Medicare Is Too Good a Deal

I have had two experiences this week that suggest that the government is providing too much subsidy for Medicare. In one case, I received my 2013 plan materials from my Medicare Advantage plan. In the other, I had a medical episode that required extensive testing with high-technology equipment, and consultation with professional medical staff, for which I paid $20.

Under my Medicare Advantage plan, the amounts I pay for various services will actually be reduced. The maximum “out-of-pocket” amount that I will pay for all hospital and doctor services during the year is $3900 – a reduction of $1000 from this year’s $4900. For visits to my primary care physician, I now have a copayment of $5.00. Next year they will be free – no copayment. The cost of visits to specialists will be reduced from $35 to $20, and numerous other medical services will have a similar reduction.

In the other episode, I had to visit a hospital for a barium swallow test after a pill I swallowed went into my lungs rather than my esophagus. The test required a speech therapist to feed me various foods and watch the course of the foods through my throat on a very expensive looking x-ray machine. She will later write a report that will be sent to my specialist doctor. The process took 40 minutes, used expensive equipment, and included a detailed conversation with the speech therapist about what I could do to avoid further episodes. The hospital charge for the test was $180, there was an insurance discount (required by Medicare) of $80, the hospital billed Medicare for $80, and I paid $20.

These prices are ridiculous because I can easily afford to pay more.  It may be reasonable to provide highly discounted prices to low-income persons who really don’t have money to pay for medical care (many of whom would be on Medicaid), but any reasonably affluent person could afford to pay more than I paid above for important medical services. The problem is not just that I am getting away with a cheap price; it is that other people are subsidizing that price through their taxes. With a one trillion dollar annual deficit, in order to save me $1000 in my annual medical costs, the government will be forced to borrow money from China.

Subsidization by the government of such routine medical expenditures as doctor visits or lab tests subverts the purpose of insurance, which should be to protect against the costs of major medical events. Earlier in the year, I had a knee replacement operation, in which I spent three nights in the hospital. The hospital billed the government $108,000; Medicare disallowed $96,000, but paid $12,000 for the services provided to me. The initial bill obviously overstates the hospital’s costs, but the net amount seemed reasonable, if not a little bit less than what I had expected. The savings to me were substantial and an appropriate subject for insurance.

The price reductions imposed by Medicare also have unfortunate economic consequences. The marginal cost of a visit to my primary care physician is now zero. Now, anyone with a sniffle can go to the doctor for free, while previously, the minimal expenditure of five dollars would have dissuaded many people from bothering to go. I suspect there will be a substantial increase of patients in  doctors’ waiting rooms. This, of course, imposes a noneconomic cost in terms of waiting time that is probably the equivalent of the five dollar fee. But the fee is much more efficient as a market clearing mechanism.

There has been political discussion about means testing Medicare, with even President Obama supporting the concept. However, these discussions seem to have focused on increasing premiums for wealthier Americans. I suspect there would be more impact on Medicare expenditures if we means tested payments by the individual for medical services. A more affluent person might not be dissuaded from a doctor visit by a $20 co-pay, but might decide that $100 co-pay makes the visit not worth the expense. Whichever way it goes, there ultimately should be some form of means-testing.

Democrats Want to Kill Medicare Advantage

I wrote several blog posts in February and March explaining why Democrats hate Medicare Advantage.  To see them, look in the archives for those months.  Simply put, this was a program designed to encourage private alternatives to the traditional government Medicare program.  It provided lower costs to consumers and, at the same time, superior service.  The trade-off was that consumers had to deal with the doctors and hospitals on the insurer's list -- they gave up some freedom of choice.

The Wall street Journal has now published an interesting opinion article,  entitled Farewell, Medicare Advantage, which describes the attempts of the Administration to blame the inevitable cuts in the Medicare Advantage program on the insurance companies, rather than on the costs cuts required by the healthcare legislation.  It also notes some of the studies showing that Medicare Advantage improved the quality of medical care.  Thus, the Journal says:

"According to the Medicare Payment Advisory Commission, the Advantage HMOs that serve 15% of all seniors in Medicare cost on average two percentage points less for the same benefits than the traditional program, without fiat pricing.
Using government data, the insurer trade group AHIP estimates that Advantage beneficiaries in California spend 30% fewer days in the hospital than fee for service, 23% fewer days in Nevada. These successes and others have come about because Advantage allowed insurers and providers to collaborate, pay for value and coordinate care."

The article is well worth reading.  It is unfortunate that the Democrat's general antagonism to private enterprise leads them to  cut a program that provides major benefits to a quarter of all Medicare enrollees.

More Recognition of Increasing Cost of ObamaCare

Karl Rove has an excellent column this week in the Wall Street Journal about the inevitable increases in costs that will result from the ObamaCare bill.  He talks about the same Congressional Budget Office estimate that I blogged about two weeks ago -- it increased its estimate of costs by $115 billion more than it assumed when the bill was passed.  He also makes the interesting forecast that the government will seek to keep the Medicare Advantage plans from announcing their 2011 increases until after the election.  It's well worth reading, and there are 416 comments (most not very coherent) as of today.

