August 20, 2018
Lower premiums or higher profits
When private insurers get a boost in Medicare subsidies, how much do they pass on to consumers?
President Lyndon B. Johnson signs the Medicare Bill at the Harry S. Truman Library in Independence, Missouri, on July 30, 1965.
Mitt Romney had a favorite attack line during his 2012 campaign for the White House.
He wanted the nation’s elderly voters to know that US President Barack Obama was coming for their Medicare.
“Under the president’s plan, he cuts Medicare by $716 billion, takes that money out of the Medicare trust fund and uses it to pay for Obamacare,” Romney said.
Perhaps it is not surprising that Medicare — the nation’s second largest social insurance program and the primary source of health coverage for the elderly — is a perennial topic of political debate.
Policymakers have debated the best way to rein in premiums while maintaining generous benefits for the elderly, especially for those covered under the private Medicare Advantage plans that account for a substantial portion of Medicare beneficiaries.
Our results predict that consumers and producers share in the cuts of payments and the gains in boosts to payments that are equal in proportion.
A paper in the American Economic Review examines the impact of one Medicare reform 18 years ago that sought to help the elderly by providing bigger subsidies to private insurers. Would insurers pass the money along to their beneficiaries via lower premiums and more robust benefits, or keep the profit for themselves?
The answer is... both.
“Our results predict that consumers and producers share in the cuts of payments and the gains in boosts to payments that are equal in proportion,” said Marika Cabral, who co-authored the paper with Michael Geruso and Neale Mahoney.
The paper comes at a time of heightened tension surrounding health insurance reform efforts, with many progressive Democrats calling for “Medicare for all” even as Republicans attempt to dismantle the Affordable Care Act.
The paper highlights the complexities of health reform and limitations of the tools at policymakers’ disposal. It also emphasizes the importance of competition in health insurance markets and provides insights on the potential effects of an estimated $156 billion in Medicare Advantage payment reductions under the Affordable Care Act.
The Medicare Advantage program is different than traditional public fee-for-service Medicare in that Advantage plans offer additional benefits, like dental coverage, and also have alternative cost-sharing arrangements. Private insurers receive a capitated payment, which varies county to county.
The reform known as the 2000 Benefits Improvement and Protection Act raised those capitated payments to insurers in 72 percent of counties.
Proponents argued that insurers would pass the higher payments along to consumers through lower premiums and more robust benefits. That did indeed happen, but they didn’t pass along the full amount.
Overall, insurers passed through roughly half of the increase to beneficiaries through lower premiums and more generous benefits. For every dollar subsidy increase, 45 cents was passed along to consumers through lower premiums and an additional 9 cents went to expanded benefits.
One potential explanation for why insurers wouldn’t pass along the full amount is that lower premiums attracted more costly patients. That might have led insurers to keep some of the money in order to cover higher costs. The authors estimate that this accounted for 15 cents of incomplete pass-through, or roughly one-third of the observed short fall relative to full pass-through.
What about the rest of the money? One possibility is that insurers have market power, and thus they may feel little competitive pressure to pass-through the increased payments. In fact, there’s evidence in the paper to support this. In the most competitive counties, insurers passed along 74 cents on the dollar to consumers while only 13 cents was passed on in places with little or no competition.
The good news for people covered under the Affordable Care Act is that planned reductions in the payments to Advantage insurers may not have the impact many commentators fear. Insurers appear to have plenty of padding. Just as the benefits of increased payments didn’t entirely accrue to the individuals covered, neither should the costs when subsidies decline.
“This suggests that with the ACA cuts, consumers and producers would have shared the burdens of these cuts in roughly equal proportion,” Cabral said.
“Do Larger Health Insurance Subsidies Benefit Patients or Producers? Evidence from Medicare Advantage” appears in the August issue of the American Economic Review.