Monday, October 19, 2015
The National Bureau of Economic Research
NBER Working Paper No. 21650
The Efficiency Consequences of Health Care Privatization: Evidence from
Medicare Advantage Exits
By Mark Duggan, Jonathan Gruber, Boris Vabson
There is considerable controversy over the use of private insurers to
deliver public health insurance benefits. We investigate the efficiency
consequences of patients enrolling in Medicare Advantage (MA), private
managed care organizations that compete with the traditional
fee-for-service Medicare program. We use exogenous shocks to MA
enrollment arising from plan exits from New York counties in the early
2000s, and utilize unique data that links hospital inpatient utilization
to Medicare enrollment records. We find that individuals who were forced
out of MA plans due to plan exit saw very large increases in hospital
utilization. These increases appear to arise through plans both limiting
access to nearby hospitals and reducing elective admissions, yet they
are not associated with any measurable reduction in hospital quality or
From the introduction
The growing privatization of Medicare has been motivated by potential
efficiencies from the Medicare management provided by private insurance
companies. This is a particularly interesting topic in the context of
Medicare Advantage, where private insurers provide coverage side-by-side
with the government system.
… we find that there is a substantial rise in inpatient hospital
utilization after MA plan exit. We estimate that previous MA enrollees
see their utilization of the hospital rise by about 60%, when moving
back to the traditional FFS plan. This estimate is comparable to the
corresponding estimate of 65% from the RAND Health Insurance Experiment
of the 1970s, which randomly assigned patients to managed care plans.
The finding is robust to specification checks and appears to be
long-lasting, so that it does not simply reflect pent-up demand that
caused a temporary increase in utilization. The increases appear across
all types of hospitalizations, but are particularly pronounced for
elective visits. We also find substantial reductions in the average
distance traveled to the hospital when patients exogenously switch from
MA to FFS following plan exit. This suggests that the mechanisms for
lowering costs under MA plans are both reduced hospital availability and
greater restrictions on elective care.
From 3.3 Quality Impacts
To measure the quality of care at the hospital level, we turn to two
sets of standardized measures from the CMS Hospital Quality Initiative
database. The first set of metrics consists of process measures…
Using these measures, we do not see any consistent evidence of moving to
higher quality hospitals, as seven of the nine measures are
insignificant; further, one of the significant coefficients suggest
higher quality (improved process for pneumonia) while the other suggests
lower quality (worse outcomes for heart failure). Moreover, all of the
coefficients are very small relative to mean values and precisely
estimated, ruling out meaningful impacts.
We next turn to more direct process measures of outcomes created from
our discharge data. One such measure, the 60-day hospital readmission
rate… Another measure, preventable hospitalizations…
When MA plans exit, we find that both measures rise - that is, plan exit
does not appear to be translating to more efficient care on net that is
lowering readmissions or preventable admissions. The odds of
readmission, conditional on an initial hospitalization, rises by about
15% among those initially in MA plans after plans exit. Meanwhile, the
odds of a given hospitalization being preventable rises by 10%. By these
measures, therefore, quality is falling for those initially enrolled in
MA following the exit of MA plans.
Finally, we examine the impact on mortality… Both estimates are in fact
positive, suggesting that plan exit leads to higher mortality, although
neither estimate is significant.
The results from this section appear to indicate that there is a
sizeable inefficiency in transitioning elders out of Medicare Advantage
into the FFS program. Utilization of, and spending in, the hospital
rises substantially, with no consistent indication of quality
improvement (although travel to the hospital is greatly reduced). If
anything, we find a reduction in quality, with readmissions, preventable
hospitalizations and mortality (the last insignificantly) increasing
after the shift out of managed care plans.
From the Conclusions
The role of private players in public insurance is the subject of a
central debate in U.S. public policy. This debate is perhaps most heated
around the role of Medicare Advantage plans. Advocates claim that the
higher efficiency of such private options should push the government
towards expanding the role of managed care plans. Opponents point to the
sizeable positive selection faced by these plans (and their high
baseline reimbursement, even independent of selection) to claim that
they are over-reimbursed and are costing, rather than saving, government
Central to this debate is the question of whether MA plans actually
deliver care more efficiently. Our paper contributes to the literature
on this point in two important ways. First, we make use of data that
tracks the treatment of both traditional Medicare (FFS) recipients and
MA enrollees. Second, we make use of exogenous variation in MA
availability, arising from county-level exit of MA plans. Using these
empirical advantages, we document sizeable increases in hospital
inpatient utilization along many dimensions when MA plans exit a county.
