The $149 Billion Medicare Advantage Boondoggle

Senate Republicans have decided to attack the health care bill by offering a tactical motion to recommit. This motion, as offered by John McCain, would send the bill back to the Senate Finance Committee to have it rewritten without any "cuts" to Medicare Advantage. Democrats are defending the existing bill by explaining how this Medicare Advantage program is a huge boondoggle that hands hundreds of billions of tax payer dollars to private health insurance companies.

There was a program for many years that would let seniors get their Medicare benefits through a private insurance company instead of the traditional Medicare fee-for-service (FFS) system. The government would give these private insurance plans slightly less money than they would normally pay per capita to Medicare enrollees. This program was meant to save the government money. For the most part, the only types of private insurance that would participate were HMOs that could provide more cost-effective care. Relatively few private insurance companies could provide the same care for less money, so the program was not used by many Medicare enrollees.

This all changed with the massive Medicare Modernization Act of 2003. It put in place a new bidding formula for determining how much Medicare would pay a private insurance company to cover an enrollee. The formula was horribly flawed, and the result has been one of the most massive corporate giveaways in American history.

The original idea was that private insurance companies could do a better job than Medicare, and therefore save the government money. The result has been the complete opposite. The CBO found:

The government's spending for beneficiaries in Medicare Advantage plans will, in almost all cases, exceed what it would spend if those beneficiaries were in the traditional fee-for-service sector. That outcome occurs because benchmarks are almost always higher than FFS costs, and the government retains only 25 percent of the difference between a plan's bid and the benchmark.

In 2007, CBO estimates, the average payment to such plans is 12 percent above traditional FFS costs. The differential is larger for private fee-for-service plans: According to estimates by the Medicare Payment Advisory Commission (MedPAC), the payments to those plans in 2006 averaged 19 percent above FFS costs. Of that difference, 10 percentage points' worth went to beneficiaries in the form of extra benefits or rebates. In contrast, payments to HMOs averaged 10 percent above FFS costs, MedPAC estimates. 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).

The extra benefits and rebates offered by Medicare Advantage plans attract enrollees, and the rising proportion of beneficiaries enrolling in the plans will add to the growth in Medicare spending. In addition, because premiums for Part B of Medicare are set to cover 25 percent of the costs of that program, the higher costs of Medicare Advantage plans add about $2 to the monthly premium for Part B. Those higher costs also accelerate the exhaustion of the trust fund that supports Part A.

The government is paying these private plans 12% more than it would cost to cover the same people with traditional Medicare. Some of this extra money is used by private insurance to offer additional benefits to entice more customers, and some of it is just pocketed by the insurance companies. This attempt to use private insurance to save the government money has turned into an extremely costly failure.
The Democrats, through their health care reform legislation, are simply planning to have the government stop overpaying the private insurance companies. The reform bills would change the formula, so that Medicare Advantage plans would only be given an amount equal to the cost of covering someone with traditional Medicare.

Not overpaying the private Medicare Advantage plans would save the government huge amounts of money.

Relative to spending under current law, CBO estimates, that policy would save $54 billion over the 2009–2012 period and $149 billion over the 2009–2017 period.

The Republicans have spent the last three days defending the massively wasteful corporate giveaway to private insurance companies. They are defending a program that wastes billions of taxpayer dollars. You can't be a defender of the broken Medicare Advantage program and still be a fiscal conservative.

Ideally, the establishment media will start reporting on the GOP's amazing hypocrisy.