The Wonk Room

In Controversy Over Medicare Pay Cuts, Conservatives Side With Insurance Industry

Last week, the White House and its allies in the Senate, voted down a proposal that would have made “cuts to the private Medicare Advantage program” in order to finance the deferment of a 10.6% physician fee cut for doctors who treat Medicare patients.

Writing an editorial in the Wall Street Journal, Scott Gottlieb, a former policy adviser at the Centers for Medicare and Medicaid Services, laid out the conservative argument and baselessly suggested that the private insurance plans that participate in Medicare Advantage provide better care than traditional Medicare and should not be cut:

Private insurers employ thousands of doctors, nurses and pharmacists, many experts in new technologies….private plans spend roughly four times more than Medicare on “consumer services, provider support, and marketing,” which includes money spent answering the telephone to adjudicate individual issues. Smaller health plans use one clinician for every 10,000 beneficiaries. Medicare would need 4,500 clinicians to keep pace.”

But as Robert Laszewski of Health Care and Marketplace Review points out, while Medicare Advantage plans “are paid 13% more than traditional Medicare pays for similar seniors,” there is no evidence to suggest that they deliver “a better cost/quality result” than traditional Medicare programs.

As AARP CEO William D. Novelli explained, “overpayments to Medicare Advantage raise costs for beneficiaries in the traditional program.” This is because Medicare premiums increase with Medicare costs, and overpayments by Medicare “drive premiums higher than they otherwise would be.” As a result, the millions of seniors enrolled in traditional Medicare “are charged higher premiums each month to help subsidize the cost of these overpayments.”

Insurance companies pocket the extra dollars. In fact, according to a Government Accountability Report (GAO) released just last week, private plans participating in Medicare Advantage earned greater profits and spent less on benefits:

Because organizations spent less revenue on medical expenses than projected, they earned higher average profits than projected. On average, MA organizations’ self-reported actual profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profits in 2005 than MA organizations projected…Nearly two-thirds of beneficiaries were enrolled in health benefit plans offered by MA organizations for which the percentage of revenue dedicated to profits was greater than projected and the percentage of revenue dedicated to expenditures (medical and non-medical combined) was lower than projected.

Thus, rather than bringing Medicare Advantage payments back to parity with fee for service, and using the savings to prevent the scheduled physician fee cuts, conservatives sided with the insurance lobby.