Medicare + Choice = Insurance Boon

The latest argument against the Baucus bill, and health-care reform generally, is that it is illegitimate to finance insurance subsidies for the uninsured via reductions in the amount of money that will go to Medicare if no change is enacted. The flashpoint of this discussion is the proposed reduction in payments by Medicare to private insurance companies under Medicare Advantage.

Medicare Advantage is the latest reincarnation of an experiment started in the 1970s in which elderly individuals were allowed to enroll in private insurance (mostly HMOs), with Medicare paying their premiums. The original goal of this policy was to save the Medicare program money, but such savings never materialized.

Until 2006, the premiums paid by Medicare were based on how much Medicare spent caring for the average beneficiary in a given county. In the 1980s and 1990s, Medicare paid insurance companies 95 percent of this county-based average as a premium.

However, this did not save money because persons choosing to sign up were healthier and would have cost Medicare less than 95 percent of this average had they remained in traditional Medicare. It is not clear whether this is because sicker persons are less willing to change insurance or whether insurance companies were simply successful in marketing to healthier persons.

In 1997 the name of the program was changed from Medicare HMOs to Medicare+Choice, but the idea remained the same: elderly persons choosing private insurance plans with Medicare paying the premiums. While there were still no cost savings, efforts to expand enrollment in such plans have increased since then. During the past five years, premium payments to private insurance companies have risen dramatically, as the Bush administration was eager to encourage Medicare beneficiaries to join private plans, even if it cost more. Currently just over 1 in 5 Medicare beneficiaries are covered by Medicare Advantage plans, up from 1 in 7covered by Medicare+Choice in the late 1990s.

The main argument against reducing the amount paid for Medicare Advantage plans is that it would result in enrollment reductions and loss of extra benefits that private plans provide, such as enhanced drug or dental coverage. However, a recent study shows that for each extra dollar Medicare pays to private insurance companies for these plans, beneficiaries get 14 cents of extra benefits, with the rest flowing to insurance companies.

Deleting a Tax Subsidy from the EquationOn balance, these extra benefits are not worth the extra cost -- Medicare is now paying to private insurance companies 114 percent of the average cost of caring for a beneficiary in traditional Medicare. The Baucus bill would force rebidding of Medicare Advantage premiums, which would reduce the premiums paid, causing a decline in plan enrollment as some insurance companies exited this market.

It is good policy to reduce the premiums paid to private insurance companies under Medicare Advantage even if it leads to enrollment declines, because the increase in benefits is small but the financial burden to Medicare is large. If you want to argue against this proposed policy change, you call it a cut in benefits. If you want to argue for it, you call it a reduction in Medicare expenditures that improves program solvency. It is both.

Medicare is a traditional source of savings anytime there is an attempt to slow federal spending growth. About half of the savings enacted by the Balanced Budget Act of 1997 came from reductions in planned Medicare spending. And those savings went for deficit reduction. In this case, reductions in Medicare spending compared to planned levels are slated for investment in the health system, with the largest investment being subsidies to help the uninsured buy insurance. This could be spun as an inter-generational battle royale, perhaps the first of many to come. But this is a superficial analysis at best.

At the risk of belaboring the obvious, the uninsured being helped to purchase insurance under reform are the children, grandchildren and great-grandchildren of Medicare beneficiaries. And those to be helped to buy insurance are some of the same people who do and will pay taxes to finance Medicare -- not for some faceless group of people but for their parents, grandparents and great-grandparents.


Donald H. Taylor Jr. is an assistant professor of public policy. His blog is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on October 2, 2009.  This is part of a weekly series of articles by Donald Taylor exploring aspects of the health care reform issue.