Friday, March 23, 2007

The (In)Efficiency of Private Medicare Plans

A recent congressional inquiry has shed some light on findings by the Medicare Payment Advisory Commission (MedPAC) that private plans associated with Medicare -- known as Medicare Advantage -- cost the federal government between 10 and 19 percent more than traditional coverage in the public plan.

If the private plans were eliminated, estimates are that it would save the public coffers $65 billion between 2008 and 2012 alone.

Of course, this brings into question the long held belief of many conservatives that the private sector can always do everything more efficiently and, as a result, cheaper than the public sector.

But what makes this a case -- at least on the surface -- for bizarro world is how the political lines are forming around it.

The congressional inquiry has sparked at least one Democratic lawmaker -- Rep. Pete Stark (D-CA) -- to charge that the extra cost is too much, while more than one Republican lawmaker has come to the defense of paying more for Medicare Advantage because the private plans in it tend to offer more coverage for those seniors who may need it.

Huh? Dems talking about cutting public spending on social services, and GOPers countering that we need to continue spending more tax dollars to help those in need?

Well, not exactly those in need...unless you consider private insurers who generate, on average, about 30 percent of their total revenue from participating in Medicare Advantage to be in need.

To explain, it is true that Medicare Advantage plans typically provide more coverage than the traditional Medicare plan. But it isn't true that in all cases that extra coverage can explain why Medicare Advantage plans cost more.

According to MedPAC in its testimony before Congress on Wednesday, private insurers initially make a bid on the same coverage offered by the traditional Medicare plan and then are paid "rebates" on top of that for the extra coverage they provide.

The average bid for private HMO plans is 97 percent of the traditional Medicare plan cost -- which makes sense because HMOs have limited provider networks while the traditional plan doesn't -- but that's the only type of Medicare Advantage plan this is cheaper than the traditional plan.

The average local PPO bid comes in at 108 percent, the average regional PPO bid at 103 percent, and the average private fee-for-service bid is 109 percent of the traditional Medicare plan (which is also fee-for-service).

(Side-Note: You can get an explanation of HMO plans here, PPO plans here, and fee-for-service plans here.)

So that means the traditional Medicare plan is 3 percent more efficient than the average private regional PPO, 8 percent more efficient than the average local PPO, and 9 percent more efficient than its private counterpart fee-for-service plan.

The recommendations of MedPAC are to keep Medicare Advantage but just scale back the initial bid levels of the PPOs and fee-for-service plans so that they match or come in under the traditional Medicare plan. This seems reasonable, especially if it maintains the ability of seniors -- which most seem to want -- to have some amount of choice over their health plan.

It'll be interesting to see whether the GOP lawmakers back this sensible recommendation, or if they insist on spending more public revenue on private industry in spite of the latter's inability to be what it always said it would be: more efficient.

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Anonymous John said...

Congressman Pete Stark is not the greatest authority on healthcare legislation...although he has meddled in that area his entire 35 plus year career in the House.

Of late, Stark is just an 'old fart' so to speak who wants to tick off the world. He rants and raves at his constituents and is not a nice guy…he's not a "poster child" that any organization would want to represent them…atheists or otherwise. Check out where he denigrated a constituent who just returned from an overseas deployment to Kosovo…the soldier wrote his congressman (Pete Stark) and got this angry insulting voicemail back. (See the link to the Fox News video below).

March 23, 2007  
Blogger Seth Zlotocha said...

Thanks for your comment, John.

However, Pete Stark really doesn't have much to do with this issue. And while I don't doubt he's been out there on some issues before, it doesn't appear that this is one of them. In fact, what he was saying -- that funding for Medicare Advantage needs to be brought in line with the rest of Medicare -- is supported in the MedPAC findings (and, actually, exactly what MedPAC recommended), while the argument of some GOP legislators to continue the funding inequities is contrary to those findings (and recommendations).

March 26, 2007  

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