Democrats Proudly Cut Medicare Benefits

Last week Congress cut benefits to Medicare recipients and liberal pundits applauded.  Indeed, Paul Krugman said this was "Kennedy’s Big Day" and "the first major health care victory that Democrats have won in a long time."  Of course, Krugman and the others who applauded this "victory" didn’t say that they were cutting Medicare benefits – even though that is exactly what they were doing – instead they framed the victory as one over privatization and waste.  Here’s the story.

Medicare beneficiaries can enroll in Medicare’s fee for service plan or they can choose Medicare Advantage joining, for example, an HMO.  In the latter case, Medicare pays the HMO a rate per enrollee and the HMO competes to obtain enrollees by offering them a package of benefits and premiums. 

Now what you will be told about Medicare Advantage is that it is more expensive than traditional Medicare.  Thus the CommonWealth Fund says:

Private Medicare Advantage (MA) plans were paid an
average 12.4% more per enrollee in 2005 compared with what the same
enrollees would have cost in the traditional Medicare fee-for-service

That much is true.  But why are MA programs more expensive?  The answer, which one gets by innuendo and implication, is that Medicare Advantage programs are wasteful and the extra money is being pocketed by corporations.

The CommonWealth Fund says:

"…eliminating extra payments to private plans could save Medicare a projected $30 billion over five years." (italics added)

Paul Krugman says:

the fastest-growing type of Medicare Advantage plan, private
fee-for-service, costs taxpayers 17 percent more per beneficiary than
Medicare without the middleman
.  (italics added).

Robert Waldmann is least careful and in a comment on Tyler’s article on means testing says

Cowen doubts that expanding the public share of health insurance would
reduce costs. We have a test case medicare vs medicare advantage
accounts. They cost, on average 12% more per patient…

Thus the message is that traditional Medicare is cheaper because it eliminates the middleman, doesn’t involve private corporations, and is more efficient at lowering costs.  None of this is true.

I’ll give you the full story in a minute but let me first point to one clue that something is amiss.  According to all of the above "enrollment in these plans has been growing rapidly" (Krugman).  Now why would so many Medicare beneficiaries opt out of low-cost, efficient Medicare and into high-cost, inefficient MA plans?   

While you puzzle over the clue let’s cover the necessary background.  Here is how the MA program pays a private provider (quoting the CBO).

Private plans that want to participate in the Medicare Advantage program must submit bids indicating the per capita payment for which they are willing to provide Medicare’s Part A (Hospital Insurance) and Part B (Supplementary Medical Insurance) benefits–and to take on the financial risk of doing so.

The government compares those bids with county level benchmarks that are determined in advance through statutory rules. The benchmarks are the maximum payment the government will make for enrollees in private plans; in most cases the plans’ bids (and the resulting payments) are lower than the benchmarks….

If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid.

So far you might think that Krugman et al. have a point.  If the benchmarks are set too high and Medicare pays the plan its bid plus 75% of the amount by which the benchmark exceeds the bid then the plans could bid their costs and get extra payments.  Now, I hope that many of you are thinking, What about competition?  Good thinking!  Indeed, if that was all there was to it, competition would push the bids below costs.  But in fact to resolve our puzzle we need not rely on competition and economic theory because here is the kicker (quoting the CBO again, italics added):

If a plan’s bid is less than the benchmark, Medicare pays the plan its bid plus 75 percent of the amount by which the benchmark exceeds the bid. Such a plan must return that 75 percent to beneficiaries as additional benefits or as a rebate of their Part B or Part D premiums.

Now the solution to our puzzle becomes clear.  Why do beneficiaries choose MA plans? 

…because such plans provide additional benefits beyond those available within traditional Medicare, including coverage for services not covered by FFS Medicare (for instance, dental services) and cash rebates of premiums or reduced cost-sharing.

In fact, the CBO estimates that the vast bulk of the increased payments to private providers flow to enrollees who get better benefits and lower payments.  Indeed, in the case of HMOs enrollees benefit twice – first because the benchmarks are higher and second because, contra Krugman et al., the HMOs actually have lower costs than traditional Medicare!  Thus the CBO writes:

In contrast, payments to HMOs averaged 10 percent above FFS costs…On average, HMOs offered extra benefits and rebates equal to 13 percent of FFS costs; those additional benefits and rebates reflected the difference between the benchmark (which averaged 10 percent above FFS costs) and the plans’ bids (which averaged 3 percent below FFS costs).

