How are the benefits distributed from Medicare Advantage?

There is a new NBER Working Paper by Mark Duggan, Amanda Starc, and Boris Vabson, here is the abstract, with the bold emphasis added by me:

Governments contract with private firms to provide a wide range of services. While a large body of previous work has estimated the effects of that contracting, surprisingly little has investigated how those effects vary with the generosity of the contract. In this paper we examine this issue in the Medicare Advantage (MA) program, through which the federal government contracts with private insurers to coordinate and finance health care for more than 15 million Medicare recipients. To do this, we exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250 thousand or more relative to MSAs just below this threshold. Our results demonstrate that the additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans. Our findings also reveal that only about one-fifth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures. Our results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.

There is an ungated version here (pdf).


Could this phenomenon be related to the relative decline of non-profit health providers?

On a recent trip, one the travelers was a retired hospital exec who had first served nonprofit and later served for profit hospitals. I asked him what was the difference. His answer: the last for profit mega chain he worked for acquired small nonprofits in small markets and raised the rates, and discontinued all services that did not earn them a firm 20% return. It was a roll up operation.

Might this be a result of government-granted monopoly power?

Duggan, not Duggman.

I also like the politics of cutting the reimbursement rates for Medicare advantage insures. If you try to cut their reimbursement and profits, you are attacked as cutting Medicare.

The most recent campaign against MA plan cuts was comprised of anti-Dem ads totaling $1 million in just two weeks. It was funded by American Action Network, a 501(c)4 focused on supporting Republicans.

"A somewhat larger share accrues to private insurers in the form of higher profits and we find suggestive evidence of a large impact on advertising expenditures."

This is pretty much what I'd expect. That's it. Nothing more to say, really.

Except another positive for the ACA. What this seems to be saying is that rather than a simple story of cutting health care for seniors (presumably to give it to the undeserving lazy youth) in order to lower the # of uncovered, the ACA really ended up cutting subsidies to insurance companies to expand coverage.

Another? What was the first?

I thought the simple story was forcing young people to pay for something they don't want at inflated prices so they can subsidize seniors?

You mean Medicare didn't exist before Obamacare.

Okay, sorry, replace seniors with "old people"

Seniors get their care through Medicare and Medicaid in some cases. They were 'subsidized by young people' long before Obamacare came along.

You don't understand how insurance works.

Medicare is not paid for mainly through the payroll taxes mostly paid by younger people?

Sounds about right, healthcare in general is about 20% efficient compared with Singapore and countries that are properly governed.

Non-profits vs. for-profit, upon further review……..

“My cost-cutting examples are all for-profit companies. About 70% of hospitals and 85% of health-care employment is in non-profits, (10) whose legal and regulatory treatment protects much inefficiency from competition.”

“Maybe for-profit companies pay too much attention to stock prices. But non-profits can go on inefficiently forever, with no stockholders to complain. The whole point of a non-profit is to pursue goals other than economic efficiency.” (1)

**10 Lakdawalla, D., and T. Philipson (2006), “Non-Profit Production and Industry Performance”, Journal of Public Economics, v 90 (9), 1681-98.

(1) After the ACA: Freeing the market for health care, John H. Cochrane, October 18 2012, pg. 6

Updated version 02/06/13:

Also, the vast majority of health insurance supply is non-profit [e.g. Blue Cross, Kaiser Permanente, Health Care Service Organization, and Himark, Inc. not to mention Medicaid and Medicare]. “…more than 60% of the health insurance providers in America with at least 100,000 subscribers are nonprofit organizations” (2) (3)

(2) Do non profit health insurance companies exist? Health insurance provider, 01/04/2012

(3) Basic facts & figures: nonprofit health plans. Alliance for Advancing Nonprofit Health Care.

"Between 1960 and 2000, the typical nonprofit hospital shrank from being 3 times as large as the average for-profit hospital to being merely one-third larger. Analysis of aggregate hospital data implies that the convergence in capacity is replicated by the growing similarity between nonprofit and for-profit hospitals in the number of admissions and average lengths of stay. An analysis of hospital-level data reveals that the convergence was driven primarily by entry, exit, and ownership switches, rather than expansions or downsizing of existing hospitals."

The conclusions of this paper are not surprising.

