Premium Support and True Competition in Medicare
The ongoing discussion about entitlement reform has sparked a debate about some of the details of the current Medicare program, and how it might change under various reform proposals. At the Incidental Economist blog, Boston University professor Austin Frakt wrote a post last week arguing that under premium support, traditional government-run Medicare might actually thrive. Much of his post was based on the fact that Medicare pays providers much less than private insurers – a difference that will accelerate if provisions of Obamacare are implemented as scheduled – although he did admit that access in traditional Medicare might become constricted if 40 percent of providers become unprofitable from taking Medicare patients, as the program’s actuary has suggested.
Frakt went on to re-state a popular syllogism that falls short:
Why are so many seeming to lack confidence that the program can compete? After all, look at what’s going on today. Private plans are at a tremendous advantage and have been for many years. They receive per beneficiary subsidies way above the average cost of traditional Medicare. They offer many additional benefits and many plans offer lower premiums and cost sharing relative to traditional Medicare. Still, traditional Medicare retains 75% of the market. Competitive bidding would reduce the overpayments to Medicare Advantage plans, reducing the advantage they have in the market today.
The “overpayment” argument misses the point, for several reasons:
- Why does Medicare retain 75% of market share? Because new enrollees in Medicare are enrolled not in the cheapest plan, or the best-rated plan, or the plan with the broadest provider network, or the plan with the best benefits. Instead, beneficiaries are automatically enrolled in the government-run plan.
- Other studies of plan switching strongly suggest that seniors do NOT switch plans on a regular basis. The Medicare Payment Advisory Commission (MedPAC) found earlier this year that “only about 6 percent of Part D enrollees have switched plans voluntarily each year.” So once people enroll in a plan, they’re likely to stay in that plan – meaning that because government-run Medicare has a structural monopoly on enrollment, many seniors are not likely even to think about switching to a Medicare Advantage private plan.
- Because Medicare beneficiaries must make an affirmative choice to enroll in Medicare Advantage – and because Medicare Advantage plans CANNOT take away government-run Medicare’s structural enrollment monopoly by undercutting the government-run plan on price – they MUST use better benefits to attract seniors.
Former CBO Director Alice Rivlin acknowledged the structural deficiencies in the current program in her testimony before the Deficit Reduction Committee earlier this month: “If a private healthcare plan currently has lower costs than FFS Medicare in its area, it cannot offer a rebate to enrollees as an incentive to sign up. Instead, it must increase benefits – which in and of itself increases Medicare spending. Therefore, beneficiaries in areas with high FFS Medicare costs who enroll in private plans receive a host of free supplementary benefits, financed by the government.” Rivlin again illustrates that Medicare Advantage plans have little incentive to under-bid Medicare on price – they must offer more benefits in order to attract seniors to enroll. In other words, the supposed “overpayments” are actually a symptom of a larger disease – the disease being the structural obstacles in the way of Medicare Advantage plans obtaining larger market share by offering a better deal to beneficiaries than government-run Medicare.
One easy way to solve this problem would be to automatically enroll new beneficiaries in the lowest-cost plan, whether that plan is a private Medicare Advantage plan or government-run Medicare. Ironically enough, MedPAC – which spent years attacking “overpayments” in Medicare Advantage – has remained strangely silent about the structural bias in favor of government-run Medicare that caused this problem in the first place. Unfortunately, this deafening silence may mean that neither MedPAC’s ostensibly non-partisan “experts,” nor liberal advocates fixated on a single-payer health care system, have an interest in putting private health plans on equal footing – both financial AND structural – with government-run Medicare.