The Advantage of Medicare Advantage

Medicare Advantage is an important alternative to traditional Medicare, which operates as a government monopoly. Seniors can choose among various plans provided by private health plans and select one that best suits their needs. In order to participate in the program, insurers submit bids to the government for the right to offer policies and are paid according to a regional formula. Roughly one out of every four Medicare beneficiaries is in Medicare Advantage.

The other option for seniors is traditional Medicare, in which the government’s contractors pay doctors, hospitals, and other health-care providers according to Soviet-style prices, centrally fixed by bureaucrats in the federal government.

The federal government now claims that Medicare Advantage is too expensive. The Medicare Payment Advisory Commission concluded that the average Medicare Advantage plan costs the government $12 billion more than if beneficiaries had been consigned to conventional fee-for-service Medicare.

However, critics of Medicare Advantage ignore that this alternative helps keep health care costs for other patients lower than they would be if all seniors were consigned to fee-for-service Medicare. Conventional Medicare reimburses health care providers much less than it actually costs to treat a patient. In California, for instance, Medicare only pays about 74 cents for every dollar of cost. To compensate, hospitals charge privately-insured patients more: A “hidden tax.” Medicare Advantage plans cover hospitals’ costs, so Medicare Advantage helps relieve this hidden tax. Traditional Medicare underpayments cause privately-insured Americans to pay $49 billion more each year than they would if Medicare paid private-market rates. This “hidden tax” is four times greater than the alleged overpayments to Medicare Advantage plans. By driving more seniors into traditional Medicare, the government will significantly increase this hidden tax.

It will also reduce seniors’ access to care. Low reimbursement rates have already caused doctors to stop accepting Medicare patients. According to a 2008 survey, 36 percent of doctors report that Medicare payments do not cover the cost of providing care. 12 percent of those surveyed said that they’d closed their practices to new Medicare patients.

Earlier this year, the Kelsey-Seybold Clinic, the largest medical practice in Houston, announced it would no longer accept new patients with traditional Medicare coverage because reimbursements had fallen too low. The Mayo Clinic closed a primary-care clinic in Arizona for similar reasons. These high-quality providers issued press releases. Surely, many other providers have simply, quietly, stopped accepting new Medicare patients.

This is not to say that the cost structure of U.S. hospitals is remotely “efficient.” It certainly is not. Nor is it to say that Medicare Advantage doesn’t have significant shortcomings: It was designed to accommodate HMOs, managed-care organizations that cannot resolve the problems inherent in relying in third-party payment. Fee-for-service Medicare Advantage plans suffer perverse incentives that prevent “consumer-driven Medicare” from arising. A number of improvements can address these (and other) shortcomings.

But simply cutting payments to Medicare Advantage will only result in seniors getting lower quality care while shifting more costs to privately-insured Americans.

This blog post originally appeared on John Goodman’s Health Policy Blog.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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