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Medicare Advantage revenues are 30 percent higher than their health care spending!

February 7, 2020

Topics: Quote of the Day

By Vilsa Curto, Liran Einav, Amy Finkelstein, Jonathan Levin, Jay Bhattacharya
American Economic Association, American Economic Journal: Applied Economics, April 2019


We compare health care spending in public and private Medicare using newly available claims data from Medicare Advantage (MA) insurers. MA insurer revenues are 30 percent higher than their health care spending. Adjusting for enrollee mix, health care spending per enrollee in MA is 9 to 30 percent lower than in Traditional Medicare (TM), depending on the way we define “comparable” enrollees. Spending differences primarily reflect differences in health care utilization, with similar reductions for “high-value” and “low-value” care, rather than health care prices. We present evidence consistent with MA plans encouraging substitution to less expensive care and engaging in utilization management.

From the Introduction

While Traditional Medicare (TM) offers publicly administered insurance, a significant fraction of the over-65 Medicare population has opted out of TM in the last decade and enrolled in private insurance plans through Medicare Advantage (MA). In MA, private insurers receive capitated payments from the government for providing Medicare beneficiaries with health insurance that roughly mimics commercial health insurance for the under-65 population.

A simple tabulation of the MA and TM claims points to a large difference in public and private health care spending levels. We calculate that MA spending per enrollee-month in 2010 totaled $642, of which $590 was paid by MA insurers and the rest by enrollees out of pocket. In contrast, average spending per enrollee-month in TM was $911, of which $771 was paid directly by the Medicare program to providers. Capitated payments to the MA plans roughly track the latter amount; the MA plans in the HCCI data received on average $767 per enrollee-month. In other words, the revenue of the MA plans we observe is 30 percent higher than the payments they make for their enrollees’ health care. If this applied to the entire MA population in 2010 (including those outside our sample), it would imply $21 billion in annual (2010) revenue for MA insurers in excess of their spending on health care claims.

Lower health care spending in MA than in TM primarily reflects lower utilization of services rather than lower payments for the same services.

From the Conclusion

We find that MA insurer revenues are 30 percent higher than their health care spending. Health care spending per enrollee-month in MA is 30 percent lower than in TM; holding enrollee county and risk score fixed, this spending difference shrinks to 25 percent, and adjusting for mortality differences further reduces it to 9 percent.

The lower spending by MA enrollees is entirely due to lower health care utilization. Prices appear similar in MA and TM. Where we can most directly measure this—the price of an admission for a given DRG at a given hospital—we estimate that average prices in MA are 1.1 percent higher than in TM. Reductions in utilization appear similar both for types of care where there is concern about “overuse” (e.g., imaging and diagnostic tests) and where there is concern about “underuse” (e.g., preventive care).

We provide suggestive evidence for some of the potential channels by which MA may reduce health care utilization for enrollees. We find that utilization is lower in MA but that, conditional on an encounter, spending per encounter is similar or slightly higher in MA. This suggests that MA plans restrict utilization on the margin to sicker individuals. Relatedly, individuals discharged from the hospital are much more likely to be sent home—and less likely to be sent to a post-acute care facility—if they are enrolled in MA rather than in TM. We also find evidence consistent with substitution to less expensive types of care in MA; for example, differences in specialist visits are much larger than differences in primary care visits.

Finally, in light of the widespread interest in geographic variation in health care spending in TM, and recent work on geographic variation in commercial (under-65) private insurance, we explore similar comparisons in MA. Although geographic variation in spending in TM is often viewed as a reflection of the inefficiencies in a public health insurance system, we find similar—in fact, slightly larger—geographic variation in spending in MA compared to TM. And while recent work has emphasized the much greater geographic pricing variation in private commercial insurance than in TM, we find similar—in fact, slightly smaller—geographic variation in pricing in MA compared to TM.

One natural question these findings raise is their implications for MA insurers and consumers. For insurers, our estimates from MA data indicate that their revenue exceeds their health care expenditures by $177 (about 30 percent) per enrollee-month. Implications for consumers are more elusive, since the elements of their objective function are not as straightforward to define or measure.



By Don McCanne, M.D.

Per capita health care spending is much higher in the United States, on average twice that of other wealthy nations. It is now clear that this high level of spending is not due to greater utilization of health care services but rather is due to our high prices. Medicare is an exception. Medicare has been much more effective in controlling high prices than has the private commercial insurance sector.

This study is important because it provides a direct comparison of prices and utilization between the traditional Medicare (TM) program and the private Medicare Advantage (MA) plans offered as an option to Medicare beneficiaries.

Early on it was recognized that the private MA plans were successful in marketing their products to healthier Medicare beneficiaries while being paid at rates reflecting the lower average health of the entire, more expensive, Medicare population. To correct this scheme, risk adjustment was introduced with the intent of adjusting payments based on the health of each Medicare beneficiary. Private insurers, always being advocates of innovation, then began to upcode – adding diagnoses to each patient to make them appear sicker than they actually were. From a business perspective, that worked well since shareholders benefited from greater profits and rising stack evaluation.

So how effective was this? The MA plans have been able to keep payments down at the level of the TM program rather than having to pay higher rates comparable to the commercial plans. Yet by being paid capitation rates more appropriate for patients who were sicker than their healthier insured clients, the MA plans have been paid 30 percent higher than their spending on actual health care – comparable to a medical loss ratio (MLR) of 70 percent (medical loss being an insurance term for what has to be paid out on actual health care). Compare that to the requirement that larger employer-sponsored plans are required to meet an MLR of 85 percent, leaving only 15 percent for their administrative costs and profits. This explains why the larger insurance companies that dominate the MA market have done so well on Wall Street – the MA plans holding back 30 percent rather than the 15 percent or less of the larger commercial plans.

Supporters of the private MA plans contend that this shows that they are more effective in reducing unnecessary utilization of health care – that is, managing care – and thus they are entitled to greater rewards. In fact, this study shows that utilization of specialized services by MA patients is much lower, and there is also much lower utilization of post-acute care facilities. Since physicians are paid about the same in both TM and MA and have no reason to game referrals, this lower utilization strongly suggest that the MA patients are significantly healthier and that the MA plans are guilty of very serious upcoding.

The MA plans continue to grow in popularity. If patients think they are doing such a great job, then they should grapple with the question as to why there are so few specialty referrals. Could it be that physicians are withholding information about specialty care that they should have in order to increase the profits of the MA plans? Highly unlikely, especially since the physicians would have nothing to gain by doing this. Rather it is much more probable that the patients are healthier and have less need for specialized services. Yes, these patients are happy with their care – care that they don’t need and thus know nothing about. But what would these patients think if they knew that the insurers were being paid 30 percent more than it costs them to provide care? Would they really agree with this egregious waste of our tax dollars?

Since the private MA plans have been cheating us, why would we want to continue to support them with our tax dollars? Since the commercial insurance plans have been complicit in the exorbitantly high health care spending in the U.S., why would we want to leave them in charge of our health care dollars? Haven’t we had enough? Wouldn’t it be much better to improve the benefits of the traditional Medicare program, expand it to cover everyone, and then fund it equitably through progressive taxes that each of us could afford? Single payer, improved Medicare for All is just what we need to correct our health care injustices.

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About the Commentator, Don McCanne

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Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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