Imagine a Medicare Advantage (MA) policy which increases the quality of health care for seniors, saves the government money, brings MA to the few remaining places that don’t have it, and puts checks in the hands of senior citizens. What you are about to read should do all that, in theory. However, I’m sure there are practical issues that I am overlooking, and I am hoping to attract comments noting those issues that, as Woody Allen once said, can take this from being a notion to an idea, and eventually a concept.
First, each county would have a “default” plan that would automatically enroll people on their 65th birthday, rather than have the traditional plan serve as the default option. (Those of us already in an HMO with a Medicare option can stay in it, seamlessly, rather than join the default plan.) Anyone could still opt out into the traditional plan or another MA plan, of course, at any time.
The default plan is chosen based partly on its Stars rating, but partly on a bid process, in which plans offer to pay the government for the right to be this default plan. The payment would be substantial for three reasons:
1. In some highly populous counties, MA is profitable enough to support fifteen or twenty plans, far more than would survive in a competitive market with market-based pricing. Much of this “excess profit” would be bid back to the government by the default plan, in exchange for access to many more enrollees;
2. Member acquisition costs for the default (“opt-out”) plan would be a small fraction of the $500- $1000 that a new member costs in today’s opt-in MA environment. Much of this savings would be included in the bid;
3. The bid would be calculated not based on just on one year’s profit, but rather on the expected lifetime value of a member, taking into account projected member retention and any scheduled or anticipated relative reductions in reimbursement.
The final part of the proposal is to ensure acceptability to seniors, via a rebate check. People who stay in any MA plan for one year get a check from the government, paid out of the bid proceeds. (Most people who stay in an MA plan for a year don’t later go back to fee-for-service, so a satisfactory first year should create a customer-for life.)
A brief review shows that perhaps we can have it all:
· Quality should increase because the Stars ratings –already a priority for many plans – would now have “teeth” beyond today’s small annual bonuses. It would be difficult to imagine low-rated plans routinely out-bidding higher rated plans. (If this happens, the bid formula should be changed to increase the importance of quality relative to the bid.)
· The Savings is obvious and immediate: the government receives checks capturing a chunk of the net present value of profits plus the savings in member acquisition costs. In addition, the government receives the biggest checks in the markets where the current pricing model generates the most profit. This phenomenon creates a “shadow price” that brings market forces to bear in areas where the federal pricing formulas are overly generous.
· Access is not a major issue any more, but counties in which no bids are made could be grouped together into one national contract, that would certainly reach the scale needed to attract bidders.
· And finally, satisfaction, already high in Medicare Advantage due to the better economics, would increase because of the rebate checks. The rebate checks should blunt or silence any objections by the AARP or any other organization purporting to represent seniors. Tough to argue against a policy in which participation is totally voluntary, quality increases, and checks are mailed out.
There are some logistical issues. One that comes to mind right away is that the default plan might have a higher premium than other plans in the market. People would be free to move to other plans. “Default” means just that — the choice still belongs to the member.
So where would the opposition come from? Well, we’ll see soon enough from the posted comments whose oxen are gored. Since excess profit is squeezed out of the private sector, some opposition will ironically come from health plans, especially those with low Stars ratings and high profitability – the ones who would be need to, and be likely to, submit the highest bids. More members joining a “default” plan will increase the plan’s contracting leverage, meaning that doctors and hospitals will make less money. The only beneficiaries of this idea are the seniors themselves and taxpayers, two constituencies not well-represented on THCB.
Al Lewis, called “the country’s leading outcomes measurement guru” in the 9th Annual Report on the Disease Management and Wellness Industries, is president of the Disease Management Purchasing Consortium, www.dismgmt.com. He was founder and first president of the Care Continuum Alliance. An excerpt from his forthcoming book Why Nobody Believes the Numbers: The Outcomes Measurement Guide for Grown-Ups may be downloaded here.
