Friday, January 9, 2015
Variations In County-Level Costs Between Traditional Medicare And
Medicare Advantage Have Implications For Premium Support
By Brian Biles, Giselle Casillas and Stuart Guterman
Concern about the future growth of Medicare spending has led some in
Congress and elsewhere to promote converting Medicare to a "premium
support" system. Under premium support, Medicare would provide a
"defined contribution" to each Medicare beneficiary to purchase either a
Medicare Advantage (MA)–type private health plan or the traditional
Medicare public plan. To better understand the implications of such a
shift, we compared the average costs per beneficiary of providing
Medicare benefits at the county level for traditional Medicare and four
types of MA plans. We found that the relative costs of Medicare
Advantage and traditional Medicare varied greatly by MA plan type and by
geographic location. The costs of health maintenance organization–type
plans averaged 7 percent less than those of traditional Medicare, but
the costs of the more loosely structured preferred provider organization
and private fee-for-service plans averaged 12–18 percent more than those
of traditional Medicare. In some counties MA plan costs averaged 28
percent less than costs in traditional Medicare, while in other counties
MA plan costs averaged 26 percent more than traditional Medicare costs.
Enactment of a Medicare premium-support proposal could trigger cost
increases for beneficiaries participating in Medicare Advantage as well
as those in traditional Medicare.
From the Discussion
This analysis of the relationship between the costs to provide Medicare
benefits by MA private plans and by traditional Medicare in the same
county found that these costs varied widely by the type of MA plan and
the level of costs in traditional Medicare at the county level.
Most notably, Medicare Advantage HMO plans had lower costs than
traditional Medicare in areas in the nation where the average costs per
beneficiary in traditional Medicare were relatively high compared to the
national average. In contrast, the three less tightly organized MA plan
types had higher costs than traditional Medicare in almost all areas of
the nation, and their costs were much higher where the average costs in
traditional Medicare were lower than the national average.
Although both traditional Medicare and MA plans are changing, these
findings have broad implications for future Medicare policy, especially
for proposals to transform Medicare into a premium support-based program.
Nationwide, MA plans in rural areas have costs that average 115 percent
of local costs in traditional Medicare. In some metropolitan areas, MA
plan costs to provide Medicare benefits are also higher than in
traditional Medicare. In cities such as Rochester, New York; Sacramento,
California; and Seattle, Washington, Medicare Advantage HMO plan costs
are higher than costs in traditional Medicare by 18 percent or more. In
these areas, with low costs in traditional Medicare, a premium-support
program would not lead to an increase in the monthly Medicare premium to
traditional Medicare beneficiaries. It would, however, reduce payments
to MA plans, which would then need to raise their monthly premiums to
Medicare members and reduce any supplemental benefits that they now provide.
This analysis suggests that reform of Medicare based on the
premium-support model will inevitably result in major changes in costs
for health insurance coverage and health care services for elderly and
disabled beneficiaries in substantial portions of the nation. The
analysis finds that only the more tightly organized Medicare Advantage
HMO–type plans have costs that are lower as a national average than
traditional Medicare costs in the same area. Medicare Advantage
HMO–model private plans, although very successful in some high-cost
urban regions, have proved expensive and difficult to develop and expand
in other areas with lower costs in traditional Medicare. After thirty
years of federal and private support, the most tightly organized
Medicare Advantage HMOs have achieved significant cost savings relative
to local costs in traditional Medicare in only a limited number of urban
The lesson is that these less structured MA plans, which mostly mimic
the fee-for-service payment system for which traditional Medicare is
criticized, have costs that are substantially higher than those of
traditional Medicare in the same area and would not contribute to lower
Finally, the analysis finds that the traditional Medicare program is not
as universally inefficient and expensive relative to private plans as is
often suggested. The findings described here indicate that MA plans have
average costs that are higher than costs in traditional Medicare in five
of the ten US county cohorts with the lowest traditional Medicare costs.
In the three county cohorts with the lowest traditional Medicare costs,
even HMO plans have costs that exceed those of traditional Medicare, by
more than 10 percentage points.
Comment by Don McCanne
The contention that private Medicare Advantage (MA) plans competing with
the traditional Medicare program are able to lower costs has been proven
repeatedly to be a fiction. Yet there continues to be a push to convert
Medicare into a premium support system in which patients would use
vouchers to purchase private plans under the false promise of lower
costs through market competition.
Although tightly organized HMO-type Medicare Advantage plans may have
lower costs in areas where the costs of the traditional Medicare program
were higher, more loosely structured PPO and private fee-for-service
Medicare Advantage plans averaged 12 to 18 percent more than the costs
of the traditional Medicare program.
Understanding the distinction between tightly organized HMOs and loosely
organized PPOs and private FFS plans is important to be able to make
sense of the economic impact of these models. PPO and FFS Medicare
Advantage plans are business models of private insurance designed to be
marketed as insurance products that partially cover losses due to health
care. These models are associated with very high administrative costs, a
fact acknowledged in the Affordable Care Act since similar plans are
permitted to consume 15 to 20 percent of the premiums for their own
administrative costs and profits. These administrative costs are far
higher than those of the traditional Medicare program, as mentioned above.
Tightly organized HMOS, such as Kaiser Permanente, are designed as
patient service models providing prepaid health care. These models have
been shown to be effective in improving efficiency and sometimes
reducing health care costs. What distinguishes them from the loosely
organized models is that these HMOs are integrated health care delivery
systems whereas the loosely organized models are simply intermediary
insurance plans that contract with mostly non-integrated private providers.
Why is this important? Integrated systems such as Kaiser that are a part
of the delivery system would be covered under a single payer national
health program - an improved Medicare for all. The loosely organized
models are simply private insurers that are not part of the health care
delivery system. Under single payer they would be replaced by an
improved Medicare. Thus we would be keeping efficient prepaid delivery
systems while dumping the wasteful and intrusive private insurer
How would premium support change this? The advocates would provide
generous vouchers for these wasteful intermediaries while failing to
provide adequate cost adjustments for the traditional Medicare program.
We know that they would do this because they already are doing it.
Although the Affordable Care Act called for the reduction of the
Medicare Advantage overpayments, a conspiracy between the insurance
industry and the administration has resulted in various accounting
innovations that have preserved these overpayments, though in a
disguised form. So they would eventually displace traditional Medicare
with a thriving market of private plans, but, as patients would
eventually discover, plans with unaffordable cost sharing and limited
choice of narrow networks.
This study is yet one more that demonstrates the irrationality of using
wasteful private insurance plans in a public program. Yet it also shows
that those who prefer to obtain care through an integrated delivery
model, such as Kaiser Permanente, could continue to do so under single
payer since it is a prepaid health delivery system rather than a
private, superfluous, intermediary insurer. But, by all means, be
prepared to protest vociferously when you hear talk of premium support.
at 6:11 PM