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Seniors Already Have a Robust Public Option. Does It Keep Private Insurers “Honest”?

May you purchase innovative private insurance — ancient American curse, circa AD 2009

Medicare turns 44 this Thursday (July 30), and fittingly, single-payer advocates will gather in Washington to lobby and rally in support of extending, improving, and providing universal access to this successful, popular, “uniquely American” national insurance program. (Any Brooklynite who wants to catch a lift with me early Thursday morning, let me know in comments.)

Few people of any ideological stripe hesitate to acknowledge Medicare as, for most intents and purposes, a single-payer system. Yet in many respects, it also makes sense to regard today’s Medicare as an example of a “robust public option” in competition with private plans.

Private insurers have been permitted to muscle in on Medicare’s action since 1997, with subsidized private insurance plans initially called Medicare + Choice and later Medicare Advantage. In fact, even earlier (starting in 1985), Medicare recipients had the option of joining federally subsidized but privately administered Medicare HMOs. Currently, about one-quarter of Medicare beneficiaries are enrolled in private Medicare Advantage programs of various types.

Today’s public-private hybrid Medicare system differs in many respects from proposed Obamacare hybrid systems. For example, in Medicare, the public plan is the default and the profit-driven plans are the “options,” whereas in Obamacare it would be the other way around. Another key distinction, of course, is that Medicare plans, whether traditional or private, are funded primarily (but not entirely… I’m getting to that) by tax dollars, unlike insurance plans for the under-65 set in the current system or, with just a touch more help from Uncle Sam, under Obamacare.

Still, to an admittedly imperfect degree, today’s hybrid Medicare system provides a laboratory for testing the core assumption of the “public option” concept: that competition from a public plan can keep profit-driven insurers “honest.”

The Medicare HMO Experience
So, let’s start with the warning from critics like David Himmelstein and others that in a hybrid system, the private plans will — actively, passively, or both — skim the healthier (ie, more profitable) patients and dump the sicker ones on the public plan. That certainly pertained during the first decade of experience with Medicare HMOs, as documented in a 1997 article in the New England Journal of Medicine. The title pretty much says it all: "The Medicare-HMO Revolving Door — The Healthy Go In and the Sick Go Out."

An HMO’s emphasis on preventive services and integrated disease management, while meritorious, helps healthier patients more than sicker ones. Up to 1997, Medicare beneficiaries could opt in or out of Medicare HMOs and traditional fee-for-service Medicare from month to month. The NEJM authors showed that when members of Medicare HMOs got sick and required coverage for more expensive care, they exited HMOs in droves in favor of traditional Medicare. This kept the HMOs off the hook for patients’ biggest expenses. That’s pretty much the definition of adverse selection.

The pitch for Medicare HMOs, which subsequently became the broader pitch for Medicare Advantage plans, was that “innovative” private plans with varied menus of benefits, forged in the foundry of free-market creativity, provide Medicare beneficiaries with the blessing of “choice” (choice of benefit packages, that is, as distinct from choice of providers, which almost invariably shrinks rather than expands with private plans).

Those same buzzwords of innovation and choice permeate today’s dubious arguments by public option boosters for why death-by-spreadsheet companies still somehow deserve an unelectrified seat at the table in any forthcoming “reformed” system.

Medicare (dis)Advantage Programs
Today’s Medicare Advantage options include not just HMOs but private fee-for-service policies, PPOs, and other types of plans. Seniors, in focusing their hopefully still-agile faculties on whether to choose from among such plans or the “public option” of traditional Medicare, need to weigh how the plans juggle costs (including premiums and co-pays) and services (which may include bundled Medicare Part D prescription drug benefits and/or Medigap coverage, both of which traditional Medicare beneficiaries need to purchase separately).

Such complexity breeds perplexity, and for insurance companies, as Wendell Potter confirmed, consumer confusion is not a bug but a feature. Befuddlement is a profit center.

Medicare Advantage rolls have grown dramatically in recent years thanks in large measure to aggressive and often deceptive marketing practices. Insurers have wooed seniors with temporary waivers of monthly premiums that subsequently kick in and then balloon. As this essential article by Bloomberg’s Avram Goldstein notes, Medicare Advantage monthly premiums nationwide rose an average of 13 percent at the start of 2009, about five times the increase seen at the beginning of 2008.

In lieu of increased premiums, Goldstein reports, some companies effect a bait-and-switch by way of rejiggered benefits; for example, UnitedHealth Group Inc., the largest Medicare Advantage provider, increased beneficiaries’ out-of-pocket costs on a number of its plans going into 2009. That means more surprise bills to beneficiaries who thought they were covered.

