Paying Medicare Advantage plans: To level or tilt the playing field

Medicare beneficiaries are eligible for health insurance through the public option of traditional Medicare (TM) or may join a private Medicare Advantage (MA) plan. Both are highly subsidized but in different ways. Medicare pays for most of costs directly in TM, and subsidizes MA plans based on a “benchmark” for each beneficiary choosing a private plan. The level of this benchmark is arguably the most important policy decision Medicare makes about the MA program. Many analysts recommend equalizing Medicare’s subsidy across the options – referred to in policy circles as a “level playing field.” This paper studies the normative question of how to set the level of the benchmark, applying the versatile model developed by Einav and Finkelstein (EF) to Medicare. The EF framework implies unequal subsidies to counteract risk selection across plan types. We also study other reasons to tilt the field: the relative efficiency of MA vs. TM, market power of MA plans, and institutional features of the way Medicare determines subsidies and premiums. After review of the empirical and policy literature, we conclude that in areas where the MA market is competitive, the benchmark should be set below average costs in TM, but in areas characterized by imperfect competition in MA, it should be raised in order to offset output (enrollment) restrictions by plans with market power. We also recommend specific modifications of Medicare rules to make demand for MA more price elastic.     

Designing health insurance information for the Medicare beneficiary: a policy synthesis.

Can Medicare beneficiaries make rational and informed decisions about their coverage under the Medicare program? Recent policy developments in the Medicare program have been based on the theory of competition in medical care. One of the key assumptions of the competitive model is the free flow of adequate information, enabling the consumer to make an informed choice from among the various sellers of a particular product. Options for Medicare beneficiaries in supplementing their basic Medicare coverage include the purchase of private supplementary insurance policies or enrollment in a Medicare HMO. These consumers, in a complex health insurance market, have only limited information available to them because many health plans do not make adequate comparable product information available. Moreover, since the introduction of the Medicare HMO option, the long-range plan for management of the Medicare budget has become based on the large-scale voluntary enrollment of beneficiaries into capitated health plans. The policy instrument that has been used to improve beneficiary decisions on how to supplement Medicare coverage is the informational or educational program. This synthesis presents findings regarding the relative effectiveness of different types of health insurance information programs for the Medicare beneficiary in an effort to promote practical use of the most effective types of information.     

Health plan decision making with new medicare information materials

OBJECTIVE: To examine the effect of providing new Medicare information materials on consumers' attitudes and behavior about health plan choice. DATA SOURCE: New and experienced Medicare beneficiaries who resided in the Kansas City metropolitan statistical area during winter 1998-99 were surveyed. More than 2,000 computer-assisted telephone interviews were completed across the two beneficiary populations with a mean response rate of 60 percent. STUDY DESIGN: Medicare beneficiaries were randomly assigned to a control group or one of three treatment groups that received varying amounts and types of new Medicare information materials. One treatment group received the Health Care Financing Administrations's pilot Medicare & You 1999 handbook, a second group received the same version of the handbook and a Medicare version of the Consumer Assessment of Health Plans (CAHPS) report, and a third treatment group received the Medicare & You bulletin, an abbreviated version of the handbook. PRINCIPAL FINDINGS: Results of the study suggest that the federal government's new consumer information materials are having some influence on Medicare beneficiaries' attitudes and behaviors about health plan decision making. Experienced beneficiary treatment group members were significantly more confident with their current health plan choice than control group members, but new beneficiaries were significantly less likely to use the new materials to choose or change health plans than control group members. In general the effects on confidence and health plan switching did not vary across the different treatment materials. CONCLUSIONS: The 1999 version of the Medicare & You materials contained a message that it is not necessary to change health plans. This message appears to have decreased the likelihood of using the new materials to choose or change plans, whereas other materials to which beneficiaries are exposed may encourage plan switching. Because providing more information to beneficiaries did not result in commensurate increases in confidence levels or rate of health plan switching, factors other than the amount of information, such as how the information is presented, may be more critical than volume.     

Issues regarding health plan payments under Medicare and recommendations for reform.

The failures of the market for current Medicare health plans include poor information and price distortions and can be attributed to government policy. Reforms that could improve its structure are annual open enrollment periods, premium rebates from health management organizations (HMOs) to members, and termination of the federal government's subsidy of Medicare supplementary insurance. However, the price for a basic Medicare benefits package would still be distorted because Medicare bases its contribution on the cost of a comparable package in the fee-for-service (FFS) sector rather than on the cost of the most efficient plan available to beneficiaries in each market area. The present Medicare HMO program almost certainly increases total Medicare costs and actually discourages HMO growth by shielding beneficiaries from the true price difference between basic benefits in the HMO and FFS sectors. Lacking payment reforms, the Medicare HMO program should be terminated.     

The Effect of Health Plan Characteristics on Medicare+Choice Enrollment

Objective. To provide national estimates of the effect of out-of-pocket premiums and benefits on Medicare beneficiaries' choice among managed care health plans.
Data Sources/Study Setting. The data represent the population of all Medicare+Choice (M+C) plans offered to Medicare beneficiaries in the United States in 1999.
Study Design. The dependent variable is the log of the ratio of the market share of the j th health plan to the lowest cost plan in the beneficiary's county of residence. The explanatory variables are measures of premiums and benefits in the j th health plan relative to the premiums and benefits in the lowest cost plan.
Data Collection Methods. The data are from the 1999 Medicare Compare database, and M+C enrollment data from the Centers for Medicare and Medicaid Services (CMS).
Principal Findings. A $10 increase in an M+C plan's out-of-pocket premium, relative to its competitors, is associated with a decrease of four percentage points in the j th plan's market share (i.e., from 25 to 21 percent), holding the premiums of competing plans constant.
Conclusions. Although our price elasticity estimates are low, the market share losses associated with small changes in a health plan's premium, relative to its competitors, may be sufficient to discipline premiums in a competitive market. Bidding behavior by plans in the Medicare Competitive Pricing Demonstration supports this conclusion.