Where do Medicare Advantage dollars go? Into advertising. Source: Medicarechoices.org
Where do Medicare Advantage dollars go? Into advertising. Source: Medicarechoices.org

Earlier this year, an ad campaign in Washington showed an old man with binoculars, under the words "Seniors are watching." The ad warned Congress against cutting funding for Medicare Advantage, which pays private insurers to provide health benefits to more than a quarter of all Medicare enrollees.

The campaign, funded by America's Health Insurance Plans, the industry's leading trade association, argues that rate cuts "mean higher costs, lost benefits and lost provider choices for seniors." That seems pretty compelling. A newly released paper finds that it's also mostly bogus.

Medicare Advantage was initially meant to save Medicare money, by giving private insurers the chance to provide the same benefits at lower cost. Congress got in the way by increasing the amount of money insurers received for each beneficiary. By 2010, Medicare Advantage cost 9 percent more, per enrollee, than traditional Medicare.

The Affordable Care Act, signed that year, cut most of that additional funding, stripping $156 billion from the program from 2013 through 2022. Those cuts are only starting to phase in, which explains why insurers have started to increase pressure on Congress to avert or offset those cuts.

The new paper will make the insurers' pitch much harder -- or it would, if these things were decided on the merits. Written by Mark Duggan, Amanda Starc and Boris Vabson, economists from the University of Pennsylvania's Wharton School, it finds that as little as one-sixth of the federal subsidies that fuel Medicare Advantage actually filter down to beneficiaries in the form of better benefits. Here's how they put it:

It would be natural to assume that the higher subsidies are passed on to consumers in the form of lower premiums, OOPC [out-of-pocket costs], or higher quality. Our empirical results do not support this conclusion.

So where does that money go? The authors find that much of it flows to insurers in the form of higher profits. A lot of the money also winds up going to advertising, which is how Medicare Advantage plans get people to enroll.

Where does all this leave the gentleman with the binoculars? (Not the model -- whose payment is a good example of where those Medicare Advantage dollars go -- but the older Americans he's meant to represent.) To be fair, even with just a slice of the additional money going to Medicare Advantage helping beneficiaries, you could argue they have a right to be concerned about cuts.

Then again, defending a program that mainly benefits insurers and the media companies that receive their ad dollars, on the grounds that it also helps senior citizens a little bit, isn't much of sales pitch. So the next time you see that stern old man on the side of a bus, remember who's paying for those ads: We are.

To contact the writer of this article: Christopher Flavelle at cflavelle@bloomberg.net.

To contact the editor responsible for this article: Stacey Shick at sshick@bloomberg.net.