That could be written more clearly but what they are saying is that Medicare pays HMOs 10 percent more than they would pay for an enrollee in traditional Medicare but the HMOs offer the enrollee 13 percent more worth of extra benefits and rebates.  In other words, the HMOs pass on to the enrollee all of Medicare’s "extra payments" plus some.  (Note that this is exactly what one would expect in a competitive market.)

Now, I am not saying that higher Medicare payments are a good idea. But I dislike the fact that politicians are being lauded for fighting "wasteful privatization" when what they are really doing is cutting medical benefits for the elderly.   


1) Excellent post. Highly informative.

2) In politics everything will be spun to high heaven. Forget the doublespeak, always and everywhere focus on the result; otherwise you will go insane.

Even more important, where did the money go? The answer is to doctors. So Medicare beneficiaries were cut in order to keep payments to doctors from being cut.

This is the opening round in many future battles between segments of the health care system as the Federal goverment has to wrestle with the deficits that rising health care costs are creating.

Social Security surpluses that balance those deficits will run out in the next 4-8 years, causing the overall deficit to rise past $1 trillion...and beyond.

Agreed that this is a lot of useless hand-waving on the Dems' part. However, I have yet to read a viable, palatable solution to healthcare from conservatives other than the "let them eat cake" variety.

...and I wonder if the people using these plans had...higher than average incomes...

Just a thought.

The companies offering the 'Medicare Advantage Plans" are for profit entities. If you subtract out profits from the total medicare payments to these plans you will find substantially less money flowing to patient care than non Advantage plan medicare recipients.

Quick response to another alex. Don't forget that Medicare pays more the sicker the patient, i.e. payments are risk-adjusted so in fact it is not clear that an HMO makes less on a sicker person.

My wife is a physician who must deal with the new managed care firms for medicaid in Ohio. It is a nightmare for her and her patients. They refuse to allow routine medical tests. They increasingly refuse to cover medications. She is spending more and more of her time on the phone fighting with people with limited training about how to teat various medical conditions.

I am in favor of competition. But the incentives in this system encourage firms to sign up as many clients as they can, and then strictly resist access to care.

I always hated when HMO's would say that 95% of clients were happy with the HMO. But if you surveyed people who had a serious medical condition in the past year the approval numbers would have seen a dramatic drop. Regretfully you don't always know how bad your insurance is, until you try to make a claim.

Take care, this post is by Alex not Tyler.

Quoting from a Feb. 28 GAO report: "GAO found that MA plans projected they would use their rebates primarily to reduce cost sharing, with relatively little of their rebates projected to be spent on additional benefits," and "MA plans projected they would allocate, on average, about 9 percent of total revenue ($71 PMPM) to nonmedical expenses, including administration and marketing expenses; and about 4 percent ($30 PMPM) to the plans’ profits. About 30 percent of beneficiaries were enrolled in plans that projected they would allocate less than 85 percent of their revenues to medical expenses."

The Medicare Advantage rebates are used primarily to provide participants assistance with their out-of-pocket expenses, which is unfair since all Medicare beneficiaries should participate equitably in relief from the financial burden of cost sharing. For providing this unfair benefit, MA plans waste valuable resources on administration, marketing and profits. We should quit paying the Medicare Advantage plans for running this shell game that is cheating the taxpayers.

As I'm sure Alex realizes, Krugman's happiness about this change in the law is not because of a general enthusiasm for cutting Medicare benefits. I would guess it's because he thinks that we should have single-payer health insurance, and that extra-generous payments to private MA plans serves to both enrich the plans and to futher entrench private insurance, which by his lights is a step in the wrong direction. The fact that some (most? certainly not all) of these extra-generous payments gets passed through in the form of more generous services for enrollees doesn't change this basic fact, and moreover it's not clear that the extra services provided to consumers through this mechanism are a good use of that money.

The spending is wasteful unless they can prove old people live longer under the MA programmes.

If the old people live just as long, but have 13% more money spent on them, it's a waste of whatever more it costs!

Only an idiot would confuse expenditures and results.

