Another annual open season for Medicare enrollment launched this month. It ends on December 7. Medicare Advantage (MA) enrollment continues to grow. About 48 percent of those eligible for “full” Medicare (parts A & B) already are enrolled in various types of those private plans. Within the next two years, MA could command a majority.
This is not a simplistic story of private sector innovation and operational flexibility outcompeting the sclerotic vestiges of an outdated traditional fee-for-service (FFS) Medicare program. MA certainly starts with the advantages of more coordinated health care services and the leeway to provide additional benefits beyond the basic traditional Medicare package. However, MA plans also increase their subsidies from taxpayers in various ways, most notably through excessive upcoding of enrollee risk scores. Their Star Quality bonus payment boosts tend to be tied too generously to limited measures of quality that do not reflect improved health outcomes.
MA plans bid against local FFS costs known in advance. Although they have succeeded in bidding below FFS-related costs to deliver the traditional program’s required Part A and Part B services by increasing margins in recent years, MA plans then leverage most of the difference between their bids and even higher payment benchmarks into rebates that finance extra benefits to attract enrollees. Those benchmarks increasingly are based on the costs of a minority of Medicare enrollees in given counties.
“Redeploying” most of those savings allows MA plans to offer lower supplemental premiums, reduced cost sharing, integrated drug benefit coverage, and additional services. But they then end up costing more per comparable enrollees than traditional Medicare would, in federal budget terms.
The MA versus FFS “competition” is tilted toward MA in other ways. Unlike the traditional FFS program, MA plans must offer caps on total out-of-pocket expenses (imposed by federal regulation since 2011). They also can rely on balance billing caps on provider reimbursement tied to the administered prices of the traditional program. Enrollees in the traditional program must pay extra premiums for supplemental Medigap coverage to reduce their cost sharing (averaging about an extra $1800 per year for individual coverage), if they do not receive supplemental employer-based retiree coverage or qualify for dual-eligible Medicaid benefits. About 16 percent of traditional program enrollees lack such supplemental coverage and remain unprotected from potentially catastrophic out-of-pocket costs.
Meanwhile, political supporters of more government-centric health care for the elderly are stuck in a bind. They are losing market share, with a less attractive product that is increasingly unfamiliar to recent enrollees exiting employer-based managed care plans. Indeed, the actual number of traditional program enrollees is lower today than in 2006. The traditional program’s main remaining appeal is its less-restricted choice of providers, but this runs counter to the longstanding mantra among Medicare policymakers that favors more coordinated care, organized delivery systems, and tighter regulatory hands on the health care wheel. The latest hope by Medicare’s central planners in the Biden administration is to “steer” all traditional program enrollees into modified versions of accountable care value-based arrangements with providers (retitled as “ACO Reach”) by 2030. The trick is getting that health care more controlled without necessarily requiring the full consent of beneficiaries in advance!
The political competition ahead mostly involves how to tilt the latest payment rules across various dimensions to favor either more private or more public control of health care services for the elderly, though each version still will operate under significant regulatory limits. Neither side wants a “level” playing field and more vigorous competition. For now, more generous, quasi-private MA is winning, even while taxpayers are losing.
The long litany of problems in paying MA plans highlights the chronic problem of centralized payment rules that cannot adjust quickly enough to match the for-profit arbitrage incentives of more nimble private sector operators to shoot at slow-moving targets. Excessive payment benchmarks have been reduced to some degree over the last decade, but Medicare data always seems to be too incomplete, limited, and lagging to balance the scales fully. Incomplete risk adjustment mechanisms always promise to get more accurate “next” year (but never budget neutral). Other initially neutral rules are regularly recalibrated to achieve other goals (“health equity” is the latest buzzword) that conflict with greater efficiency and economy. They also often bend to the countervailing wishes of organized interests. And it’s even easier to keep giving than taking away during an era of budgetary profligacy
It could be worse. Even more current and future Medicare beneficiaries could still be stuck with just a backward-looking traditional program that will approach future insolvency at only a slightly slower rate. Next, a look at other factors limiting choice and competition options in Medicare.
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