Nate, the “excess profits” are determined not by me or the government (as today), but rather by the size of the bids. In markets where there are 20 Medicare Advantage plans, these bids will be high, reflecting the profitability of those markets.
And other plans can still market their services to you. You are still welcome to switch plans just as today if you find a better one.
As for your “rate of profit,” it would be like today. If you can improve outcomes and negotiate good provider contracts, you’ll make money.
I’m a bit late to the party here, playing catchup on my recreational reading so thanks for leaving this on “editor’s choice.” I’ve read this posting and the comments up, down and sideways and there’s no question this “trumps” everything being discussed now, not to mention the current clunky system. The only problem with this is, it makes too much sense. Someone will find some reason to do something that enriches more industry stakeholders but creates less value. Meantime, someone should forward this to Obama or Romney, or even Gingrich to see if he’s as smart as he says he is about health care.
The numbers do seem to add up. I’ve asked around since I first read this posting last month, because the “have it all” conclusion seemed too good to be true. But it works on paper.
There are two sources of waste in MA: member acquisition costs and excess profits in some markets. This gets rid of both of them. That’s probably why this proposal will never see the light of day: the insurance companies, quite ironically, will oppose it.
In fact, everyone will oppose it except the AARP (because of the rebates). This makes it just the opposite of most privatization ideas! It actually benefits people, not special interests. Hence it’s DOA.
what’s excess profits?
If I could lower medciare cost 60% tomorrow, deliver better care, make people healthier, and create the idea system are you saying my rate of profit should be the same as someone that doesn’t achieve any of that?
How do you determine excess profit? Is it a %? Is it a $?
“There are two sources of waste in MA: member acquisition costs”
I forget the exact number but something like 70% of insured drivers could save money by changing auto insurance carriers but the average driver only shops once every 5 years. How will MA mebers be made aware of cheaper or better performing plans if someone is not marketing them?
If I spend $500 to make you aware of a plan that saves you $1000 per year how is the $500 wasted money?
Assuming Medicare is “going private’ this seems like the best way to do it, ideology aside. Money gets saved, seniors get rebates, and the high-quality plans get a boost. Much better than “vouchers”. that don’t save money (except on the backs of seniors), increase sales expense instead of reducing it, and don’t address the “excess profit” the way this proposal does.
This is just so wrong on so many levels to me. First, I find it completely incongruous that we have to incent physicians to use a simple tool that is designed to make their life easier, their practice more efficient, and their care more effective. I can’t recall, but I didn’t see the need to incent the stethoscope, antibiotics, or any other health innovations.
Second, the offer itself is just dripping with the grease and slime of “taking” something “while the getting is good”. Does anyone care that this “stimulus” money is subject to the grossest abuses.
And third, perhaps most fundamentally, we are incenting the wrong thing. The EHR is not the end all be all technology to implement into practices across the country.
So that we all are try to improvr Medicare Quality, Savings, Access and Satisfaction with full of confidence.
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Profit or no profit, I still don’t understand the purpose of these plans. Is there an assumption that they can reduce costs by managing care?
If so, what is the purpose of ACOs, which are also supposed to take risk and reduce costs by managing care?
How many levels of passing down risk and general bureaucracy do we really need?
And at each level a few pennies are taken out from every health care dollar….
They do deliver Medicare benefits 2-4% cheaper then Medicare does. The purpose was to provide better benefits and fill holes in Medicare, i.e. Rx, dental, vision. They were also created to hopefully get government out of healtcare, its easier to budget when you tell 10 insurers we will give you $x per month then let them ration and control cost then it is to actually run a healthplan.
I’m a liberal and I don’t think profit is a dirty word. In this scenario if any health plan “rationed their services” people would simply move to another plan or back to fee-for-service.
Also, because you’re setting up a single, major competitive bid to be the “default” choice, a lot of what would have been profit gets traded back to the government for the promise of greater enrollment at a much lower acquisition cost.
