Medi-wha?: Medicare Advantage (Part II)
If your alphabet soup is too bland, stir in some competition.
Last month, we started our Medicare alphabet soup with A and B, but maybe that recipe was a bit bland (and ingredients were too expensive). So today we discuss solutions from the test kitchen!
1. Pricing leading to overuse of care
"Traditional Medicare" (Parts A+B) covers most of the health care gamut – hospitalization through routine care. However, we also saw that Medicare throws the government into a new role, which it may not be best-suited for. One new task is to create prices for care. Because there is only a single payer rather than a market of buyers, the helpful 'invisible hand' can't set appropriate prices. As such, Traditional Medicare uses a system called "Fee For Service," or FFS. In essentials, FFS is like a big list of prices (fees) for different medical services. Clear and simple, right? However, how does a provider increase revenues in this system? Only by doing more stuff. Since sitting and chatting about diet and exercise is normally not reimbursed as well as tests and procedures, this creates big incentives for too much care (which also inflates costs).
Any ideas for a fix? Private sector insurers deal with this problem like it's their job…hey, what if we asked them?
2. Advantages of parting from Tradition
Medicare Advantage, a sort of "Part C," was the answer to these problems. Private sector insurers had been controlling overtreatment incentives and rising costs through new plan structures such as HMOs or PPOs. These managed care plans use primary care gatekeepers to control procedure choice and keep costs down by negotiating access to enrollees in their networks in exchange for lower prices. With Medicare Advantage, the government contracts with these private insurers to offer the same services but with alternative HMO and PPO plans.
For each Traditional Medicare enrollee who switches to a Medicare Advantage plan, the government pays a fixed rate to the private insurer and the enrollee toddles off into the HMO or PPO. Here's (hopefully) the magic: since the HMO can control costs better than the government's Traditional Medicare (with FFS), the insurer can use the extra cash to offer swag to the enrollees that switch- like dental, vision, or lower premiums.
Here's another cool feature- moving enrollees to private insurer plans can also introduce competition into the single-payer Medicare world. To offer a plan, insurers submit a bid for their per-enrollee payment. If this bid is higher than the Medicare benchmark, the premium for this plan will be raised by the amount over the benchmark, hurting that plan's competitive advantage. If the bid is lower than the Medicare benchmark, Medicare and the insurer split the difference and the insurer gets a "rebate" to fund supplemental coverage and increase its competitive edge in the enrollees' choice set.
3. Voluntary choice + Insurance = Keep a careful watch
Since a goal of Words to the WHYS is to help you think critically about policy, let's not get too giddy without checking the omnipresent undercurrent of asymmetric information. Particularly, this is a voluntary switch for enrollees from Traditional Medicare to the managed care framework of Medicare Advantage. Voluntary means choice is based on health characteristics and needs. Leaving Traditional Medicare means more restrictive networks, hurdles to accessing care through gatekeepers, and/or tiered copays for more expensive branded drugs. Who would choose to leave then? Turns out, if you're relatively healthy, you don't care much about these things (but you'd love dental coverage or lower premiums), and if you're sicker, you'll stay right where you are, thank you very much.
The result is advantageous selection (the opposite of adverse selection) into Medicare Advantage plans. That is, Medicare Advantage plans skim healthy enrollees out of the Traditional Medicare system, leaving the government with a sicker pool of enrollees to cover. The hitch is that Medicare Advantage payment rates are benchmarked at approximately the average cost of a Traditional Medicare enrollee- so Medicare is paying more money to private insurers to take the cheap people out of the system! Recent reforms to create risk-adjusted benchmark payments have helped; however, there’s still work to be done to fully realize the benefit of collaboration with private insurers.
Read the rest of the Medicare series: Medicare vs. Medicaid (Part I), Medicare Drug Plans (Part III), and Medi-caid (Part IV).