Gin and Tonic asked a great question yesterday;
now that we’re in Medicare open enrollment and every second TV ad is about that, I’m left wondering how private insurers can offer what appear to be better benefits for the same or sometimes less money, while still making a profit. Is there some form of cream-skimming going on, where only the people with more expensive needs stay on Federal Medicare? This does not seem viable in the long term.
This is a great question.
Let’s think about revenue and expenditures..
We’ll do revenue first. Medicare Advantage insurers are supposed to be paid the risk adjusted average regional cost of treating the patients that they enroll. An individual with metastatic cancer who enrolls in a Medicare Advantage plan will trigger a larger payment from the federal government to the insurer than an individual with high blood pressure who lives across the street from the first individual. The challenge is that risk adjustment is imperfect and gameable in both benign and malicious manners.
Recent estimates state that the federal government pays Medicare Advantage plans 2% to 3% more for a similar patient than traditional Medicare due to very aggressive risk adjustment. This 2% to 3% wedge happens even after CMS takes off a decent chunk of a risk score to account for upcoding and risk adjustment gaming. Medicare Advantage insurers are really good at optimizing risk adjustment (when I worked at UPMC Health Plan I was in charge of optimizing Medicaid risk adjustment for several years using a similar set of tools). We know that tying payment to coding incentives vary how providers code events in traditional Medicare. Traditional Medicare which does not determine payment by diagnosis code at the outpatient office level will always be playing catch-up to normalize the gap between observed and reported realities in Medicare Advantage populations.
An extra 2% or 3% of revenue buys a lot of extra small benefits as a lot of people will look at a benefit, smile, buy on the basis of the existence and option value of that benefit and then never use it.
Now let’s talk about expenses.
Medicare Advantage tends to pay clinicians and hospitals close to the same rates as traditional Medicare. There is not a huge per unit cost difference. So where is the expense wedge?
The big thing is that Medicare Advantage is allowed to actively manage patient care. Traditional Medicare does not have differential cost-sharing within a type of service or by physician nor are there significant prior authorization or approval processes. Medicare Advantage will restrict which physicians people can use, they will restrict hospitals people use. Some of the selection of the network will be a function of the provider’s efficiency of care. For instance, excluding from the network docs who order MRIs willy nilly for unspecified lower back pain on the initial visit would be an “efficiency” decision. Some facilities and docs would be excluded because they want 110% Medicare and a good enough network could be built at 105% Medicare fee levels.
But the real expenditure squeeze is Medicare Advantage insurers will change care delivery pathways. There are procedures that could be done either in-patient or outpatient. Traditional Medicare has few tools to drive people to the cheaper outpatient settings. Medicare Advantage insurers will aggressively drive people to the cheaper outpatient settings. Recovery and post acute care are often squeezed and directed. These changes in treatment pathway are pervasive and spill-over into practice and care patterns for other payer types.
So Medicare Advantage increase revenue by a bit, pay about the same per unit of care but significantly reduce the number of units of care that their patients receive.
Is that a good trade-off — more benefits and better catastrophic protection for slightly more money and a lot more restrictions?
That is the key question.