Medicare Advantage Cure Is Worse Than The Disease

Last Updated Sep 3, 2009 6:12 PM EDT

During the 2008 election campaign, then Sen. Obama and other Democratic Presidential candidates bemoaned the excessive amount that Medicare was paying private Medicare Advantage plans. And President Obama has made cutbacks in these payments part of his "reserve fund" for healthcare reform. But the way the government proposes to reduce payments to Medicare Advantage plans may be counterproductive, according to a new study from George Washington University.

The Office of Management and Budget has proposed a competitive bidding process in which the payments to MA plans would be based on the average of all bids submitted to the Centers for Medicare and Medicaid Services (CMS) in a particular area. The Congressional Budget Office has estimated that this approach would result in CMS paying only 101 percent of the amount spent on beneficiaries in the fee-for-service program, which would lead to savings of $150 billion over 10 years.

The recent GWU study, however, found that while CMS would pay about the same to MA plans nationally as it does in conventional Medicare, the amounts it would pay in relation to the fee-for-service program would vary markedly from one region to another. In 11 states, including Oregon, Rhode Island, Washington, and Wisconsin, CMS payments to MA plans would exceed fee-for-service payments by an average of 10 percent, or about $1,000 per enrollee. In contrast, payments to plans in other areas would drop steeply. In Florida, for example, they would be 20 percent, or $2,100, less than fee-for-service reimbursement per enrollee.

In general, MA plans would continue to receive higher payments in rural areas and small cities, while plans in large urban areas like Los Angeles, Miami and New York would be paid less than the fee-for-service Medicare level.

If the OMB's proposal is carried out, the authors say, MA plans would be unlikely to fold as many did in the late '90s, when their annual rate increases were capped. Even in lower-payment areas, their internal costs and profits would be accounted for in their bids. But the extra benefits they provide to Medicare beneficiaries would probably be curtailed.

Market-based reimbursement is an effort to counter the irrational payment methodology based on historical Medicare costs in each county. But if it results in benefit cutbacks to Medicare patients, the cure may be worse than the disease. And, if seniors get no added benefits in return for their premiums and network restrictions, they might as well switch back to traditional Medicare.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.