Obama was called a liar during his recent address to a joint session of Congress. Actually, he was not fully truthful
about the implications of cuts to Medicare. Obama repeated that his
health reform plan includes payment cuts for private Medicare Advantage
(MA) health plans:
The only thing this plan would eliminate is the
hundreds of billions of dollars in waste and fraud, as well as
unwarranted subsidies in Medicare that go to insurance companies —
subsidies that do everything to pad their profits and nothing to
improve your care. … So don’t pay attention to those scary stories
about how your benefits will be cut… That will never happen on my
watch. I will protect Medicare.
Obama’s claim that the cuts will trim insurer profits but not Medicare benefits was meant to calm nervous seniors. As I and others
have pointed out the proposed cuts will in fact reduce benefits to some
degree, contrary to the President’s assertion. But seniors, in
general, should not be concerned. First, only about 23% of Medicare beneficiaries are enrolled in an MA plan.
Second, there will be very little loss in consumer surplus due to MA payment cuts. Estimates from my 2008 International Journal of Healthcare Finance and Economics paper (co-authored by Steve Pizer and Roger Feldman)
suggest that the consumer surplus loss associated with cuts in payments
to MA plans will be only 14 cents per dollar saved. The study on which our paper
was based was funded by the Changes in Health Care Financing and
Organization (HCFO) Initiative of the Robert Wood Johnson Foundation
and is summarized in a HCFO Findings Brief.
In this case, consumer surplus is the dollar value that Medicare
beneficiaries receive from the benefits provided by their chosen health
plan. This is estimated by examining the detailed choices seniors
actually make and then calculating what they would be willing to pay,
on average, for particular bundles of benefits. It turns out that the
additional benefits and flexibility created by recent increases in MA
payment rates simply weren’t worth very much to seniors. By comparison,
the consumer surplus loss per dollar saved associated with eliminating
prescription drug plans, something no one has proposed, would be nine
Despite Obama’s rhetoric, the truth is that under his plan a small fraction of Medicare beneficiaries will
lose their MA benefits and/or face higher costs. However, the potential
savings are enormous and research shows that the benefit cuts needed to
achieve them will not be terribly missed. While Obama’s statements
about Medicare cuts are not strictly true, in practice they will turn
out to be mostly true.
Austin Frakt is a health economist and principal investigator
with the Department of Veterans Affairs’ Health Services Research and
Development Service and assistant professor with the Boston University
School of Public Health, Department of Health Policy and Management.
The views expressed in this post are his alone and do not necessarily
reflect the positions of Boston University or the Department of Veterans
Affairs. Frakt blogs at The Incidental Economist where this post first appeared.
Also by this Author: