Anyone worried about the cost of health care in the U.S. should view this week's capitulation on Medicare Advantage with concern.
Faced with a lobbying campaign that health insurers have described as their "largest ever," the federal government backed down from next year's proposed cuts to the program, which pays private insurers to deliver Medicare benefits. If the government has this much trouble trimming a useless subsidy for the insurance industry, it will have a hard time being frugal when it comes to health spending that actually matters.
When the program now called Medicare Advantage was created in 1982, the goal was to reduce costs by harnessing competition between private insurers. That goal was undermined starting in 1999 as Congress, in an attempt to draw more insurers into the program, increased federal payments until they exceeded the cost of traditional Medicare:
The Affordable Care Act includes a provision that reduces those extra payments and saves $156 billion over 10 years. The money not wasted on Medicare Advantage is supposed to help pay for extending insurance to more Americans. Those cuts started to take effect in 2012.
"Wasted" is the correct word, because the overpayments have not translated to significantly better care for the 28 percent of Medicare beneficiaries who use Medicare Advantage, as insurers have argued. Only a fifth of the extra payments even goes to pay for extra benefits, according to a report last month from economists at the University of Pennsylvania. Insurers use much of the rest for advertising or to increase their profits.
The performance of the Medicare Advantage market since Obamacare was passed supports the argument that trimming overpayments doesn't hurt beneficiaries. The insurance industry warned that less federal money would lead to higher premiums and lower enrollment. Instead, premiums have fallen almost 10 percent, and enrollment has increased by 38 percent.
Yet insurers have had some success in protecting their payments. Last year, the industry blocked a proposed cut of 2.3 percent per beneficiary for 2014, instead winning an increase of 3.3 percent. This week's victory turned a proposed cut of 1.9 percent per beneficiary for 2015 into a 0.4 percent increase.
It's hard to fault the insurance industry for defending its interests. More objectionable is that lawmakers from both parties have endorsed the industry's claims and pressured the Centers for Medicare & Medicaid Services to avert further cuts.
Medicare administrators say they remain committed to bringing Medicare Advantage costs in line with those of the traditional program. If so, they need to make sure the recent payment increases are only a detour on the path toward eliminating Medicare Advantage overpayments.
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