Fix MEDICARE Now–Start With Medicare Advantage

Posted by David Edman in February 2010, Healthcare Reform, Healthcare Reform Blog on February 7th, 2010 | No Comments »

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In late January, while speaking to GOP Congressman at a planning retreat, President Obama asked for ideas on how to improve healthcare without spending lots of money.  Here’s one suggestion—we should fix Medicare Advantage now, and I believe that I bring a unique perspective on why and how to accomplish this.

Searching For Alternatives to Traditional Medicare

Around 1980, the Federal Government began a demonstration project where Medicare beneficiaries could join private health plans in order to receive their Medicare benefits.  It was called the “Medicare Capitation Demonstration Project”, involving 8 HMOs from around the country, including 4 in the Minneapolis/St. Paul region.

HMOs were paid a fixed monthly amount established by formula (95% of the area adjusted per capita costs or AAPCC) designed to save money for the government.  In exchange, the HMO provided an enrollee with their standard Medicare benefits plus ‘additional’ benefits (provided at the discretion of the participating HMO) designed to attract beneficiaries to voluntarily sign up,.

Beginning in 1981, I was working for a consulting firm based in Rockville, MD named Jurgovan and Blair, Inc. (JBI).  JBI had the evaluation contract, and I was part of a team of 8 or so people traveling the country to evaluate all aspects of the financial and operational effectiveness of this Demonstration program.

Demonstration Results

The government concluded that the concept of Medicare beneficiaries joining private plans was a success, a ‘win-win-win’ proposition.  The Federal Government saved money, the participating plans benefited from membership growth from a new source of patients, and the Medicare beneficiaries received great benefits (generally better that traditional Medicare) for little or no cost.  As a result of this demonstration, Congress passed a law in 1985 (part of the annual budget reconciliation) to allow qualified HMOs to contract with the government on this basis.

Two Plus Decades of Change (NOT for the Better)

The original Medicare Capitation Demonstration program has evolved into today’s Medicare Advantage (Part C) program.  However, the program has changed significantly since 1985, with over 11 million Medicare beneficiaries covered at the end of 2009.  But over the course of two decades and despite its popularity, the program has become costly and unwieldy in the following ways:

1. The government began allowing PPOs and later private fee-for-service (PFFS) plans to participate in the program.
2. The number of plan options has grown dramatically, making it very difficult for Medicare beneficiaries to understand and comparatively shop for coverage.
3. Payment formulas have been co-opted such that average payments to the plans are now 15% to 18% above average traditional Medicare costs (instead of 5% below).

Medicare Advantage should be fixed, but not eliminated as suggested by many Democrats.  Traditional Medicare is a financial mess and is decidedly NOT a better model for financing health care for the elderly.  The evidence—it costs 3X as much per capita for Medicare in Miami, FL compared to Honolulu, HI?  The major differences in costs and utilization reflect structural deficiencies in the government’s approach to paying for health services.

Solution To Runaway Medicare Costs

We need to go back to basics—the original principles for private plan participation in Medicare that worked in the 1980s.  The following changes should be made:

1. Allow only managed care plans (PPOs and HMOs) to participate in the program that meet specific standards for effectively managing utilization and cost.
2. Limit the number of benefit plan options—there should be 10 or so standard plan designs that any eligible insurer can offer to beneficiaries in its service area.
3. Continue using the current payment formula, but limited by a payment cap tied to average Medicare per capita costs in the country that is phased in over three years (e.g., 2011—the lesser of the current formula amount or 130% of the national average cost; 2012—cap reduced to 120%; 2013—110%; 2014—capped by the national average).

The above plan will force inefficient providers to model themselves after programs in other parts of the country that are delivering high quality care for less money.  This is managed competition—requiring insurance carriers to compete on the basis of cost and quality.  What do you think?