BEYOND THE NUMBERS
In 2012, Medicare Advantage bids have come in on average a bit below traditional Medicare costs, analysis by the Medicare Payment Advisory Committee shows. Even more relevant to the revised Ryan plan is that, in 2009, the second-lowest bid in each U.S. county — which is what the new plan would be based on — was an average of 9 percent below traditional Medicare, a new analysis in the Journal of the American Medical Association shows.Does this mean that Medicare Advantage plans cost less than traditional Medicare? “No,” says Orszag, “because there’s a very good reason to believe that the 9 percent differential is a mirage.” Why? Because Medicare Advantage plans tend to enroll beneficiaries who are relatively healthy, and Medicare’s risk-adjustment process is highly imperfect.
Plans that can better predict beneficiary costs [are able] to game the system by selecting beneficiaries who are able to cost less than their risk-adjusted payments. ... How big is this selection effect in Medicare Advantage? The evidence suggests it’s huge. The most careful analysis was reported in a 2011 National Bureau of Economic Research paper . ... In 2006, ... relative to their bids, the plans were overpaid by $2,000 per beneficiary — or roughly 25 percent of the bid, on average.
That overpayment rate, furthermore, is likely to be higher for the second-lowest bid in each county, and it is therefore likely to be larger than the much-touted 9 percent discount, which doesn’t appropriately account for the selection effects.
The bottom line is that, if anything, Medicare Advantage bids are above, not below, traditional Medicare — once you do the analysis correctly, on an apples-to-apples basis.The question of how the costs of private health plans compare to that of traditional Medicare is a timely one. House Budget Committee Chairman Paul Ryan has proposed to gradually replace Medicare with a system of vouchers that seniors could use to help buy private health insurance or — in this year’s version of his proposal — a form of traditional Medicare. We reported that the 2011 version of his proposal would have raised total health care spending and massively shifted costs to beneficiaries. Ryan has not provided enough detail about the 2012 version of his plan for CBO to prepare a precise estimate, but the new plan is enough like the old one that it would have the same kinds of impacts, even though the numbers would differ.