It is not often that policymakers have the opportunity to improve healthcare coverage for seniors, while reducing costs at the same time – but potential reforms to Medicare Advantage may allow exactly this.
On September 1st, the Centers for Medicare and Medicaid Services moved to allow Medicare Advantage plans greater flexibility to offer supplemental benefits and reduce cost-sharing for beneficiaries. This shift promises to enhance the cost-effectiveness and quality of healthcare received by those with chronic conditions, but the administration’s hands are bound by statute from making more than a tentative step in this direction. By legislating in support of these efforts, Congress may have a rare opportunity to enhance the services available to Medicare enrollees, while generating savings for millions of senior and disabled citizens.
Ideally, the design of health insurance should protect the sick from costs that are out of their control and eliminate financial barriers to the most essential and effective medical services, while preserving the incentives for them to shop around for treatments and to be thrifty with more discretionary services. Unfortunately, Medicare’s statutory cost-sharing structure seems designed to do the opposite – falling heaviest on unforeseen hospital admissions and imposing potentially unlimited out-of-pocket costs on those suffering from prolonged illness, while doing nothing to disincentivize the inappropriate use of diagnostic tests and home health services. To protect themselves from these costs, those enrolled in traditional Medicare plans must purchase supplemental private Medicare coverage, costing on average an additional $2,196 per year.
Over the past decade, seniors have increasingly embraced Medicare Advantage plans as an alternative to these awkward and expensive arrangements. Under MA, plans are allowed to structure cost-sharing and provider networks to more efficiently provide the standard package of Medicare benefits – returning the savings to seniors in lower out-of-pocket costs and supplemental benefits. For instance, 60 percent of MA enrollees benefit from the addition of dental coverage, while 78 percent have access to plans that prevent catastrophic out-of-pocket costs for no additional premium.
However, Medicare Advantage plans are hobbled by an array of statutory provisions that undermine their attempts to provide such supplemental benefits. Every year, plans must submit “bids” to CMS, registering the cost at which they believe they could provide the standard package of Medicare benefits. If this bid is below a “benchmark” rate related to the estimated cost of CMS directly providing benefits, plans may rebate 50 to 70 percent of the difference to beneficiaries as supplemental benefits or reduced out-of-pocket costs. By implicitly taxing plans 30-50 percent (depending on a variety of regulatory performance metrics) for bidding below the benchmark, MA rules discourage them from cutting costs to pass on efficiencies to enrollees. As a result, a 2014 National Bureau of Economic Research study found that sudden increases in benchmarks tended to be retained by plans as higher profits and employed in increased advertising spending more than spent on supplemental benefits.
Plans are also currently prevented from increasing cost-sharing on any standard benefits, in order to lower them on supplemental services of preventive value. This frustrates their ability to fill gaps in the standard Medicare benefit, by financing care that keeps people out of the hospital, rather than waiting for beneficiaries to access services when they get sick. For example, the provision of oral healthcare by MA plans should not be impeded simply because its dental coverage is excluded from the “standard” benefit. Untreated gum disease could lead to infections and costly emergency room visits, while the loss of teeth can induce severe nutritional deficiencies and complications for existing chronic conditions. Similarly, plans should not be forced to disfavor supplemental home-based care and case management services which have been demonstrated effective at keeping beneficiaries healthy and out of hospital.
More generally, cost-sharing under MA is currently limited to 24 percent of expenses – the level prevailing under the standard Medicare benefit. That is more restrictive than the Silver (30 percent), Bronze (40 percent), or Catastrophic (above 40 percent) plans chosen by 8.9m out of 9.9m individuals on exchanges under the Affordable Care Act. If those purchasing insurance through the exchange were similarly forced to purchase insurance with cost-sharing capped at 24 percent, rather than allowed to select bronze plans, their premiums would be an average of 35 percent higher. As Medicare spent an average of $12,179 per enrollee in 2014, allowing plans to offer cost-sharing similar to those prevailing in exchanges for under-65s could realistically return several thousand dollars to the pockets of senior and disabled citizens struggling to live on fixed incomes.
In April, after 18 years of trying to fix Medicare physician fees, both parties finally came together to enact a permanent reform. Working together again to fix the above flaws would make Medicare Advantage a more efficient and effective healthcare benefit – allowing Congress a rare opportunity to enhance medical protection for seniors, while returning savings to their pockets.
Christopher Pope is the Senior Advisor at the West Health Policy Center.
 “CMS announces Value-Based Insurance Design Model to improve care and reduce costs in Medicare Advantage Plans.”https://www.cms.gov/Newsroom/
 “Paying More for Less: Medigap Cost Sharing.” Medicare Rights Center.http://www.medicarerights.org/
 “Oral Health and Medicare Beneficiaries.” KFF Issue Brief (June 2012).https://
 Mark Duggan, Amanda Starc, Boris Vabson. “Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program.”NBER Working Paper 19989. http://www.nber.org/papers/
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 2015 Medicare Trustees Report, p11 (Table II.B1):https://www.cms.gov/research-