxpayers paying private plans more to do a job that has traditionally been done by the federal government for lower cost?" from the study of costs.

The problem is that the federal government is not doing it at a lower cost.

Medicare traditionally pays 20% of the cost for most items, which for the average retired person, can put a real dent in their income, especially if they have serious illnesses. The MedAvantage policies, even with a premium, are cheaper than Medicare, or Medicare + a supplemental policy to cover the additional 20%. For instance one person I know pays the Medicare premium + $200 for a supplemental policy, another person, with the same insurance company, pays the Medicare premium + $99 + a co-pay of $10 for the MedAdvantage regardless of whether it is a general practitioner or a specialist.

Which would you choose?

Whether you like it or not, whether you agree or not, seniors are being caught between a rock and a hard place, they simply cannot afford the cost of medical care with Medicare only. There needs to be a level playing field for every one. And so far all I see is politics being played.

Posted by: psaunders3 | September 29, 2009 11:37 AM | Report abuse

I'm a medicaid worker in Kansas City Missouri, and I have different take on Medicaid Advantage plans than you guys up in Washington. From where I sit, dealing with clients who are above the income standard for regular Medicaid ($768 for an individual and &1033 for a couple in Missouri) and are required to have a "spenddown" or monthly deductible that must be met before medicaid kicks in.....the Humana Golds, and Avantra Plus's are pretty good deal.
You all talk about Medicaid like it covers all your bills, but it doesn't. It only covers 80% of your doctor and hospital and lab bills. The other twenty percent requires some kind of supplemental covrage. Twenty percent of open heart surgery could be pretty pricey. Twenty percent of multiple visits to multiple providers every month could also add up to signifigant change for somebody making $1000 or so every month.

The Medicare Advantage programs provide a viable alternative for folks whose "spenddown" is going to be two or three or four hundred dollars each month and don't have any other supplemental coverage. Humana Gold (for instance) provides pretty comprehensive coverage (including your part D) and only requires fairly small co-pays for each office or hospital visit. If one of my clients who may have a three hundred dollar spenddown each month enrolls in a Medicare Advantage program, I can then go ahead and put them on the program that pays their Medicare premium, because we wouldn't need to keep their spenddown amount low. That way they get nearly a hundred dollars extra on their Social Security check each month and have pretty good comprehensive coverage with reasonalbe co-pays for drs, labs, hospital visits and perscriptions. Until Medicaid becomes a simple insurance program at some decently high percent(133% or up) of poverty.....this is the best option for clients who are petty poor, but too rich for Medicaid without a deductible. Seriously.

Posted by: rvanwye54 | September 29, 2009 2:33 PM | Report abuse


"You talk about Medicare" (not medicaid) "like it covers all your bills..."

The poster directly before me made a similar point with similar typos. (Medicare covers 80%, not 20%)

Posted by: rvanwye54 | September 29, 2009 2:45 PM | Report abuse

Wow you are incredibly wrong. There is a huge difference between a statistical model and a simulation(which is also sometimes called a model).

The paper uses the former, verifies against empirical data, and builds on previous peer-reviewed literature. Using econometric techniques to quantify a utility function is standard and reliable.

Your criticisms all apply a simulation, and thus completely miss the point.


So what you're saying, is that the people opposing cutting healthcare costs are sooooo irrational that we can't try to cut healthcare costs? What you are saying makes absolutely no sense.

Posted by: zosima | September 29, 2009 6:37 PM | Report abuse

"It almost makes you miss the purity of the Gingrich crew."

Is that something your parents used to tell you about?

Posted by: whoisjohngaltcom | September 29, 2009 7:33 PM | Report abuse

Conservatives oppose the public option because they predict it will be subsidized by tax dollars and thus have an unfair advantage over private insurers. Based on the example of Medicare and Medicare Advantage the exact opposite appears to be the case.

Our government is so dominated by private interests that it is far more likely to subsidize private insurers, giving THEM an unfair advantage.

Posted by: stevedwight | September 30, 2009 11:30 AM | Report abuse

Does no one else see the contradiction in this quote? He says that only 14% of the additional cost goes to providing value to the beneficiaries, but then says that the other 86% is made up paying for additional benefits and insurer profit. The portion of that paying for additional benefits IS providing value for beneficiaries.

I'm in favor of spending less on Medicare, not more, so I'd be in favor of reducing spending on MA, but this is a very flawed argument to say only 14 cents on the dollar goes to seniors and ignore the additional benefits they receive with the other 86%.

Posted by: ab13 | September 30, 2009 12:20 PM | Report abuse

@ab13 - That's a common misunderstanding of what consumer surplus is. Perhaps my recent post will help:

-Austin Frakt

Posted by: TheIncidentalEconomist | September 30, 2009 9:18 PM | Report abuse

Posted earlier:
It also notes that the 25% choosing Medicare Advantage, at increased costs to them, are mostly from the poorest income bracket again indicating a real value as people made real life choices......"
This is a classic misunderstanding of cause and effect.

The poorest (lowest Social Security Benefits) have a much higher incidence of lower education (lower paying jobs,lower savings) and are over-represented by single women (widows) on Social Security.

They are also more amenable to the deceptive advertising of these for-profit plans.

In fact, these plans are often a poor choice and may actually increase the annual expense over simple Medicare Part B premiums and standard Medicare deductibles.

Posted by: JohnInMI | October 3, 2009 2:59 PM | Report abuse

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