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If Premium Support is 'Fatal' for Medicare, Why is it Good Enough for Obamacare?

September 02, 2012

By Avik Roy

PRINTER FRIENDLY

I’ve written about how President Obama’s Medicare advertisements deliberately and egregiously misrepresent the Romney-Ryan plan for Medicare reform. Today, I want to talk about the wonkier critiques of that plan from leading liberal economists. The irony is that the very same wonks who criticize private insurance and premium support in the context of Medicare have endorsed the use of the same concepts in a law they enthusiastically support: Obamacare.

(DISCLOSURE: I am an outside adviser to the Romney campaign on health care issues. The opinions contained herein are mine alone, and do not necessarily correspond to those of the campaign.)

Peter Orszag, Obama’s former budget chief, wrote a piece for Bloomberg View last month declaring that the idea that the Romney-Ryan plan could lower Medicare’s costs was equivalent to believing in the "tooth fairy."

But as I and others have noted, we already see the benefits of private competition in the Medicare Advantage program, where a study by three Harvard economists—Zirui Song, David Cutler, and Michael Chernew—found that, under a competitive bidding system, Medicare Advantages plans could provide the same level of benefits as traditional Medicare, but as much as 13 percent cheaper.

Yuval Levin and James Capretta, accurately, have called this Harvard study "one of the strongest cases yet published in favor of premium support." But Orszag calls that conclusion a "mirage," claiming that the only way private plans could be delivering lower costs is by gaming the system.

The concept of "cherry-picking" the cheapest patients

In his new piece, Orszag alleges that private plans use a technique called risk selection, or "cherry-picking," to optimize their self-interest. Risk selection works like this: if insurance plan A (privately-run) and plan B (government-run) are asked to cover the same population of seniors at the same price, the privately-run plan can try to attract the healthiest seniors to its risk pool, leaving the sickest—and costliest—patients to the traditional Medicare program.

Indeed, when Medicare Advantage was first created in 1982, insurers did attempt to cherry-pick the youngest and healthiest seniors. This had the paradoxical effect of increasing Medicare’s costs, because the traditional government-run program still dominated the market, and thus its higher costs resulted in higher overall health spending.

The Balanced Budget Act of 1997 changed all this by introducing a more sophisticated risk-adjustment system. Risk adjustment programs examine the risk pools of competing plans, and force plans with healthier patients to pay into a fund that compensates the plans with sicker patients. The Swiss health care system successfully uses risk adjustment to ensure that competing plans don’t cherry-pick the least costly patients.

Unfortunately, the 1997 risk-adjustment system was too onerous, and private insurers started to drop out of the Medicare Advantage program. So, in 2003, Congress passed the Medicare Modernization Act, best known for adding Medicare’s prescription-drug program. The MMA increased payments to Medicare Advantage plans in order to improve their viability. By 2009, Medicare Advantage plans were being paid 14 percent more per patient than traditional Medicare. Today, one-quarter of all Medicare beneficiaries are on these privately-run Medicare Advantage plans.

Liberal critics of private-sector health insurance have long used this 14 percent figure to argue that private plans are 14 percent less efficient than public plans. But that’s not correct. Medicare Advantage plans are severely restricted from passing along cost savings to seniors; instead, they’re required by law to offer more generous benefits. Hence, while Medicare Advantage plans are costlier than traditional Medicare plans, they also have more generous benefits.

Are Medicare Advantage plans gaming the system?

The Harvard study, published in the Journal of the American Medical Association, looked at what Medicare Advantage plans would cost on an apples-to-apples basis, if their benefits were of equivalent financial value to those of government-run Medicare. The authors found that the cheapest plan would be 13 percent cheaper than traditional Medicare, and the second-cheapest plan would by 9 percent cheaper.

