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The Medicare Advantage Scam

Philip Rucker takes a good, hard look at the scam that is Medicare Advantage. Essentially, it works like this: Congress allowed private HMOs to compete for Medicare patients under the rationale that they could offer better service at lower cost than the government. They couldn't. So Republicans in Congress began boosting their payments, to the point that Medicare Advantage gets paid 114 percent what Medicare gets paid to care for a patient. That leads to some fun perks, like free gym memberships and complimentary aspirin and band-aids, which in turn leads seniors to defend the program because they like their perks. But it also means a lot of unnecessary expense for taxpayers.

And it's important to remember that those free perks do not account for the whole of Medicare Advantage's overpayments. Rather, economists have estimated that for every extra dollar we pay the program, 14 percent is passed on to seniors and 86 percent goes to profits or other costs. In other words, we're getting only 14 cents of obvious value for every dollar of overpayment.

But no matter. Rucker notes a bunch of Senators -- both Republican and Democrat -- are solidly committed to the principle that we can never cut a dollar of Medicare spending, no matter how wasteful or unnecessary it is. It's "not fair to take these benefits away from seniors," says Sen. Jon Kyl, who appears to think it's fair to ask taxpayers to overpay insurance companies so long as insurance companies give 14 cents on every dollar to seniors.

Sometimes, it almost seems as if this country deserves to go bankrupt.

By Ezra Klein  |  October 15, 2009; 11:20 AM ET
Categories:  Health Reform  
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It is also important to note that the Medicare Advantage programs do not provide for needed tests that are more expensive...they have a gate keeper there, limiting MRIs, colonoscopies, arteriograms, etc. It is rediculous for the government to pay for these intermediaries, when Medicare does a better job. Medicare part D is a prime example of waste. Why should the government pay retail prices for medications that seniors can afford to pay for themselves. Medicare part D should be needs based, e.g. a sliding scale payment system according to income.

Posted by: ritapolicarpotexas | October 15, 2009 11:36 AM | Report abuse

"Sometimes, it almost seems as if this country deserves to go bankrupt."

I guess this explains your support for a new healthcare entitlement which is projected to cost $1T over 10 years but will probably cost 4 or 5 times that much.

Posted by: kingstu01 | October 15, 2009 12:03 PM | Report abuse

"Sometimes, it almost seems as if this country deserves to go bankrupt."

Now thats a great quote amigo. I totally agree, in fact, I think we'll actually come out on the other end better off, much like a person who survives a quadruple bypass and suddenly learns to exercise regularly and not eat McDonald's constantly.

Where's the small government conservatives? Suddenly the very party who just a few years ago would have ended Medicare is now its supposed biggest defender. Even when there's gargantuan waste in it. Great!

Posted by: zeppelin003 | October 15, 2009 12:12 PM | Report abuse

Ezra - I agree with your criticism of MEdicare Advantage subsidies. But you've got your history slightly wrong. Health plans were able to attract seniors to their products without subsidies -- but the plans were heavily weighted towards urban areas (south Florida, NY, Chicago, SoCal, etc). They had over 5 million members before subsidies were added in 2004.

An important contributing reason for the subsidies is that HMOs were unable to offer plans in rural areas (lack of scale, lack of leverage with single hospital markets, etc). The subsidies were partly a giveaway to people like Baucus and Grassley so their consituents would have access to the same extra benefits that urban seniors had.

I also wonder about the statistic that you cite: only 14% of extra payments are passed to seniors as extra benefits. According to MedPAC analysis included in their report to Congress MArch 2009 - on average Medicare health plans are paid $1.30 for every $1.00 of enhanced benefits - meaning that 77% of subsidies are passed through as enhanced benefits. For the HMO product specifically, plans are paid only $0.97 for every $1.00 of enhanced benefits. Private fee for service plans are much less efficient, being paid $3.30 for every dollar of extra benefits.

Posted by: mbp3 | October 15, 2009 12:50 PM | Report abuse

You are misinterpreting that 14% number. It does not mean that 14% of the additional payments goes to seniors, basically all of it does. What the 14% means is that under the assumptions in that study seniors would only be willing to spend 14 cents of their own money for those additional benefits that MA pays a dollar for. What this illustrates is that third party payment shields people from the true cost of something which in turn increases the cost of that good. The 86% is not going to profit or other costs, it is going to overpayment for those additional benefits. To correct this we ought to be moving towards less, not more, shielding people from the true cost of providing care. More cost sharing, higher deductibles, no first dollar benefits.

Posted by: ab13 | October 15, 2009 1:23 PM | Report abuse

Another scam is Medicare Advantage plus Part D (MAPD). The government apparently doesn't know much about the inner workings of those plans, but I've heard rumors that big HMOs are making a killing.

Posted by: bmull | October 15, 2009 1:36 PM | Report abuse

bmull - No need to rely on rumors. Much of the information is reported by plans. Almost every Medicare Adv plan (perhaps 90-95%) also provides the prescription drug benefit (Part D). Profit margins on MAPD are in the 4-6% range pre-tax. Profit margins on standalone Part D plans are 4-5% pre-tax.

Posted by: mbp3 | October 15, 2009 2:10 PM | Report abuse

mbp3, get out of here with those facts, bmull has rumors! His cousin's sister's coworker's friend said they're making a killing!

Posted by: ab13 | October 15, 2009 2:28 PM | Report abuse

The Medicare Advantage plans, if properly regulated, fill a important niche for people with moderate incomes, particularly in rural areas. Also, these plans will by the beginning of 2011 become almost exclusively network type plans, as private-fee-for-service plans are discontinued. By 2011,there will be only a handful of PFFS plans remaining (all in rural areas), which is a boon for taxpayers and patients alike. The remaining network style plans (HMO, HMO w/POS, PPO) arguably provide better care than other options, since they are more likely to require coordination and "medical home" types of services. A large study in Health Affairs last year indicated that, based on their treatments of critically ill patients, these types of Advantage plans often outperform traditional indemnity coverage -- probably because of the coordination of care aspect. These plans should compete on a level-playing field, though, without subsidies. In 2010, the avg. subsidy will be reduced by about 4.5%, and, unless Congress intervenes, these subsidies will likely disappear within three years).

Posted by: wdarmes | October 15, 2009 2:51 PM | Report abuse

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