One thing not clear in this is whether total medical care spending in FFS is less or only the government's portion of it. Does the 12.4% include FFS copays?

Tyler wrote:

...and I wonder if the people using these plans had...higher than average incomes...

... and I wonder if all of the people who directly benefited by this latest act of Congress are among the most highly compensated in American society.

Just a thought.

Krugman can be such a boob, why do people take him seriously? When I started studying economics I thought it was scientific and objective, but some of these more famous economists are too shallow in their observations and too biased in their conclusions.

The gridlock is ugly.

As someone who just literally signed up for medicare, Part D, and Medigap all separately, and have many friends who signed up for medicare advantage programs, I can tell you from first hand experience that the prices for medicare advantage are not the main attraction of the advantage programs. It is simply the paperwork and hassle. I had to go through many forms, calls to companies, documents to get these programs. One stop shopping is a true convenience.

The only reason I put myself through the hassle is that I found I could save a significant amount of money by finding low cost providers for the services that I specifically wanted. If you are willing to invest the time and do your homework, there is plenty of competition out there in each of these categories.

Actually Jacob, I see lots of people protecting sacred cows, or stoning opposing cows, and few actively problem-solving.

Well, worse than that, some can't even name the problem ... how would you state it? What should be our national goal, never mind mechanism, for health care?

odograph, my goal is a medical industry that satisfies the needs of its customers at a price that satisfies enough people to keep the industry running and profitable.

This is virtually impossible to regulate or centrally plan for. Econ 101 teaches us that. I think that even among market economists, we're so stuck in in-the-box thinking that we look for symptomatic solutions, things to improve aspects of the system as is but nothing that fundamentally changes it. People are WAY OVER-FOCUSED on the insurance side, while totally ignoring the *real* cause of rising costs: the provider side. Lower costs on the provider side would make the insurance side a non-issue. Here are some things I would implement, were I emperor of America:

1. The end of procedure-based regulations in favor of results-based regulations. REAL results-based regulations, not the half-@$$ed kind bureaucrats are currently fond of.
2. An end to occupational licensing. Keep the licensing boards intact, but make them certification boards. This gives consumers the choice between a fully-trained, high-cost doctor or a less-trained, low-cost medic.
3. In the area of medical professional training, serious reform to the education system is needed. Without going into specifics, I think it's highly inefficient to make people study things unrelated to their profession. The accreditation process allows the universities and colleges to operate like cartels, allowing them to become bloated and hugely inefficient.
4. Get rid of the FDA. Like Friedman, I believe that lawsuits should be a major correcting force in the markets (of course, this assumes we don't have the messed up court system we have now, but the end of occupational licensing should help that in some regard).

Simply put, there is no telling where a market-based medical industry could take us. Study disruptive technologies (look it up) for examples of how entire industries experienced sea changes that nobody predicted. New ways of dividing up labor could bring untold efficiency and lower costs, but not so long as licensing exists or it is so expensive if not impossible to get the needed training.

The high costs we experience in America are due to the market being *prevented* from working, not from the workings of the market.

Alex seems to just be wrong here, then. I don't mind letting the $3 in efficiency gains go entirely to the patient (although if the plans achieve this gain by cherry picking the healthy it would be nice if at least some of the gain went back to Medicare to pay for the sick) but why give Advantage patients an extra $10 in benefits just for being in the Advantage system? Was this perhaps a subisdy to jump start the industry when the program was rolled out? Or is this ideological, to entice more people to choose the 'private' plan and then scream that you're hurting people's 'choice' if you ever try to cut it?

That also debunks the gist of Alex's post. Democrats did not cut Medicare Benefits, they simply moved them from one bucket (Advantage patients) to another bucket (regular patients who simply see a doctor who takes Medicare). Given that the Advantage patients are getting more benefits than can be justified by their efficiency savings alone that doesn't seem to be very shocking to me.

When asking the question of why we are in the "health care mess" we are in, and what we need to do to fix it, I seldom hear anyone ask what it was that screwed it up in the first place. There was a time when people were fairly well cared for (adjusting for differences in technology). So what happened?

