The Obama Administration surrendered to political reality yesterday, granting a program that seniors love and that it loathes a reprieve from what would have been devastating cuts.
Medicare Advantage (MA) plans are private health insurance products that are offered to beneficiaries alongside traditional Medicare. Roughly one in four seniors has declined to sign up for traditional Medicare coverage, opting instead to join an MA plan. The Centers for Medicare and Medicaid Services (CMS) had threatened to cut payments to those plans by up to 10 percent next year. Yesterday it relented, announcing that it would provide plans a positive update of 3.3 percent.
Democrats generally abhor the participation of private plans in Medicare. That made MA a juicy target for cuts in the health care law that the President championed. That law requires CMS to slash payments to MA plans by $308 billion, accounting for the biggest chunk of the law’s $716 billion in Medicare cuts. Those cuts in government subsidies for the health care of older Americans are supposed to offset some of the costs of providing subsidized coverage to younger low and middle income people.
Actually implementing those cuts is proving politically more tricky – particularly for Democrats — than the White House reckoned. The MA cuts are especially tough. In the traditional Medicare program, savings can be achieved by cutting payments to hospitals, doctors, therapists and others who provide care to the elderly. Seniors don’t see those cuts directly, although they will feel their effects sooner or later as low payments lead more doctors to refuse to see Medicare patients.
Cuts in payments to MA plans, however, are more direct and, consequently, harder to disguise. That’s because they are not paid directly to hospitals or doctors, but rather to the MA plan in which a senior elects to enroll. Because payments to MA plans are premium subsidies, any cuts to those payments result in premium increases for enrollees. That makes it impossible for politicians to pretend that MA cuts don’t harm seniors.
Which is why, just months after enacting MA cuts in the March 2010 health care law, the Administration mitigated them in the run-up to the President’s re-election. They did it by announcing a “demonstration program” estimated to increase payments to MA plans by $8.35 billion. The program drew a rebuke from the General Accountability Office, but served its purpose, postponing the worst of the health law’s MA cuts until after the election.
With the President safely returned to office, CMS announced earlier this year that it would cut MA payments by 10 percent. There was just one problem: Democratic Members of Congress, unlike the President, have to face the voters again. More than 160 Senators and Representatives, including all 11 Massachusetts Democrats, wrote CMS to protest the cuts. That campaign led to yesterday’s announcement that the agency would provide MA plans with a positive update.
That decision, in my view, is the right one. Medicare Advantage represents the best of the Medicare program. For seniors, it offers a modernized benefit, one that looks a lot more like the coverage that working-age Americans receive than the antiquated traditional Medicare benefit. Seniors in MA typically pay only $10 or $15 when they see their doctor, as opposed to 20 percent of the bill (after meeting a deductible of $147) under traditional Medicare. MA plans also often offer catastrophic protection, capping annual medical expenses (e.g., a $4,000 cap on out-of-pocket spending). Traditional Medicare offers no protection against bankruptcy-inducing medical bills. MA plans, unlike traditional Medicare, also typically cover dental and hearing services and many incorporate prescription drug coverage, rather than requiring beneficiaries to pay a separate premium to cover their medicines.
More importantly, MA avoids the biggest flaw in traditional Medicare: government price-setting. In MA private insurers negotiate rates with hospitals and form networks of preferred providers, then compete for customers with other insurers over price, coverage and quality. The government’s role is generally limited to assuring that the plans provide required coverage, are financially stable and charge a fair premium.
In traditional Medicare, government uses a political and bureaucratic process to determine how much to pay providers for specific services. The process is predictably Kafkaesque, involving a determination of how much a unit of a doctor’s time and effort should cost ($34.0203, in case you were wondering). This “conversion factor” is then plugged into a clunky formula that takes into account the resource-based relative value of each procedure (attempting to quantify the difference in value between, say, heart surgery and an annual checkup), labor costs in a particular area, rents, malpractice insurance and the like. (You can find the formula here.)
This price-setting process, in addition to being almost comically complex, is open to a good deal of mischief. Bureaucrats, politicians, lobbyists and interest groups of various descriptions all weigh in to influence the price-setting process. The AMA exerts outsized control over physician price-setting through its “Resource Utilization Committees” (RUCS), which greatly influence the bureaucracy’s decisions over how much Medicare pays for specific procedures. The RUCS have triggered food fights among doctors themselves, with primary care physicians calling on the government to abolish them because they allegedly favor specialists.
This shit show isn’t confined to physician payments, but is replicated in some form in virtually every category of Medicare reimbursement. And the distortions this process produces don’t stop with Medicare. As the government tries to wring savings out of the program by squeezing reimbursement rates, doctors and hospitals press for higher payments from private insurers to offset their Medicare losses. Over time, commercial reimbursement rates have come to be defined as multiples of the Medicare scale, with private insurers paying amounts above the Medicare rates. And so the poison of government price-setting leeches into the premiums you and your employer pay for coverage.
Government price-setting in traditional Medicare has distorted prices, impaired the functioning of markets and driven up premiums for private insurance. That price-setting, sadly, will continue, but at least the Administration was shamed into preserving a degree of choice for seniors by giving MA one more reprieve. At least until the next election.
Interesting and provided me with more insight on the issue. It looks like the problem is that Obamacare risks a death by a thousand cuts. Or at least a severe wounding. And I don’t think that is necessarily a good thing for the tax payers.