Ezra Klein

Ezra Klein

Ezra Klein writes an opinionated blog on economic policy, cap and trade, health care reform and pretty much anything else you can attach a chart to.

A Wasteful Program

The argument over Medicare Advantage is pretty simple: The program, which allows private providers to compete for Medicare patients, was supposed to cost as much or less than traditional Medicare. It actually costs 114 percent of what Medicare costs. Democrats want to eliminate those overpayments and force private insurers to live within Medicare's budget, given that they're taking Medicare's money. Republicans say that will cut benefits for retirees, which is something they're suddenly very concerned about.

On some level, Republicans are right: The reform will change some benefits for a small minority of Medicare's beneficiaries. But will it change it by very much? Austin Frakt, a health economist at Boston University, has studied whether the Advantage program is spending its windfall on patients or not-patients (profits, advertising, administration, and so forth). The answer? Not-patients, mainly.

Payment to MA plans has gone way up since 2003. Did the payment increase largely benefit beneficiaries or not? This is a current political and policy debate, about which much has been written in the media (both traditional and blogospheric). It turns out the answer is known and quantifiable. My work (with Steve Pizer and Roger Feldman) shows that for each additional dollar spent by the federal government (taxpayers) on the program since 2003, just $0.14 of it can be attributed to additional value (consumer surplus) to beneficiaries (see also: findings brief).

What do we make of the other $0.86? That goes to the insurance companies but doesn't come out "the other end" in the form of value to beneficiaries. In part it is accounted for by the costs of the additional benefits and in part it is captured as additional insurer profit.

So, do higher MA payments produce little value to beneficiaries, as Obama claims, or are the benefits they fund important to maintain, as Republicans would have us believe? The balance of the evidence is on Obama's side. In fact, it is a landslide: for each dollar spent, 14% of the value reaches beneficiaries and 86% of it goes elsewhere (profit or cost).

"Cuts to MA should be a no brainer," he concludes. This is a case, incidentally, where Republicans have lined up in favor of a wasteful government program, where their rhetoric relies on the inviolability of current and future Medicare benefits, and where they are opposing a reform that will improve the deficit over time. It almost makes you miss the purity of the Gingrich crew.

Entry originally published here.

By Ezra Klein  |  September 29, 2009; 12:05 PM ET  | Category:  Medicare Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
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