Orszag argues that private plans are cheaper not because they’re more efficient, but because they’re continuing to game the system. "The [risk-adjustment] system has improved over time," he writes, "but evidence suggests it still does not work very well." Orszag cites a 2011 paper by Jason Brown, Mark Duggan, Ilyana Kuziemko, and William Woolston which argues that insurers are still gaming the system through risk selection.

But that 2011 study does not observe any direct effort on the part of insurer plans to game the system. The authors simply assume that insurers’ cheaper prices are a result of cherry-picking, instead of greater efficiency. And that’s despite the fact that Medicare already has a rigorous risk-adjustment system, one that is being improved all the time.

David Cutler, one of the Harvard authors, goes even farther, declaring that analysts citing his paper to show that private plans are more efficient are "misusing" his study. He points out that the study proposes three explanations for the less-costly nature of privately-run Medicare Advantage plans:

"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."

It’s true that risk selection, or cherry-picking, could explain some of the difference between private plans and government ones. But Cutler provides no evidence to support that explanation. "At this point," he grants, "we really don’t know which answer is correct, although it’s entirely possible all three are true, to an extent."

That’s a bit of a duck from Cutler. If he really believes that insurance companies are successfully gaming the system, he should cite empirical evidence of how they are doing so. The Medicare program has plenty of authority to alter its risk-adjustment process in response to new evidence. In the absence of such evidence, however, his outrage is overwrought.

And the idea that medical education is responsible for the difference in cost-efficiency is implausible at best. Medicare actually benefits from having much of its administrative costs funded by other government agencies, masking the program’s true costs.

There are good reasons to believe private plans are more efficient. Traditional Medicare must contract with any willing provider of health-care services, regardless of efficiency or quality. Private Medicare Advantage plans, on the other hand, can steer their patients to more cost-efficient hospitals and doctors. Private plans also have some latitude to structure their plans in such a way as to incentive smarter health spending.

Obamacare relies on the same system of risk adjustment

One final point: if risk adjustment is a horrible and cruel way to cover America’s seniors, it’s also horrible and cruel for the 25 million Americans that Obamacare will place into subsidized insurance exchanges.

There’s more. The Romney-Ryan risk-adjustment system is modeled after the systems used in Medicare Advantage and the Medicare drug program. And, interestingly, so is Obamacare’s. In other words, if you think Obamacare is awesome for low-income Americans, you should also love Wyden-Ryan for America’s seniors.

Here’s what section 1343(b) of the Affordable Care Act says (emphasis added):

"The Secretary, in consultation with States, shall establish criteria and methods to be used in carrying out the risk adjustment activities under this section. The Secretary may utilize criteria and methods similar to the criteria and methods utilized under part C or D of title XVIII of the Social Security Act."

Part C is Medicare Advantage; Part D is the Medicare drug program.

Just as those two popular programs do, Obamacare sets up a risk-adjustment program to ensure that plans compete on quality and price, and not by cherry-picking the cheapest patients. So if Cutler thinks that risk adjustment "could be fatal" to America’s seniors, he should agree that it could also be fatal to those who buy insurance on Obamacare’s exchanges. And yet Cutler and Orszag both played key roles in the design and passage of Obamacare.

What’s good for the goose is good for the gander

So: do David Cutler and Peter Orszag believe that Obamacare’s insurance exchanges are fatally flawed, and that optimism about their success is equivalent to believing in the tooth fairy? Inquiring minds want to know.

The bottom line is this. Competitive bidding and premium support were Democratic ideas, ideas that Republicans like Mitt Romney and Paul Ryan adopted as a way of seeking bipartisan support for Medicare reform. Orszag and Cutler opposed these approaches so strongly that they incorporated them into the Affordable Care Act.

It’s certainly possible that Medicare’s risk-adjustment system can be improved. But if choice and competition are good enough for a key part of Obamacare, they’re good enough for the rest of America, too.

Original Source: http://www.forbes.com/sites/aroy/2012/09/02/whos-better-at-running-medicare-government-or-the-private-sector/

 

 
 
 

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