As to making changes in the production side vs. the insurance side of the medical market, while I have no quarrels with getting the government out of all kinds of regulatory business, I think we cannot overlook the effects that insurance of any kind have on the issue. 1.) Insurance provides a type of security which artificially inflates the demand aspect of the market. If people can see a doctor for what they perceive is a lesser amount through a copay than the full charge of the visit, they will be more prone to use the physician, and by proxy the pharmacist, for minutia. This is by definition more demand while the supply is not physically able to keep up. More demand with less supply means higher costs. These higher costs are passed onto the insurance companies who have a couple of options to offset these costs: higher premiums, higher copays, or higher health requirements, or a combination of the above. These lead to problem 2.) Any of the remedies available to the insurance companies will price certain segments of the populace out of the insurance market; i.e. the poor, the lower middle class, or the sick, and the problem continues to escalate up the socio-economic chain until it is perceived that the "greedy insurance companies" are PREVENTING health care to those who need it.

If the market were allowed to work on its own, this bubble would eventually burst, because prices can only be sustained while they are being paid. If more people are left out of insurance, then the inflated prices of medical care will have to drop due to the supply exceeding the demand of those capable of paying. Instead we have a government which refuses to let markets react, and so they institute Medicare and Medicaid which only serve to continue the problem. The bubble gets bigger, and suddenly the Medicare system begins to go bankrupt due to both escalating prices and use, so alternatives are sought such as MA plans, which just dumps the problem back into the laps of the insurance companies without helping Medicare. Plus, you add the prescription drug benefit which just further bankrupts Medicare while furthering the increase of artificially inflated medical and pharmaceutical prices. The market was taken out of play long ago.

Now the solution being proposed is to take it completely out of the private sector and either provide through the government or require acquisition, through the government, of medical insurance, thus infinitely perpetuating the problem in the first place, that being that insurance provides the "perception" of low cost health care which inflates the demand, and thus costs, of health care. Just ask Britain and Canada how that works. Since most Canadians come over here for their care, you should be able to ask them in our northern hospitals.

The solution cannot be the extension of insurance coverage to the whole populace, but the reeducation of the populace that Medical insurance is intended not for medical care, but the catastrophic events which MIGHT occur. If America would relearn that lesson, the crisis would be averted.


I did not say that "government insurance has cost rampant cost escalation." I said that it supports it.

No, the cause is excessive misuse of insurance for non-catastrophic care. If you have a cold and want to go to the doctor, don't use your insurance or medicare/medicade to do so. If you want a routine medical check-up, pay for it yourself. Insurance has become like a credit card; it seems like you are using someone else's money, so you are less frugal with it. However, then don't get mad when the other person says, "stop using my money so liberally."

I have spoken to some Canadians, and though I will check into the GDP issue, (though the cost is only part of the issue since the demand is so high that time is the other issue) they generally can't wait months for their care, so they come here to get it immediately.

When did it become a right to have health care? I don't remember reading that in the Bill of Rights. In the Declaration of Independence, it says we have a right to "Life, Liberty and the PURSUIT of Hapiness." This meaning that no one can take our life, no one can take our liberty, and no one can take the ability to pursue happiness. If your happiness lies in medical care, then by all means pursue medical care, but it may 1.) require you to not pursue something else, and 2.) does not give you the right to infringe my right to liberty (money I have earned and wish to use in my own pursuits)

No one has a right to have anything? Everyone has the right to ATTEMPT to obtain it, and then they have the right to keep it once they have it. And they most certainly have the right for the government to keep out of the way!!


Your complete lack of compassion is saddening, and maddening. The government is not here to take care of bouts of "bad luck." That is what YOU are here for, as well as the other neighbors around you. If you can't fully help by yourself, then organize a drive to help with aid. It happens all the time.

When you see someone in trouble, help them as best you can, don't leave them and lament how the government should be doing more. That is TRUE lack of compassion, because it belies an apathy about truly dealing with people at their need.

However, it is equally uncompassionate for anyone to demand the government to mandate policy which attempts to cover someones "bad luck" with forced slavery in the form of inappropriate taxation.

The government is mandated with only a few things to do and assisting people out of "bad luck" is not one of them. However, it IS something for you to do if you see the need.

The fact remains, you do not support universal healthcare as a fixed goal. You only support it if it just happens, though voluntary giving.

Just curious, in 50K year of civilization has universal healthcare ever actually happened, though voluntary giving?

Are you offering fantasy as policy?

