Government Payments to Medicare Advantage Plans
Introduction
Medicare Advantage is a private alternative to tradtional Medicare for health insurance offered to adults over age 65. Individuals are able to choose plans offered from private insurers, and the government in turn provides payments to these insurers. Cabral, Geruso, and Mahoney (2018) study the impact of changes to the subsidies in these plans. They use variation induced from the Benefits Improvement and Protection Act (BIPA) implemented in 2000. The BIPA instituted new minimum payment standards that led to increases in payments in 72% of counties in the US. Cabral, Geruso, and Mahoney (2018) use a difference in difference design by comparing the outcomes in these counties to those whose payments did not increase. They find payments increased by an average of $600 per beneficiary per year, of which roughly half is passed through in the form of reduced premiums ($0.45) and an increase of $0.09 in the actuarial value of the plans; the remainder is captured as profits by insurers.
Finkelstein and Hendren (2020) use these estimates to construct the MVPF of additional payments to Medicare Advantage insurers.
MVPF = 1.0
Net Cost
Finkelstein and Hendren (2020) consider the net cost of a $1 subsidy to Medicare Advantage insurers. The cost is $1 plus the impact of any behavioral responses on the insurer. Finkelstein and Hendren (2020) first note that Cabral, Geruso, and Mahoney (2018) estimate that every $1 of subsidy increases Medicare Advantage enrollment by about 0.09 percentage points (and decreases enrollment in traditional Medicare). Finkelstein and Hendren (2020) draw on estimates from Medicare Payment Commission (2018) and Curto et al. (2014) that the government ends up paying 3–6 percent more for individuals enrolled in Medicare Advantage than it would have if they had enrolled in Traditional Medicare. Taking the 6% number would imply a cost implication of 0.0009 x 0.06 = 0.000054, for a total cost of roughly $1.
Willingness to Pay
Finkelstein and Hendren (2020) note that the $1 subsidy leads to a combined willingness to pay of $1 between patients and insurers. Patients receive a benefit of $0.45 lower prices and $0.09 in improved care. Insurers retain the remaining value of $0.44 as increased profits.
MVPF Summary
Combining the net cost near $1 and willingness to pay of $1 implies an MVPF near 1.
References
Cabral, Marika, Michael Geruso, and Neale Mahoney (2018). “Do Larger Health Insurance Subsidies Benefit Patients or Producers? Evidence from Medicare Advantage.” American Economic Review 108(8): 2048-87. https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20151362
Curto, Vilsa, et al. (2021). “Can Health Insurance Competition Work? Evidence from Medicare Advantage.” Journal of Political Economy, 129(2): 570-606. https://doi.org/10.1086/711951
Finkelstein, Amy, and Nathaniel Hendren (2020). “Welfare Analysis Meets Causal Inference.” Journal of Economic Perspectives 34(4): 146-67. https://pubs.aeaweb.org/doi/pdf/10.1257/jep.34.4.146
Medicare Payment Commission (MedPAC) (2018). Report to Congress: Medicare Payment Policy. Washington D.C.: MedPAC
http://www.medpac.gov/docs/default-source/reports/mar18_medpac_entirereport_sec.pdf
Policy Features
- Category
- Social Insurance
- Sub-Category
- Health Adult
- Beneficiary Type(s)
- Seniors (65+)
- Average Age
- 65
- Country of Implementation
- United States
- Year of Implementation
- 2000
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- pubs.aeaweb.org/doi/pdf/10.1257/jep.34.4.146