Associated Press reporter Kevin Freking says today that congressional Democrats have made it a high priority to reduce the costs of Medicare: “Democrats Look to Trim Medicare Costs.”
It turns out that the proposal is to reduce expenditures, not cost, by $27.6 billion over five years. Payments to insurers offering managed care plans called “Medicare Advantage” would be reduced so that they are the same as payments to traditional fee-for-service Medicare providers.
Under traditional fee-for-service insurance plans, providers are reimbursed for the services they provide based on a published schedule. As long as the reimbursement rate exceeds the provider’s marginal cost, there is little incentive to control cost. If marginal cost exceeds the reimbursement rate, providers either will lose money, refuse to provide services, or game the system to provide other services that recoup the money lost on the original service.
Managed care plans are intended to create incentives for insurers to reduce cost by allowing them to retain what they save. Managed care has been a feature of Medicare for several years and is widely used in private health insurance plans. It also was an important element of the health care reform plan proposed by the Clinton administration in 1994.
According to Freking, congressional Democrats believe that Medicare Advantage plans have allowed insurers to “scrimp on care” to earn profits. Medicare Advantage plans also compete effectively with traditional fee-for-service plans:
For years, Democrats have said the Republican-led Congress intentionally overpaid insurers so they could offer lower costs and more benefits than are offered through traditional Medicare.
“We have strong evidence now that there are very, very large overpayments to insurance companies,” said Rep. John Dingell, D-Mich., who will probably serve as chairman of the House Energy and Commerce Committee.
Dr. Mark McClellan, who oversaw the Medicare program until just last month, said the payments to insurers make the program more affordable to beneficiaries. Their premiums would go up if the government subsidies went down, he said.
He also said that the plans offer patients the promise of more effective care than they get through traditional Medicare. For example, many diabetics in managed care undergo aggressive counseling and testing of their blood sugar levels to help them avoid costly complications down the road, such as kidney disease or stroke. They often don’t get that kind of coordinated care in the fee-for-service setting, he said.
“It would be a real shame for beneficiaries in Medicare not to have access to that,” McClellan said.
A starting point for objective policy analysis is to clearly distinguish expenditures and costs. Expenditures are what Congress appropriates to fund the Medicare program. Costs are the real resources consumed — for example, by doctors, laboratories, hospitals, and even insurance companies — to coordinate and provide health care. Medicare Advantage may or may not have reduced health care costs, but the debate thus far is not illuminating on that point because it is focused on federal expenditures.
McClellan warns that reducing expenditures will not reduce cost. Rather, reducing expenditures by $27.6 billion will shift costs to Medicare service providers and Medicare beneficiaries.
At least one ranking Democrat does not believe Medicare Advantage has actually reduced costs, and uses a metaphor that is unlikely to encourage dispassionate debate:
“Much like Iraqi weapons of mass destruction, the purported Medicare Advantage cost reductions don’t exist,” Rep. Pete Stark of California said in the summer. Stark oversees health care issues for Democrats on the House Ways and Means Committee.