Sorry odograph, but the idea of universal healthcare is itself simply socialist fantasy. You are reaching for something that cannot be achieved. The only way to do so is to tap the wealthy at such a rate as to discourage wealth acquisition which promptly deflates your funding pool.* So even IF you succeeded in the short term, in the long term you would make it worse than before. How much of the lower % of GDP costs of socialized medicine countries is due to price fixing? Price fixing is anathema to a dynamic market because it stifles R&D, plus it lowers incentive to enter the market, thus exaserbating the same supply and demand problems I have already mentioned. When these problems are held in price freezes, they manifest in time increases. For a more local example, refer to the energy crisis in the 70's and what price controls did there.

However, odograph, between the two of us, you are the ONLY one hung up on UNIVERSAL health care. It is a fantasy no matter what position you take, and I am not at all interested in trying to achieve fantasy. I am interested in freeing up the system so that as many as can get in are able to, and that will only come through personal liberty and responsibility.

*BTW, when you try to tap the wealthy, usually business owning members of the population, they have a means of recouping some of that loss, called price increases, so that those already in financial difficulty are squeezed even more. If they do not pass on the added costs, they will just decide it is not profitable to do business, and either move elsewhere with that business or shut down completely, which harms everyone. So again, here is an example of your supposed compassion.

Wikipedia thinks universal health care exists:

Who has the fantasy?

As if the only two options were universal health care or sedentary obesity.

HOW is it justified? So far, you seem to have shown no real understanding of what has enabled this country to become affluent; namely, the freedom to be industrious and not be interfered with by others who claim they know better what to do with your money.

Odograph, I really don't mind, if you want to go try the other nationalized systems out, by all means feel free. However, just because a system says it provides care to all people does not mean it practically, or actually, does. I've already been over that. I mean, if a system says, "yeah, you're covered. We'll get to your chemotherapy in 6 months," I would say that this person is not PRACTICALLY covered.

You are asking the question I've already answered. You ask if the wealthiest "could" provide everyone health care ... when we know they haven't. On the other hand we know that many nations have, through national programs.

Practical compassion dictates our path.

We have to be impractical, and without compassion, to choose otherwise.

It seems we will be in economy ression for quite a long time. We can see the economy crisis effect everywhere.

If anyone posting here is truly interested in learning how medicare costs will be cut, read this:
For everyone subscribed to the Advantage HMOs or PPOs the Medicare Fund pays $800 per month, unless you have a chronic condition in which case it is more; and, in some plans Medicare pays your Medicare Premium of 96.40 per month which is reimbursed to the subscriber (next year it will be more). Some of the plans offer dental and eye glasses and health club benefits in order to entice seniors to join. In these plans you have lists of doctors and hospitals you may use and you must get the approval of a plan administrator to see a specialist (of their choosing) and get approval, also, for some procedures your doctor recommends. There are copays and some are high. The past year a friend complained that every doctor on her "list" had changed. That meant a new doctor. She did however say that they save a lot of money (so far they are fairly healthy) and, in fact, can afford a cruise and some other nice things. We, on the other hand, have heart disease and prefer to keep our specialists so we use traditional Medicare and a supplemental insurance policy. In other words these plans are good until you really need insurance then the insurance company REALLY makes out. As it is Medicare pays private insurance companies such as Humana 14% more to carry these plans than traditional insurance would pay a health care provider. That is all gravy for the insurance company. These plans will need to be trimmed anyway in order to save Medicare and they will be trimmed regardless of whether there is health care reform. That is, if seniors want to keep Medicare because these plans cannot be sustained. They were instigated several years ago by the Bush administration and a Republican Congress to massage the insurance industry. They were supposed to save Medicare money. They obviously did not do that.

Eliminating the private-fee-for-service portion of Medicare Advantage eliminates choice for seniors. Medicare Advantage already covers seniors during the prescription drug gap - erroneously touted as a new Medicare benefit - and offers seniors prescription drug coverage, cancer screenings, basic dental, and routine eye care, none of which is offered by Original Medicare. To obtain these benefits seniors enrolled in Original Medicare have to purchase two additional insurance policies from these same private insurers, a "supplemental" policy and a drug policy. Unlike Original Medicare, Medicare Advantage provides preventative care, and also offers better hospitalization coverage than Medicare Advantage.

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