This is absurd! What a hand out to insurance companies. Seniors will be sorry once the for profit middle men start rationing their services to report big earnings to their share holders. Single payer works so much better, we just need to get the whole nation/state covered. Then were talking real leverage to negotiate provider/drug fees. I’ve lived in a single payer country and it is a wonderful thing…soon it will spread across America, perhaps pushing MA will get people to realize even sooner that private insurance companies shouldn’t be practicing medicine and getting in between people and doctors.
I would just add that, to me, profit, within reason, is not a dirty word, even in the healthcare field. To many liberals, it is.
Humana’s medical cost ratio on its Medicare Advantage business is probably in the 85% range as far as I can tell which, in a normal year, implies 10% for administrative costs and 5% for profit pretax. I think that’s reasonable. Medicare has numerous administrative functions performed for it by other government agencies that don’t count in its administrative cost calculation nor does the cost of fraud which, while difficult to quantify precisely, is virtually certain to be much higher than in the private insurance sector.
Innovation is not Medicare’s strength. It took 41 years before it offered a prescription drug plan which private insurers had for decades. When it runs pilot projects, they take years to complete and then evaluate. Care coordination requires the alignment of incentives which generally means some form of capitation, bundled payment, a significant bonus scheme for scoring well on agreed upon metrics or shared savings. Straight fee for service with no provider risk or potential for additional reward is unlikely to get the job done.
It’s also important to note that the wealthiest 5% of seniors are already paying significantly more for their Part B premium. Those who make over $428,000 per year pay $344 per month vs. the standard premium of $99.90 for 2012. At the same time, they’ve paid much more in Medicare taxes over their working lives and, since 1993, have paid the tax on their entire earnings from wages, bonuses, stock option and restricted stock awards. If they derive no benefit whatsoever from all those taxes paid, it is likely to erode political support for the program and turn it into something akin to welfare. Even many liberals oppose eliminating subsidies for the wealthiest completely for exactly that reason. Finally, most of the 5% of seniors subject to the extra Part B premiums, including myself, opt for standard Medicare plus Medigap because we prefer maximum provider choice, especially when traveling outside of our home region. We’ll pay for our own gym memberships, thank you very much.
I think there should be something in between dual eligibility and wealthy seniors that could provide some assistance with Medigap to those who truly need it.
As to manage care, as always, I don’t see why care cannot be coordinated and managed within a fee for service framework. Perhaps Medicare should concentrate on that instead of feeding the private sector. Even those low profit margins you are quoting above (after “administrative” excesses) could probably pay for a lot of coordination and management.
“Wouldn’t it be cheaper to selectively help low income seniors with Medigap payments?”
We already do this. There are between 9 and 10 million people who are eligible for both Medicare and Medicaid (dual-eligibles). The question is where do you draw the line? Also, there are huge regional differences in living costs, especially related to the cost of housing and state and local taxes. Even within states the differences can be substantial – NY and CA for example.
Another issue that’s not talked about is that the MA plans are doing some good work in the management of chronic disease. Through more intensive use of case managers and other strategies, they are reducing hospital inpatient bed days vs. patients with original Medicare. Even if there is little net cost saving in the end because the disease management approaches can be expensive as well, many of the sickest patients are net better off. Isn’t that a good thing? Unmanaged fee for service Medicare hasn’t been able to do that.
“people who opt for a Medicare Advantage plan don’t need a Medigap policy to fill in the large coverage gaps in standard Medicare. This is an especially important issue for lower income seniors.”
Right. But MA is available to seniors of all incomes. So while we are supposedly trying to reduce Medicare expenditures, we are effectively expanding covered benefits to those who need help and those who don’t. How does this make any sense? Wouldn’t it be cheaper to selectively help low income seniors with Medigap payments?
Good points. However, I want to point out that your comment regarding provider choice only applies to MA HMO’s. The Private for Service provides that you can go to any physician who accepts the terms and conditions of the plan. The MA PPO plans provide lower reimbursements if you utilize an out of network provider.
