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... But this is a distortion of our findings, for several reasons. First, it confuses costs and payments. Medicare Advantage plans bid less than traditional Medicare, but they are paid more. The plans are officially supposed to use these higher payments to sweeten the potadd additional benefits, reduce cost sharing, and the likethough some likely go for profit as well. This is why the Affordable Care Act reduced the amount that the government pays to managed care plans, over howls of protest from conservatives. Bidding less does no good for the program if the government then overpays relative to what was bid.
Second, they miss a key part of the reason why the Congressional Budget Office estimated that Ryans voucher proposal would cost seniors more. Medicare Advantage plans can only cost what they do because the traditional Medicare program is in place to help them. Specifically, Medicare sets very low payment rates to providers, and Medicare Advantage plans bargain up a bit from those rates. Get rid of the traditional Medicare program, or even reduce its enrollment substantially, and the estimated cost of Medicare Advantage premiums skyrockets.
Third, determining whether the private plans are really more efficient than traditional Medicare requires more than just knowing that they bid less. The question is why private plans come in cheaper. We take a cautious, nuanced view:
Private plans can cost less than traditional Medicare because: (1) they may use medical resources more efficiently; (2) they may enroll healthier patients relative to the risk-adjusted payment; or (3) their negotiated prices may not fully reflect the costs of indirect medical education or payments for disadvantaged hospitals, which traditional Medicare explicitly pays. The magnitudes of efficiency, selection, and avoided add-on payments are unclear... To the extent that the 9% cost advantage reflects efficiency, it suggests there are better ways to provide the traditional Medicare benefit.
To put it a bit more plainly, its possible that the private plans are cheaper because they really do offer the same benefits at a lower cost. Its also possible that the private plans are cheaper because the insurers are very good at attracting the best risksthat is, the healthiest seniors least likely to run up medical billsor because they dont also subsidize other parts of our health care system, such as medical education. In effect, they may be gaming the system. At this point, we really dont know which answer is correct, although its entirely possible all three are true, to an extent.
Making the wrong assumption here could be fatal, particularly to those seniors with the gravest health needs. If managed care plans are able to select healthier enrolleesby skimping on benefits in ways that get around whatever regulations (if any) the Romney-Ryan plan put in placetraditional Medicare will end up with less healthy seniors, driving up its costs. The system will spiral out of control. The costs will proportionately rise and the guarantee of benefits that is the core of the Medicare program would erode. That is why many economists are wary of a pure premiums support model.
At the very least, it makes sense to see how premium-support works in the non-elderly population, since their health needs overall are less severe. The Affordable Care Act does that, by creating exchanges for people who dont have employer-sponsored coverage. Watching and learning from that initiative would help in designing a workable system for the elderly. That is why, on many counts, the biggest lesson is that allowing the Affordable Care Act to workrather than trying to take it off the booksmight be the best way for premium support to succeed.
David Cutler is Otto Eckstein Professor of Applied Economics at Harvard University. In 2008, he was senior health care advisor to the Obama Presidential campaign.
David Cutler is Otto Eckstein Professor of Applied Economics at Harvard University. In 2008, he was senior health care advisor to the Obama Presidential campaign.