Obama Health Plan Cuts Benefits for Quarter of All Seniors (Medicare Advantage III)

    My previous two posts discussed the details of the Medicare Advantage plans and the Administration's plans to cut them substantially in order to provide additional funding for its health-care proposal.  As Rep. Paul Ryan charged at the Health Care Summit, this is double counting in the sense that the administration has claimed that we need to reduce Medicare expenses substantially simply for Medicare to become solvent.  However, this particular reduction will have no effect on Medicare savings, because it is intended to he used to offset other costs of the health bill.  In any event, the savings are only $14 billion (see my Medicare Advantage I post).  Nevertheless, the Administration points to this as one of the major areas of savings that will offset the costs of providing health insurance to an additional 30 million people.

    The administration never admits that these particular cost savings affect a quarter of all Medicare users.  As noted in my previous post, 24% of all Medicare recipients use Medicare Advantage plans.  I suspect that, if they were fully aware of this, seniors would be even more upset about the Obama proposals than they are now  Moreover, these proposed cuts are not merely intended to save cost.  I believe that they are based on a philosophical difference with the entire concept of private plans in Medicare.  This plan was adopted in 2003 by a Republican administration and CongressI encourage the maximum use of marketplace incentives and government programs.  The plan has worked very well -- there are now millions of consumers Medicare Advantage plans who have received the benefits of competition.  Such competition will even affect the basic Medicare program which will have to respond to the loss of so many consumers.  These proposed cuts, therefore, are, in reality, an attack upon the entire concept of the marketplace.

Medicare Advantage I

I have been hearing so much in the current health care debate about how expensive Medical Advantage plans are, and how the Democrats expect to save enormous amounts of money by cutting them back to the level of fee-for-service payments that I decided to do some of my own research.  My conclusion is that they may cost slightly more than ordinary Medicare, but they provide substantially more benefits.  In addition, the savings that would be achieved by eliminating Medicare Advantage would amount to $14 billion at most, a very small proportion of the suppose of $500 billion in costs that the administration is proposing to squeeze out of Medicare.  ( According the to Medicare Payment Advisory Commission Final Report, March 2010, p. 260, "In 2009, Medicare spent roughly $14 billion dollars more for the beneficiaries enrolled in MA plans than it would have spent if they had stayed in FFS Medicare.")

I have a personal interest in this.  I am a member of a Medicare Advantage HMO plan that provides excellent service, at lower costs to me than my previous plans under vanilla Medicare.  It receives the basic Subpart B premium that I pay, but also covers all my premiums under the Subpart D drug plan.  This saves my wife and me about $900 per year.  In addition, the Medicare Advantage plan is also more generous in covering costs of hospitalization, charging a maximum of $125 a day in the first five or six days, with all the additional costs absorbed by the insurance.  Medicare has an exemption of approximately $1100, that the patient pays for each impatient hospital visit, no matter how long.

Moreover, Medicare Advantage is a lot more efficient and easy  to use than basic Medicare.  Under standard Medicare, I would receive a separate bill for each activity.  I would ignore the initial bill because it would be no way of knowing how much I actually owned.  The doctor would submit his bills to Medicare at a list price that was unrelated to any amount that Medicare would allow.  Medicare would then adjust the price to its standard cost for my procedure, and I could not be charged for more than this price.  It would then reimburse the doctor for 80% of the cost, and I would ultimately get a bill from the doctor's billing office.  These would be for negligible amounts, for example, six dollars or $10, for which I would then have to write a check and deposit in the mail at the cost of a stamp.  The amount of paperwork is enormous, and must impose substantial administrative costs on every doctor's office.

In contrast, under my Medicare Advantage plan, I make a co-pay of $10 for every visit to my primary care doctor, and $30 for each visit to a specialist, and that's it.  No further bills.  I don't know how complex the billing system is between doctors and insurance companies, but I suspect it is simpler, because the companies can deal on the basis of capitation, and not just fee-for-service.

Of course, there are trade-offs for me.  I am not free to choose any doctor, but most go to doctors on insurance company's list.  However, when I investigated this issue before signing up, I found that my primary care doctor and four of my five specialists were in the plan.  It is also a local plan covering the Dallas-Fort Worth area, which means that I cannot go outside this area for routine treatment.  If I have an emergency out of town, I am covered, but not otherwise.  From a consumer's point of view, my Medicare Advantage plan is far superior to standard Medicare, and I am very unhappy that the Democrats propose to destroy this benefit.  Their rationale has nothing to do with superior service, or efficiency, but simply with the fact that the average cost to the government per Medicare Advantage patient is 10% greater than per Medicare patient.  Subsequent posts on this subject will consider the history of Medicare Advantage, and the reimbursement structure for insurance companies, and whatever else may come to mind.