For the second year in a row, the Biden administration plans to reduce payments to Medicare’s private health plans.

This comes as Medicare Advantage—the system of private, competing health plans—enrolls more than 33 million people, well over half of the entire Medicare population.

Private health plans now dominate Medicare coverage.  

The Left is relentlessly hostile to private health coverage, and that includes Medicare Advantage. For example, Dr. Donald Berwick, then-President Barack Obama’s Centers for Medicare and Medicaid Services administrator, sees Medicare Advantage’s growing popularity as a threat to the viability of traditional Medicare, and recently remarked, “I would like to see Medicare Advantage slowed or stopped right now, or at least forced to have better carriers.”

That’s rich. While running Medicare, Berwick praised Britain’s “single-payer” National Health Service, a government national insurance program, as a “global treasure.” Last year, that “global treasure” left 7.2 million British citizens on waiting lists, or almost 11% of the entire British population.  

Payment Cut: Earlier this year, the Centers for Medicare and Medicaid Services, the agency that runs the Medicare program, issued an “advance notice” of Medicare Advantage’s payment rates for 2025.

The changes include a series of technical adjustments to several key components of the system’s mind-numbingly complex payment system, such as how the government’s annual “benchmark” payments to plans are to be set, how the agency will adjustment payments for beneficiaries’ health risks, and how the agency will allocate bonuses to plans based on their performance on health care quality measures.

CMS says that the proposed changes will increase overall Medicare Advantage payment by 3.7% in 2025 over 2024, amounting to $16 billion in revenues.

The Biden administration is also saying that the proposed changes will ensure the payments are accurate, protect beneficiaries, and maintain a stable market.

But take a closer look. The Berkeley Research Group recently conducted a detailed analysis of the data in a report commissioned by the Better Medicare Alliance, a coalition of more than 200 allied organizations. The authors concluded that the CMS changes in 2025, taking all of the technical adjustments into account, would result in a 1% Medicare Advantage payment cut “per month per beneficiary.”

Team Biden is, among other things, ignoring the persistent impact of inflation. For the first nine months of 2023, according to the Berkeley Research Group analysis, Medicare Advantage medical costs “per member per month” grew by 7.3%.

For 2025, medical inflation is projected to be between 4% and 6%. In any case, it’s a sure bet that medical inflation will swamp CMS’ vaunted Medicare Advantage payment “increase.”  

Patients Pay: When rising medical costs collide headlong into falling Medicare payments, the patients get squeezed by higher premiums or out-of-pocket costs or less access to the extra benefits and services they want.

The authors of the Berkeley Research Group report have quantified the effects of that squeeze on patients and conclude that “… the value of supplemental benefit reductions to premiums and cost sharing could fall by $33 or more per beneficiary per month on average.”

The damage to Medicare patients, of course, is never uniform. Looking at the data, the authors of the Berkeley Research Group report estimate that for Medicare patients in Kansas, Nebraska, Nevada, and Texas, the potential damage would be greatest: “The value of supplemental benefits or reductions to premiums and cost sharing for these four states could fall by $60 or more per beneficiary per month, on average, which beneficiaries would experience as an increase in their health care costs.”

An Old Game: The Left’s game plan, as Berwick says, is to stop the growth of Medicare Advantage. The Left would like to drive seniors back into traditional Medicare.

During the 2008 presidential election, Democratic presidential candidate Barack Obama promised to cut $150 billion out of Medicare Advantage over several years and transfer the funding to expand the outdated and disjointed traditional Medicare “fee for service” program.  

In 2009, then-Senate Majority Leader Harry Reid, D-Nev., proposed to cut $110 billion from Medicare Advantage  over 10 years and to reduce Medicare’s private plan enrollment by 33%.

With enactment of Obamacare in 2010, the Congressional Budget Office estimated that the law would cut Medicare Advantage by $136 billion, and the CMS Office of the Actuary projected that Medicare Advantage enrollment would be cut in half by 2017.

In 2011, Team Obama got cold feet and used funds from Medicare’s “quality-based bonus program” to blunt the cuts before the 2012 election, and the program continued to grow.

Note, too, that more than half of House Democrats and 15 Democratic senators are co-sponsors of legislation (“Medicare for All”) that would abolish virtually all private health plans, including Medicare Advantage plans.  

Fixing Medicare Advantage Payments: While Medicare Advantage has been providing affordable, high-quality care to an ever-larger number of senior citizens, the Medicare Advantage payment and risk adjustment systems are nevertheless broken.

They are not going to be fixed by periodic, piecemeal bureaucratic adjustments.

Two key policy changes are necessary.

First, instead of relying upon traditional Medicare’s declining and outdated system of administrative pricing and price controls as the basis for annual Medicare Advantage payments, Congress should base the government’s contribution to health plans on a straight competitive market-based bidding system among the plans to provide the standard Medicare benefits.

The popular and successful Federal Employee Health Benefits Program, for example, has been using this method for federal workers and retirees for more than six decades. Such an approach would ensure that the government contribution to plans reflects the real market price of coverage, and drive more intense price competition among plans and providers.

Also, such competitive bidding should be undertaken on a regional basis, rather than today’s narrow countywide basis.

Second, instead of trying to “risk-adjust” health plan payments on prospective plan estimates of enrollees’ future health-related costs, as is the case today, Congress should establish a retrospective (look-back) system to reimburse plans annually for the actual costs of enrolling high-cost Medicare patients.

As outlined by Heritage Foundation analyst Edmund Haislmaier in Chapter 9 of “Modernizing Medicare: Harnessing the Power of Consumer Choice and Market Competition” (Johns Hopkins University Press, 2023), such risk-adjusted reimbursement to the plans would come from a common pool. (The Daily Signal is the news outlet of The Heritage Foundation.)

All Medicare Advantage plans would participate and share the costs of expensive patients. The pools could be organized on a state or regional basis, funded from all participating Medicare Advantage plans, and supervised by state insurance regulators.

Such a retrospective system would not only guarantee protection for vulnerable patients and stabilize the market, but it would also eliminate the guesswork of estimating patients’ future risk and prevent any insurance company from “gaming” the system at the expense of the taxpayers.

Medicare Advantage is a major health policy success. That’s because more and more seniors are deciding that it offers them real value for their money. But the program will only have a bright future if Congress undertakes discrete, well-crafted legislative solutions to fix those features that are clearly broken.

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