Medicare Advantage: The Coming Tsunami

January 13, 2014

Uwe Reinhardt had a column the other day in which he argued that:

Uwe Reinhardt had a column the other day in which he argued that:

  1. We are paying Medicare Advantage plans more than we pay for similar patients in traditional Medicare.
  2. Enrollees in traditional Medicare are paying higher Part B premiums in order to subsidize the higher MA payments.
  3. This is bad public policy; we should instead have a level playing field for subsidies for both programs.

Now here is a surprise: I agree with Uwe.

Here’s a second surprise: I bet if they could get a real level playing field, the health insurers that offer MA plans would agree as well.

But Congress has not been willing to allow this. Politicians don’t just interfere with overall payment rates, Congress actually gets into the weeds and dictates payment rates on a county by county basis. The reason: to protect vested interests in the districts members of Congress represent.

Here is what I don’t understand about Uwe’s column, though. You might expect people in a fox hole to discuss many things, but you don’t expect them to ignore the fact that bullets are flying overhead. Similarly, if you are going to write about Medicare and Medicare Advantage payment rates, it’s hard to understand why you neglect to mention the tsunami that is about to hit both programs.

Over the next ten years, about half of the cost of ObamaCare ($716 billion) is going to be paid for by reduced spending on Medicare. And it doesn’t end there. The real per capita growth rate for Medicare has been set in the Affordable Care Act at a rate a little higher than the real per capita growth rate for GDP, indefinitely into the future. In other words, Medicare is going to grow at approximately the same rate as our income.

Think for a moment about what that means. In one fell swoop, President Obama and the Democrats in Congress actually solved the problem of escalating future Medicare deficits. If Medicare grows no faster than our income, then the financial burden of Medicare is never going to change. We can keep doing what we are doing right now, forever. (And I should add that the Republicans, through the Ryan budget, have signed on to the same growth rate!)

So why isn’t everybody out celebrating? Why isn’t there dancing and singing in the streets? Why aren’t church bells ringing, bands playing, dogs barking, etc.? Why is there so much gloom and doom? Why is everybody talking about the problem if the problem has been solved?

Answer: because although there is a law that restricts Medicare spending, there is no law that restricts overall health care spending. We’ve imposed a global budget on health care for the elderly and the disabled, but we’ve imposed no global budget on anyone else. If the past is a guide, per capita health spending will growth at twice the rate of per capita income, in real terms — meaning that Medicare rates will fall increasingly behind the rates paid by all other payers.

Now in recent years the growth rate for health care spending has slowed. And it may continue to slow. But, and here is the important policy point, whether or not it slows we have created a global budget for seniors that doesn’t allow their spending to track everybody else’s spending.

Here is what I previously wrote at this blog:

Look at the graphs below, taken directly from the Medicare Office of the Actuary’s memorandum in response to the 2012 Medicare Trustees report. In about two years, Medicare payments to doctors will fall below Medicaid rates and will fall further and further behind Medicaid with each passing year. Medicare payments to hospitals will basically match the Medicaid rate, indefinitely into the future. What will this mean? For one thing, seniors will be lined up behind the welfare mothers in the attempt to find doctors who will see them and institutions that will admit them. As Harvard health economist Joe Newhouse has explained, seniors will likely have to seek care at community health centers and safety net hospitals. As the Medicare Office of the Actuary has explained, in a few short years, hospitals will begin closing and senior citizens will have increasing difficulty obtaining access to care.

The tragedy is that outside of Rick Foster, Joe Newhouse and a few people associated with the NCPA, no one is talking about this. And in saying that Uwe is ignoring the tsunami, I don’t mean to imply that is unusual. What is about to happen in Medicare is being ignored by almost everybody — by Capitol Hill, by the health care media, and by almost everybody else in the health policy community.

There is one other thing that is being ignored — and this is where Medicare Advantage shows real promise. The administration has been spending millions of dollars on pilot programs and demonstration projects for the purpose of discovering how low-cost, high-quality care can be delivered. And three Congressional Budget Office reports (see here, here and here) have found that these programs are not working.

Yet there are places where similar techniques are working and in many cases the innovators are the Medicare Advantage plans. That’s right. Despite President Obama’s wish “to find out what works and then go do it,” the health plans that are the most entrepreneurial and the ones that are showing the most impressive progress are the very programs that the president campaigned against as a candidate and for which funding is scheduled to be cut by the Affordable Care Act.

Go figure.


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