Health Reform Won’t Cripple Medicare Advantage, Latest CBO Estimates Show

The Congressional Budget Office’s (CBO) latest Medicare estimates show that opponents of health reform were wrong:  phasing down overpayments to the insurance companies that serve some Medicare beneficiaries through the Medicare Advantage program won’t gut the program or lead insurers to drop out.  Instead, CBO expects Medicare Advantage to keep growing.

Before health reform (in 2009), Medicare paid Medicare Advantage plans 14 percent more per beneficiary than it would cost to cover these people in regular Medicare, according to the Medicare Payment Advisory Commission (MedPAC).  These overpayments drove up premiums for people in regular Medicare and weakened Medicare’s finances.

Health reform began shrinking the overpayments last year.  Eventually it will bring Medicare Advantage payments more in line with the cost of regular Medicare.  (Even if policymakers went further and required that Medicare Advantage plans receive no more than what regular Medicare costs, the plans would still be overpaid.  That’s because they enroll healthier-than-average — hence lower-cost — beneficiaries and Medicare’s “risk adjustment” mechanism can’t fully account for these differences in determining plans’ payment rates.)

Opponents of health reform claimed that cutting the overpayments would harm millions of beneficiaries and devastate Medicare Advantage.  Insurers use the overpayments to provide some benefits that regular Medicare doesn’t offer, they argued, so insurers would have no choice but to institute deep benefit cuts.  They might even withdraw from the program.

But, while part of the overpayments pay for extra benefits, insurers keep a substantial part as profit and to cover overhead.  For example, as we wrote in 2009, MedPAC found that Medicare paid Medicare Advantage plans an average of $1.30 for every $1 in additional benefits they delivered.

If insurers become more efficient, they can still provide some extra benefits and offer other inducements to enroll, despite the cuts in excessive payments.  (In fact, Medicare originally allowed insurers to provide additional benefits only if they covered Medicare beneficiaries at less cost than regular Medicare.)

CBO projects that Medicare Advantage plans will continue to thrive.  It expects enrollment in Medicare Advantage (plus some other, much smaller plans that predated Medicare Advantage) to grow from 13 million last year to 18 million by 2019, even with health reform.  That’s hardly a sign of the program’s impending collapse.