A model whose time has come

The American health care system has two distinctive features.

First, similarly situated people pay the same premium regardless of their medical conditions. In other words, no one who obtains health insurance ever pays an actuarially fair price.

Second, insurers always lose money on people who are known to be relatively sick and make money on people who are known to be relatively healthy before they ever enter the insurance pool.

As a result, no health plan wants a sick enrollee – especially one that requires expensive medications. No employer. There is no commercial insurer. No purchase insurer (Obamacare). And if the truth were known, no government system wants a single high-cost enrollee – including Medicare and Medicaid.

Health plans respond to these conditions in three ways.

First, they try to attract the healthy and avoid the sick. They can do this by making their plans attractive to the former and unattractive to the latter, and/or by providing too much to the healthy and too little to the sick.

Second, they avoid creating specialized products for people with special needs. In a free health insurance market, one would expect one type of insurance plan to cover the needs of diabetics, another for people with congestive heart failure, and another for respiratory conditions. Instead, we tend to get one size fits all: same deductible, same coinsurance, etc., regardless of medical condition.

Third, they contribute to a health care system that is incredibly bureaucratic. Prices do not serve the function they serve in other markets. In fact, most of us never see a real price for anything. Competition also does not serve the function it serves in other markets.

In general, healthcare providers do not compete on price; and when they don’t compete on price, they don’t compete on quality either.

There is one exception to all of the above: the Medicare Advantage (MA) plan. This is the only place in our health care system where a doctor who discovers a change in a patient’s health status can send that information to the insurer (in this case Medicare) and receive a higher premium, reflecting the higher expected cost of care.

Because of a highly sophisticated risk adjustment system, MA plans not only do not try to avoid sick people, they actually try to attract them. There are “special needs plans” for diabetics, for heart disease, for respiratory disease, etc. By specializing in a specific type of care, these plans have the potential to evolve into what Harvard Business School professor Regina Herzlinger calls “focused factories“, or centers of excellence.

(Note: there is risk adjustment in the market (Obamcare). But it is extremely imperfect.)

The MA program is also one of the few places in the health care system where health plans find it profitable to keep people healthy.

As good as I think the MA system is, it could be made better, as I suggest below. But first, let’s look at three frequently asked questions.

Does Medicare Advantage Save Taxpayers Money?

It may surprise you to know that no one really knows for sure. The reason: there has never been a true apples-to-apples comparison between the costs of traditional Medicare (TM) and the costs of the MA plan.

For example, many people in TM are also in an employer plan. (These people are probably relatively healthy.) Others are also on Medicaid. (These are probably less healthy.)

A well-known estimator of the cost to taxpayers of TM and MA plans (the Medicare Payment Advisory Committee or MedPAC) claims that MA costs 20 percent more than if the same patients were in TM. However, MedPAC makes no attempt to separate the different kinds of registrants.

A definitive study will separate 16 categories of enrollees and compare TM and MA taxpayer costs separately for each. However, for this to happen, CMS must do something it has never done before: release the data. Interestingly, Representative Aaron Bean (R-FL) introduced an account in Congress designed to force this kind of disclosure.

In the meantime, a stricter one Milliman’s study estimates that taxpayers save $576 per enrollee per year when an enrollee participates in an MA plan. This is in line with an industry-sponsored study by Elevance.

THE Elevation study also found that as MA penetration in a market increases, all physicians in the area begin to practice more effective medicine. Because of these “spillover effects,” a 10 percent increase in market share from MA plans results in an average reduction in spending for all Medicare beneficiaries of between $105 and $127 per person, per year.

Does Medicare Advantage Save Seniors Money?

To get comparable coverage, TM enrollees must enroll in Parts A, B, and D plus purchase mid-sized insurance (an average of $2,604 in 2023;). In contrast, many MA plans have zero premiums and offer additional benefits (hearing, dental, and eye care) that TM does not.

An analysis (commissioned by an MA advocacy group) found that MA enrollees with 3+ chronic conditions spent an average of $3,165 less per year out of pocket than those of TM.

Bottom line: most analysts agree that not only does MA save seniors money, but MA plans provide more efficient health care.

Does Medicare Advantage provide higher quality care?

Numerous studies have found that MA programs provide higher quality care at lower costs. When comparing enrollees with comparable characteristics:

On diabetes care, the former CEO of Kaiser Permanente, George Halvorson notes:

Diabetes is the number one cause of amputation in America. In Fee-for-service Medicare, 20 percent of diabetic patients will develop foot ulcers, and 20 percent of those ulcers turn into amputations. On the contrary, even the less successful ones [MA] The programs result in half the ulcers and less than a third of the amputations compared to fee-for-service. Some better care settings reduce the amputation rate to two percent.

Halvorson also addresses the issue of blindness:

We can reduce blindness in elderly diabetics by more than 60 percent by managing patients’ blood sugar levels. [In] fee-for-service Medicare for low-income people. . . Right now we have less than 30 percent of these patients with controlled blood sugar and they have high rates of blindness. . . . Fee for Service Medicare Caregivers . . . they often make more money curing patients with blindness many times instead of preventing blindness.

[By contrast,] Medicare Advantage plans boil down to their payment model, so they routinely identify every diabetic, and then all of those plans tend to do the right things to help manage blood sugar for those patients. Too many low-income people who do not participate in Medicare Advantage plans become blind and then remain blind for life.

How could Medicare Advantage be improved?

As good as Medicare Advantage is, the plan would be better if there were less regulation.

For example, if an MA plan lowers its amputation rate to 2 percent, it cannot advertise that fact during open enrollment. If his blindness rate is really low, he can’t advertise that fact either. If these facts are documented by an independent research source with no financial interest in the study’s conclusions, this must also be kept confidential.

Similarly, if a plan has fewer pre-approvals or if pre-approvals clear faster than other plans, consumers may not learn about these facts either.

Any communication from an MA plan to potential enrollees must have government approval! And CMS doesn’t seem to really like quality comparisons between plans.

That’s not how a normal market works.