I am a specialist physician who has worked with Medicare Advantage (MA) plans since 1999. Where I practice in California reimbursement in the MA plans is through capitation. This creates a physician who is strongly incentivized to withhold care. The problem is nobody informs the patient of this incentive. The patient enters into a contract with the MA plan completely in the dark as to how it really works. And it is quite easy to withhold necessary care without the patient realizing it. I see this all the time in seeing patients who have already been to multiple MA contracted specialists for a straightforward complaint (poor vision) due to a simple problem (a cataract) and were told nothing could be done about it. After I examine them I have to spend considerable time to convince them otherwise.

Yes, fee for service Medicare does incentivize physicians too perform unnecessary procedures and tests. But, it is quite simple to discern who is doing this with statistical sampling of claims- something Medicare does all the time. Yet, no attempt is made to ferret out those not doing necessary procedures and tests in MA plans. I am unaware of a single physician being singled out by any MA plan anywhere for being an "under-utilizer".

Excellent comment.
That, and why is the topic always the ACA or Medicare, and never the $1.5 trillion F-35 fighter jet?
We have PC forms of government waste?

Well, it's national defense. It's hard to get around government involvement in that sector. It's also less of an issue in the big picture since health care costs are such an enormous and inevitably rising portion of GDP. But libertarians are certainly no fans of the military industrial complex.


Yes...but add in VA spending, and DHS spending, and Intelligence spending, and pro-rated interest national debt and you get to $1 trillion annual on national security....

That's a little bit of money...every year...

Add on: 180,000 Americans have been murdered since 9/ drunk drivers....

And terrorists?

"Well, it’s national defense...."

I thought guns in the hands of citizens was national defense.

Nuclear weapons, fighter jets, and such are all about mass destruction and conquest in exercise of global power to create an empire.

The Swiss don't spend massively on military yet they have managed to defend themselves cheaply with guns in the hands of citizens even when surrounded by war on all sides.

The reason I support military spending is the willingness of conservatives to justify spending massive amounts of tax dollars to create jobs. The South would still be mostly backwater if it weren't for trillions in military spending that created jobs in the South by redistributing wealth stolen from the North with taxes to the poor in the South by the biggest government jobs program since Hoover's WPA which was expanded by FDR to more lavishly shower money on the unemployed, plus the CCC which targeted the unemployed youth in a form of military boot camp and work program that morphed into the draft and two years of service after 1944 for the first US standing army.

Eisenhower and JFK sought to justify the high taxes on everyone to pay for the standing army and jobs program by emphasizing the science, technology, and engineering benefits. Ike justified the Interstates to conservatives as defense, to business as commerce, and to the public at large as the freedom of the road.

With Reagan, he fought the high taxes, but did not fight the biggest jobs program, the standing army and military business, and thus ended up making borrow and spend to get rich respectable.

It is always free lunch economics these days with conservatives, calling for killing other people's jobs because of waste, but not their own jobs. The tax cut borrow and spend has even become so respectable that progressives have embraced it. The problem is tax cut borrow and spend creates less growth than tax and spend. Tax and spend closes the economic loop - the military job holders supported paying taxes because the taxes paid them, and the others supported paying taxes because it supported them.

Now it is a matter of trying to kill the jobs of "them" so you can have tax cuts and still keep "your" jobs.

Obamacare cut the jobs related to MA but replaced them with more jobs delivering care to others. And that is what angers conservatives who have been shoveling money at their voters who are in the highest numbers over 65, while cutting the money going to the young who are more likely to go left or just ignore politics. That's why the GOP wants to cut taxes and pay for it with entitlement cuts, except the entitlement cuts are two decades in the future with the tax cuts immediate.

When Republicans lay out the entitlement cuts that go into effect a decade before the tax cuts, then we will know conservatives are being honest.

At least Obama has been campaigning on tax hikes consistently and signing into law some tax hikes so that programs like Obamacare cut some entitlement spending while highing taxes so that together the spending to create jobs which will be seen as of benefit to the taxpayers. The Republican's can't cut Obamacare benefits and simply cut spending because they then end up with taxes on people to pay for benefits they have taken away.

specialist says: "But, it is quite simple to discern who is doing this with statistical sampling of claims- something Medicare does all the time." - so you expect the medical boards to sanction a physician who is a statistical outlier? I doubt this is feasible. Most professionals are rarely if ever sanctioned for major offenses, much less something borderline like dispensing more healthcare than the average doctor, presumably to collect more Medicare.

@specialist: Btw, a cataract operation here in the Philippines costs about USD $1000, FYI. Done without even going to a hospital.

It can be done on an outpatient basis anywhere. Not just Manila.

Providers need to also be accountable for quality and outcomes for capitation to work well for everyone, like the ACO model.

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