Medicare Advantage
Matthew Martin
2/19/2013 04:40:00 PM
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Cliff explains why the stocks corrected:
Late Friday afternoon, right after the market closed, the federal government cut Medicare Advantage reimbursement rates ... about 7 to 8 percent in 2014. Health investors were already girding for a slight haircut, as the Affordable Care Act’s reduced Medicare Advantage payments begin to kick in next year....they did not expect ... a 2.3 percent reduction in the per capita growth rate for each Medicare beneficiaries. Compare that to rates set for this year, which gave Medicare Advantage plans a 2.5 percent per beneficiary pay boost, meant to cover overall growth in health care costs.Normally, congress regularly increases Medicare Advantage reimbursement rates by around 2.5% every year to offset overall growth rates in healthcare costs. So when the ACA scheduled cuts to the level of reimbursement to begin 2014, insurers thought they would still get the annual 2.5% growth in reimbursement rates, offsetting the cuts. On Friday, Congress promised that it would decrease the growth rate by 2.4%.
Here's a little background on what's going on. Medicare Advantage, also called Medicare Part C, is a privatized version of traditional Medicare (Parts A and B). It is an optional program where instead of paying hospitals and health providers directly, as Medicare Part A and Part B do, Medicare Advantage pays a private health insurance company, who then provides the same benefits as Medicare Part A and Part B. About 25% of all seniors have opted for Medicare Advantage instead of traditional Medicare.
Medicare Advantage has a few theoretical advantages. One is that this would allow for the much-fabled "market competition" to work, as private Medicare Advantage plans compete with eachother on price and quality. Another advantage is that private insurers have a bit more flexibility than traditional medicare has--for example, they can provide additional benefits it they want, or they can form provider networks and attempt to control costs through "managed care" practices (ie, where you can only see in-network doctors/hospitals, and need permission from your primary care physician to use any health services).
That didn't work out in practice. There were several factors that prevented competition from working its magic--adverse selection and loading costs, to name a couple. But perhaps more central to the issue is that private insurers for Medicare Advantage aren't actually competing on price. There have been a lot of papers estimating the price elasticities of various specific health insurance plans (technically, these are "semi-elasticities" since they are estimated against only to the enrollee's out-of-pocket premiums). The price elasticity tells us how sensitive customers are to changes in the price of that plan, so if there is a lot of price competition between insurers, we will see very large (absolute value) elasticities on individual plans. As policy makers, we want to enact policies that will increase the magnitude of the price elasticies--Germany was reasonably successful at achieving this in a recent reform measure in 2007.
The price elasticity on Medicare Advantage plans, by contrast, are low.[1] Hades low. Almost zero. What that means is that enrollees in Medicare Part C are not picking the cheapest health plans, but rather sticking with their insurer regardless of cost. That means that individual insurers under Medicare Advantage can essentially engage in non-competitive pricing, and have almost no incentive to cut costs.
That empirical fact explains why Medicare Advantage actually costs the federal government considerably more than traditional medicare--1,138 dollars more per enrollee, according than Sarah Cliff.
Therefore, the fact that health insurance stocks tanked today is a good thing. Ideally, it means private insurers will get their act together. But even if they prove unable to cut costs, the outcome will be that private insurers will toss seniors back to traditional Medicare, thereby saving the federal government some $14 billion annually (according to my back-of-the-envelope calculation: roughly 12.5 million Part C enrollees x 1,138 per year per enrollee).
Note, some data on those price elasticities after the jump:
[1] Just a quick addendum on the estimated semi-elasticities:
Estimates for Medicare part D:
0.007 Atherly et al. (2003)
0.009 Town and Liu (2003)
0.0129 Dunn (2010)
Estimates for other types of insurance plans:
0.05 to 0.25 Buchmuller &Feldstein (1997)
0.08 to 0.16 Chan & Gruber (2010)
0.11 Einav et al. (2010)
0.07 to 0.09 Bundorf et al. (comming soon to the AER)
I've attempted to convert these all into the same units, my apologies if there are mistakes--think of them as the percent decrease in a plan's market share in response to a $10/month increase in out-of-pocket premia.
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