The Wonk Room

Medicare Advantage Overpayments Don’t Improve Quality Of Care

This summer, Republicans argued that curbing the excessive federal reimbursements to Medicare Advantage plans would undermine choice and strip millions of enrolless of insurance. Conservatives also claimed that the private insurance plans that participate in Medicare Advantage provide better care than traditional Medicare and should not be cut.

Responding to these arguments, the Wonk Room pointed out that 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. Today, three studies published in Health Affairs concur, finding that private plans “have increased the cost and complexity of the program without any evidence of improving care.”

One paper by Carlos Zarabozo and Scott Harrison explains that private plans were intended to “achieve efficiency through care coordination.” The initial design “called for plans to be paid 95 percent of projected fee-for-service spending for each enrollee — generating a 5 percent savings to Medicare.” Policy makers hoped to encourage private plans to compete on efficiency and offer extra benefits to enrollees. However, since “payment increases have been so large that plans no longer need to be efficient to offer extra benefits,” Medicare now pays “an average 12.4 percent more per enrollee in 2008 compared to what the same enrollee would have cost in the traditional Medicare fee-for-service program”:

The higher MA payment rates have financed what is essentially a Medicare benefit expansion for MA enrollees, without producing any overall savings for the Medicare program, and with increased costs borne by all benefices and taxpayers…the additional benefits have not resulted in improved quality among MA plans.

Insurance companies pocket the extra dollars. In fact, according to a Government Accountability Report (GAO) released just in June, 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.

Fortunately, President-elect Barack Obama has promised to eliminate this subsidy to insurers and use the extra savings ($62 billion over 5 years, $169 billion over 10 years) to finance comprehensive health care reform.