Hospital inpatient utilization rises by 60%, and total charges by more
than 50%. We find that MA insurers may achieve this by reducing the use
of the hospital for elective and emergency cases, and also by increasing
the distance that a patient needs to travel to the nearest hospital.
Moreover, we find no evidence that this is accompanied by reduced
quality of care for Medicare patients when enrolled in MA; quality
indicators, if anything, deteriorate when MA plans exit.
… our results suggest that there are large efficiencies from ensuring
that at least some managed care option is available to enrollees. This
could occur through a premium support system of the type discussed in
CBO (2013), which would set up competitive exchanges through which
private plans could compete with the government option. Alternatively,
the government could establish a monopoly MA provider for each area, and
auction off the number of MA slots for the area, in that way minimizing
the reimbursement of MA plans while ensuring MA plan availability.
Comment by Don McCanne
We will likely hear more about this study. The reports will certainly
say that private Medicare Advantage (MA) plans provide greater
efficiency and lower costs by reducing unnecessary hospitalizations and
elective care. We may even hear that they do this while increasing
quality and reducing mortality. With a more careful analysis of this
article and with additional thought input, these conclusions do not seem
to be warranted.
This study was of hospital utilization in regions where the sole MA plan
picked up stakes and left the region. Why would a plan pull out of a
region? Simply because the business prospects did not seem favorable
(code language for not enough profits).
These plans were successful in reducing access to hospitals, partly by
using hospitals that were a greater distance away, requiring greater
travel for patients. They were also able to use managed care techniques
(prior authorization, etc.) in a manner that reduced elective and
emergency admissions. Even though the MA plans were paid more than what
was being spent on traditional fee-for-service (FFS) Medicare patients,
it still wasn't enough, and they bailed out.
After the plans left, the patients were hospitalized at a greater rate,
and costs went up. The authors of this study suggest that these
hospitalizations occurred because the FFS Medicare program is not as
efficient in preventing them as were the private MA plans. But couldn't
this be explained by the business success of MA plans in preventing
patients from having care that was appropriate? Isn't it more likely
that chronic conditions - ubiquitous in this group - became worse and
thus more expensive through the neglect imposed by the MA plans?
The authors try to dismiss this possibility by looking at measurements
of quality and mortality. They report that "quality indicators, if
anything, deteriorate when MA plans exit." Yet from the CMS Hospital
Quality Initiative database, they report, "we do not see any consistent
evidence of moving to higher quality hospitals, as seven of the nine
measures are insignificant; further, one of the significant coefficients
suggest higher quality (improved process for pneumonia) while the other
suggests lower quality (worse outcomes for heart failure)." By these
measures, there was no quality difference.
On the other hand, they report that hospital readmissions and
preventable hospitalizations both rose after the MA plans exited. They
interpret this as evidence of lower quality in the traditional FFS
Medicare program. But every clinician knows that readmissions and
preventable hospitalizations represent a sicker patient population.
Rather than being evidence of poorer quality it is much more likely that
this is further confirmation of the well established adage that Medicare
Advantage patients go into the plan healthy and come out sick.
They use mortality estimates that are not statistically significant to
suggest that plan exit leads to higher mortality. Even if the data were
powered to show an increase in mortality, is it not true that sicker
populations have a higher mortality rate?
This study has the same flaws as many other studies being produced today
that are supportive of the private insurance industry. They look at only
a minuscule portion of potential outcomes of health care. They show that
the differences of what they did measure are almost or sometimes even
completely negligible. Then when drawing conclusions between the choices
of whether additional care is inefficient or is beneficial, they choose
the conclusion that supports the private insurance industry, even if it
is a non sequitur.
In their conclusion, they suggest that the "large efficiencies" from the
managed care option warrant consideration of the premium support
proposal that would privatize Medicare (convert it into a market of
private plans). A better interpretation of their data, based on what is
best for the patient, rather shows us that we should end the experiment
with private Medicare Advantage plans since they prevent patients from
receiving care that they should have.
at 4:04 PM