Would Medicare Advantage Options Really Cost More?

One of the big ‘war of words’ in health care is the issue of Medicare managed care – namely the Medicare Advantage program. President Obama and many Democrats want to scuttle the program because the cost of the managed care version of the Medicare program is purportedly 13% above the costs of the same beneficiaries in the fee-for-service version. Many consumers, and many Republicans, like the features and benefits and the voucher-like market orientation (respectively) of these plans.

The basic objections are captured quite succinctly by Ezra Klein in a piece in the The Washington Post, A private Medicare System Would be a Costlier Medicare System. He states, “They save money by limiting the generosity of the vouchers. Because the dirty little secret is that turning Medicare into a voucher program would actually make it cost much, much more. How do we know? Well, putting aside the fact that Medicare currently costs much less than private insurance, we actually have a private voucher program in Medicare as we speak. [...] But today, the market-based arm of the program costs more, not less, per beneficiary. Those fixed monthly payments to Advantage plans are, on average, 13 percent above fee-for-service Medicare costs.”

I think Medicare Advantage plans are an inevitable solution for the Medicare plan. The current fee-for-service system is an ungainly muddle of rules, with only the reduction in benefits (not politically feasible) and reduction in provider fees as its cost containment mechanisms. Even the health care reform initiative recognizes this through the creation of “accountable care organizations,” which are essentially provider-owned managed care plans. (And, it won’t take long for those provider-owned plans to “buy” managed care infrastructure from the current managed care programs.) Only this change in financing, moving us away from fee-for-service, permits the health care system to move beyond the current silos of reimbursement and allows for the rationing of services, which is an inevitability with, or without, health care reform.

That said, the failure that we currently have in the excessive rates mentioned by Mr. Klein is not a failure in program design, but rather a failure in contract negotiations and management. Medicare Advantage plans should not cost 13% more (or any more) than their fee-for-service alternatives. And, the medical loss ratio reporting requirements absolutely must be applied to Medicare Advantage plans to permit true transparency for consumers and a contract management tool for Medicare.