Many Medicare Advantage programs offer attractive, and perfectly fine, health-promoting perks, such as gym memberships. But the true test of coverage is how the insurer handles, or attempts to worm out of, the big-ticket medical bills accompanying major illness or injury. As noted in this 2008 article by Maggie Mahar of the Century Fund, many seniors discover too late that when they slip off the treadmill, they fall through the tracks.

Some of the worst marketing practices, including door-to-door solicitation, may have been curbed following legislative and regulatory actions taken in 2008, according to a Congressional Research Service report published this March (pdf). However, as the report’s author, Paulette Morgan, noted, “While it appears that the legislation resolved many of the issues, Congress will have to wait and see whether or not those conducting the abusive practices are able to circumvent the changes to the law.” In other words, never underestimate the capacity of “innovative” insurers to discover ways to screw beneficiaries in the service of their investors.

"Honest" Cost Control?
In the stilted parlance that dominates mainstream discourse on health care reform, “honesty” typically translates to “cost control.” By that technocratic measure, Medicare Advantage programs have been an unmitigated bust, as amply documented by – don’t be surprised – Jacob Hacker, the father of the public option concept. Allow me to quote at length from a briefing document he issued through the Institute for America’s Future in December 2008 (pdf):

[The] Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans under Medicare Advantage. This is a near perfect “apples to apples” comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population….

As is well known, Medicare Advantage plans are substantially overpaid relative to what it would have cost to provide coverage to the same enrollee in the public Medicare plan—13 percent more on average per person, as calculated by MedPAC and confirmed by the CBO. This overpayment reflects two main problems: a method for paying plans that subsidizes their participation in Medicare Advantage and the ability of the plans to attract healthier (and hence less costly) people with Medicare. Both of these problems can and should be addressed—in Medicare and in any new framework for public-private competition.

Yet the larger lesson of Medicare Advantage is that private plans do not appear to have strong tools for controlling costs relative to the public Medicare plan. The most tightly regulated HMOs have been shown to perform roughly as efficiently as the public Medicare plan does, but according to MedPAC, most private plans are not as efficient as the public Medicare plan. All but HMOs bid to provide Medicare Part A and Part B benefits for more than the public Medicare plan spends on the same benefits — often much more. Indeed, the fastest-growing category of Medicare Advantage plan, private fee-for-service plans are the least efficient and most costly for Medicare, with their bids for Part A and B benefits fully 108 percent of the public Medicare plan’s costs.

(emphasis in original)

The taxpayer-funded diseconomies of Medicare Advantage plans that Hacker writes about have all but spelled the doom of at least the private fee-for-service Medicare Advantage programs. (Traditional Medicare is fee for service, so these programs are more redundant and provide the least “innovation” of any Medicare Advantage variant.)

As a result, private insurers, standing to lose billions, have innovatively launched scare campaigns to try to preserve Medicare Advantage. Plug “Medicare Advantage” and “astroturf” into Google to learn about the fake letter-writing campaigns in which industry-paid PR firms plunked seniors’ names, without permission, at the bottom of boilerplate letters to editors imploring the President not to deprive them of their cherished private Medicare Advantage plans.

Of Competitive Pressures and Scorpions
So let’s step back for a second. Traditional, public, fee-for-service Medicare beats the pants off private Medicare Advantage plans competing for federal and enrollee dollars. Has this made the private companies more “honest”?

Certainly not in the technocratic sense – they continue to soak both the government and beneficiaries while turning up the pressure, through lobbying, marketing, and stealth to stay in business. Certainly not in the ethical sense; their innovative creativity extends solely to their preservation of market share, not health.

If, as is highly likely, some or all Medicare Advantage programs are about to disappear, they will not have been “competed” into oblivion by the public plan but rather legislated away, by a Congress and President who will have figured out that we’re better off with a Medicare more true to its unadulterated single-payer origins.

And what lessons does Jacob Hacker draw?

To read a Jacob Hacker paper with requisite care, it helps to start with a stiff shot of espresso laced with ginko biloba, ritalin, and Aricept. You need that level of sharpness to stay on top of how he meticulously and conscientiously garners evidence that conclusively supports a point he steadfastly refuses to make.

In the April 2009 expanded sequel to the earlier cited briefing document, Hacker writes,

Even in a greatly reformed market, private health plans will have incentives to engage in practices – such as selecting healthier enrollees or shifting costs onto patients – that undermine health security. A public health insurance plan will not…

(so far, so good)

…and thus can provide an essential source of competitive pressure on private plans to encourage better practices and more effective cost restraint.

"Better practices and more effective cost restraint" in service of whom: beneficiaries or investors?

Hacker is essential reading for powerful arguments in favor of Medicare for All. The notion that competitive pressure from a public plan will be sufficient to prompt the proverbial scorpion to renounce its nature garners no support from our experience with Medicare Advantage. Rather the evidence points the way to what’s genuinely necessary, "politically infeasible" or not.

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