Under Blue Cross of Idaho’s plans, if you elect to go back to original Medicare, you are allowed to enroll in Plan F without underwriting. I think that this might be a good safety net for those who do elect to return to OM.
Very few of the docs in my area take any of the MA plans, as it is impossible to keep up with their rules and fee schedules.
I’ll offer a few thoughts on this.
First, the profit margin on Medicare Advantage plans is not high. Humana, one of the two market leaders, builds a 5% pretax profit margin into its bids each year. If it does better than that, the following year it adjusts its premiums and benefit packages to reset the bid to a 5% margin again. I don’t see a lot of room for rebates here.
Second, MA payments are phasing down toward standard FFS Medicare. What never gets talked about, though, is that people who opt for a Medicare Advantage plan don’t need a Medigap policy to fill in the large coverage gaps in standard Medicare. This is an especially important issue for lower income seniors. My AARP Medigap policy under their “Plan F” (most comprehensive) will cost $157 per month in 2012. The implied actuarial value of standard Medicare Part B coverage is $428.75 per month based on the $344.00 per month that the highest income seniors will pay in 2012. That payment is set to cover 80% of expected program costs. I, for one, would like to see a comparison of actuarial ratings between standard Medicare and the various MA plans. An actuarial rating reflects the estimated percentage of medical costs incurred by a standard population that would be paid for by insurers as opposed to beneficiary out-of-pocket payments for deductibles, co-pays and non-covered services.
There are two downsides to MA plans, in my opinion. The first is limitation on provider choice which can be especially problematic when traveling outside of the beneficiary’s home region. The second is that if one later wants to go back to standard Medicare, under most circumstances, you will be subject to medical underwriting for Medigap coverage and you could be turned down altogether if you have serious medical issues.
While I don’t know what the current MA churn rate is, insurers will likely have some changes in their network composition, benefit offerings and/or premium every year. What was attractive to a particular person one year may not be the following year regardless of how many stars the plan earned. I don’t think being a default choice could be accurately valued by insurers as you present it.
From what I understand, the gap is supposed to phase out by 2017 or so, supposed being the key word. What I don’t understand is why do we have to allow for profit to be extracted from the basic package. Can’t they just profit from add-ons and sell the basic packages at cost, like insurers do in Europe? It may chase out the big boys, but maybe some innovative smaller companies would want to enter such market….
If we go this route, I have no problem with default enrollment.
thanks for the comments.
no, Margalit, you are still free to go into the government plan or any other private plan. The difference is that you would have to go to a mailbox or website to do so.
And you are right about the health plans costing more this minute. The bids should redress this, but I thought — and I could be wrong about this so please correct me (people on this site are always so shy about correcting the posts…) — that the gap between MA and FFS was supposed to phase out as part of “paying” for health reform?
Steve, I think you have an excellent point in that you don’t want to confuse folks with too many bids. The bids should perhaps be for a basic configuration of benefits.
“And finally, satisfaction, already high in Medicare Advantage due to the better economics, ” Traditional Medicare (TM) also has high satisfaction ratings. MA actually has worse economics since it costs more and the services it provides are not valued as much as they cost.
That aside, there are a number of variants out there on what you have suggested and I think they are worth trying. I would keep TM as the public option. Private companies could bid against it. The low bidder becomes the default for the area of coverage. For this to work, you need to have standardized packages of services covered. These need to be transparent and easily understood by the public. Ideally, these would be limited to a very small number of packages.
I don’t understand two things, Al.
1) Does the “default” notion means that somehow the government enters into an unknown to me contract with a private business on my behalf and without my explicit agreement on my 65th birthday? Does this effectively obligate me to pay whatever the government and the business agreed that I should pay?
2) How will reductions in expenditure be achieved if MA continues to track at several percentages higher than traditional Medicare? Are you expecting the rebates and bidding process to bring MA costs to taxpayers to levels below traditional Medicare?