As part of the 10 Ideas: Prescriptions for Health Reform series, a proposal that would give seniors access to better, cheaper care and force private insurers to compete for their business.
Suppose you are a Medicare beneficiary. You have worked all of your life, saved your money, and paid payroll taxes. Now, in addition to the basic coverage provided by Medicare, you want to receive comprehensive benefits -- the same level of coverage that most Americans enjoy. You have two options, both bad.
Your first option is to continue receiving your guaranteed basic Medicare benefits from the government while enrolling in a Medicare Supplemental Insurance plan. The Medicare Supplemental Insurance Program, or Medigap, allows private insurance companies to offer insurance plans that fill the gap between basic Medicare coverage and comprehensive coverage. Basically, this option means that you would have three insurance plans: traditional government-provided Medicare, a private Medicare Prescription Drug Benefit Plan, and a private Medicare Supplemental Insurance plan. Having three plans creates unnecessary complexity and confusion. A report published in Health Affairs by the Commonwealth Fund found that the "patching together of multiple plans creates confusion for beneficiaries; creates the potential for risk selection; and leads to higher administrative expenses, because of the multiple insurance carriers involved and the lack of integrated claims administration."
If you want to avoid the problems associated with multiple plans, your only option is to receive all of your care through a private insurance plan, known as a Medicare Advantage plan. In a Medicare Advantage plan, the government pays for roughly the amount of care that it would otherwise provide through Medicare. Beneficiaries pay for the rest of the plan through premiums. Medicare Advantage plans, however, are much less efficient than traditional Medicare. According to a report issued by the Majority Staff of the House Committee on Energy and Commerce, less than 85 percent of Medicare Advantage providers' revenue is used to pay for actual medical expenses -- in stark contrast to traditional Medicare, in which more than 98 percent of revenue is used to cover medical expenses.
Why are Medicare Advantage insurers so much less efficient? Because, as Representative Henry Waxman put it, Medicare Advantage insurers "squander billions of dollars on overhead costs -- in fact, they spend ten times the amount per beneficiary [in overhead costs] than traditional Medicare." The report's findings confirm Representative Waxman's concerns that Medicare Advantage insurers spend money wastefully. The report found a company that spent only 79 percent of its revenue paying for medical expenses but paid an executive over $35 million. The same company paid 16 other executives' salaries and bonuses worth $1 million or more. The chief Medicare administrator, in contrast, receives only $165,300, even though Medicare is larger and insures more people than the entire Medicare Advantage market.
The report also discovered that a company that spent only 82 percent of revenue on medical expenses also spent $1.5 million on a corporate retreat in Edinburgh, Scotland and $1.8 million on a retreat in Cancun, Mexico. Wasting our seniors' hard earned money on unnecessary expenses is reprehensible. In the words of Representative Bart Stupak, "Seniors pay Medicare Advantage premiums with the expectation that the money will be used to provide critical medical care -- not pay for marketing campaigns and executive bonuses. The disparity between the percentage of premiums used to pay medical claims in traditional Medicare and Medicare Advantage is unacceptable; our seniors deserve better. This report is just the latest example of private insurance companies exploiting the Medicare Advantage system for their own gain."
Our seniors deserve better than having to choose between the confusion and inefficiency of multiple plans and the wasteful extravagance of Medicare Advantage providers. Congress can mitigate this problem by creating a public benefit option, a program in which beneficiaries would receive comprehensive care from the government. The government would pay for roughly the same amount of care that it would otherwise provide through traditional Medicare, and consumers would pay for the rest of the care through premiums. Beneficiaries would receive all of their care from one program, so there would be no difficulties arising from trying to combine multiple plans. Because that plan would be public and administered by the Centers for Medicare and Medicaid Services (the same program that administers Medicare), it would be remarkably more efficient than private insurers and would not waste money on extravagant corporate expenses. Finally, because the program would be paid for by consumer premiums, it would be completely revenue-neutral for the government.
The Commonwealth Fund projected the benefits of such a program and published their findings in Health Affairs. According to their report, a comprehensive benefit option would substantially improve the quality and value of coverage offered to consumers while saving them an average of $357 annually on premiums and $60 annually on out-of-pocket costs. The overall market reduction in spending would be approximately $5 billion.
Another advantage of a comprehensive benefit option is just that: it is an option. Even though multiple plans and consolidated private plans are less efficient than a single public plan, consumers may prefer these plans because they can provide more specialized care. If they are willing to pay the higher premiums associated with these plans, they would be able to purchase them. Indeed, private insurers that offer Medicare Advantage plans would have an incentive to become more efficient in order to remain competitive with the public option. This would require them to eliminate unnecessary expenses (like trips to Cancun). A comprehensive benefit option would also give insurers who provide Medicare Supplemental Insurance an incentive to do a better job of integrating their plans with Medicare to mitigate problems associated with combining multiple plans.
Our seniors deserve a better choice for acquiring comprehensive health insurance coverage. Creating a comprehensive public benefit option would give them that choice. It would require no additional government revenue and would save billions by making the market more efficient.
Wilson Parker is a member of the Roosevelt Institute | Campus Network's chapter at UNC Chapel Hill, where he is studying economics. He serves as the co-director of the chapter's Economic Policy Center.