Spillover Benefits From Medicare Advantage

I previous reported on an NBER study finding that medicare advantage expansion lowers hospital costs for other patients as well. But I missed something picked up by Austin Frakt. The government gets money back from spending on MNA plans. From the study:

[I]ncreasing MA monthly payments by $100 (about one standard deviation) would increase the share of beneficiaries in MA by just under 5 percentage points…This would increase total MA spending by $100 per month for the existing and new enrollees, or almost $5 billion in total for these states. Overall costs of hospital care is estimated to go down by something like 2% when MA penetration increases by 5 percentage points, off a base of total hospital costs for the [traditional Medicare] population remaining in these states (after the implied shift to MA) of just under $30 billion, or about $600 million. Hospital costs for those in [traditional Medicare] would thus go down by upwards of 10% of the increase in spending on MA.

From Austin:

However, the 2% reduction in hospital care cost also applies to the commercial market, so the estimated, system-wide savings are larger than estimated in this example. (Why didn’t the authors provide the system-wide savings figure?) Still, it’s unlikely that additional MA payments are fully offset by spillovers.

Remember that the federal government is heavily subsidizing the rest of the market — paying two thirds of Medicaid and, say, one-third of private coverage (thought the income tax exclusion). So, although the feds may not get all their money back, they are getting a good chunk of it back.

Comments (16)

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  1. Buster says:

    Many seniors value their MA plans. It makes sense that a managed care plan could better coordinate care than a traditional (unmanaged) Fee-for-Service (FFS) Medicare. One of my friends once complained that the FFS Medicare physicians he knew just referred patients to specialist rather than treating them. I doubt if most MA plans do that since the plans are at risk for the costs.

    • Will says:

      Great Analysis.

    • Harley says:

      You know… FFS has another meaning, and it describes this whole situation perfectly.

    • Dennis Byron says:

      Part C Medicare Advantage health plans are a great deal
      — IF your doctor and his hospital accept it and
      — IF you don’t live in two different parts of the the country for long portions of the year. (Most of them are HMOs; it’s a typical network vs no-netork trade-off that has nothing to do with Part C.).

      In addition all Part C plans are a good deal because — unlike Original Medicare — they all include catastrophic coverage. I have never seen any research on this feature of Part C plans but I suspect it is a major reason the plans continue to grow even though every one knows that the “additional payment” will be cut to zero within a year or two.

      • Dennis Byron says:

        What a Male chauvinist pig I am! I should have said “IF your doctor and his OR HER hospital accept it.” Especially since I have a daughter who is a doctor.

    • Al says:

      A lot of times the FFS doc should refer you out and a lot of times the HMO model doesn’t when they should. If one considers a cardiac study done at Dartmouth where the patient’s medical conditions and improvement were assessed those referred out to cardiologists did best. If one looks at the extremely well regarded Ware study comparing FFS to HMO’s one found “During the study period, elderly and poor chronically ill patients had worse physical health outcomes in HMOs than in FFS systems”. I wouldn’t criticize the FFS doc for referring a lot of patients out. I might condemn the HMO doc for not doing so.

      I prefer better outcomes to the so called “coordination” which frequently is geared to saving the insurer money.

  2. John Craeten says:

    We should try and streamline and fix the Medicare system to provide better care for the elderly, because the current system is riddled with problems.

    • Jack says:

      Well where would Congress go to pillage funds then? I would say that the Treasury’s general trust fund IOUs aren’t worth the paper they’re printed on.. but then again the people writing them control the volume and value of that paper.

      • Greg says:

        They could cut wasteful pork-barrel spending attached to numerous bills.

        • John Fembup says:

          “They could cut wasteful pork-barrel spending attached to numerous bills”


          Who put the pork there in the first place?

          And who elected them?

  3. Nigel says:

    The government is causing the vast majority of health-cost problems with mass direct and indirect subsidization of the health industry. If we could find an alternative to Medicare, Medicaid, and social security the U.S. financial crisis would not even come close to how bad it is today.

    • Greg says:

      One could look to policies such as the Chilean model, or other countries privatization methods.

      • Roget says:

        This is just spillover from the inertial hypocrisy of auto and agricultural subsidies. Instead of competing for consumers, the health industry seeks to maximize subsidies. “Give me your tired, your poor..” so we can disregard them all equally.

        • Greg says:

          ^Too true. Whatever you subsidize you get more of…so unhealthy impoverished individuals.

  4. August says:

    Good anyalysis from Frakt:

    “You can’t keep raising MA payments forever and expect large spillovers. There is some maximal payment rate that optimizes them, beyond which paying more doesn’t return as much in spillover goodness.”

    • Dennis Byron says:

      Kind of irrelevant. Congress passed a law three years ago to eliminate these “additional” payments to us Part C Medicare health plan subscribers. That’s why the Baicker research was meaningless. It was all about things that happened before the Patient Protection and Affordable Care Act (PPACA) was passed.

      Within a year or two–see NOTE, all Part C plans will receive no more on average than all our providers would have received on average from Medicare Parts A and B if we were on these antiquated fee for service (FFS) plans. This primarily has implications for the urban and rural poor in Part C PPOs. The typical Part C beneficiary is a suburban middle-income senior in a Part C HMO.

      The question then is what will happen to the Part C plan given this return to parity. Because the Part C HMO beneficiaries have always received about the same as if we were in FFS Medicare, those plans will probably continue and continue to offer good value.

      ((They are a great deal IF your doctor and his hospital accept it and IF you don’t live in two different parts of the the country for long portions of the year. (It’s an HMO; that trade-off has nothing to do with Part C.). All Part C plans are a good deal because unlike Original Medicare they include catastrophic coverage)).

      As the additional payments to Part C plans are further cut, the urban and rural poor on Part C PPOs will probably see large premium increases and/or benefit cuts and return to the FFS Medicare program. This appears to be what was intended by the Democratic Congress that passed PPACA. It did not like the fact that a big chunk of its constituency was using Republican-Party Medicare.

      NOTE: As of 2013 the differential is already down to 4% and most of that is from an Obama administration bonus program that the GAO found illegal.