Economics, Health Care

The problem with Kaiser’s premium support study? Seniors are smarter than that—and so are health plans

Image Credit: Sunwalk999 (Flickr) (CC BY 2.0)

Image Credit: Sunwalk999 (Flickr) (CC BY 2.0)

Going to the supermarket with my mother was always a test of patience. She would carefully examine the produce, looking for defects that only she could see to make sure that she found the best head of lettuce or bunch of carrots. If they were too expensive, she put them back.

She was a careful shopper when it came to items that cost a few dollars. It is not very likely that she would be less careful if the price was much higher. Yet that is what the latest study of Medicare reform seems to imply.

The Kaiser Family Foundation published a report this week showing that 59 percent of Medicare beneficiaries—25 million people—would pay more to remain in their current health plan if a premium support system was fully implemented. This matters because premium support is the reform advanced by presidential candidate Mitt Romney and his running mate Paul Ryan, and we are three weeks from the election. The headline suggests that Mom would stick with her expensive plan even though plans are available that offer the same benefits for much less.

There is bipartisan agreement that Medicare needs work. The program’s spending is growing much faster than the country’s ability to pay for it, and the money that is being spent is often wasted and fails to deliver high value health care. (That’s not a Republican idea; Donald Berwick, who recently stepped down as the administrator of the Medicare program, has said the same thing.)

The traditional Medicare program that most seniors choose pays more when health care providers deliver more services, essentially without limit. That’s a major reason for an explosion in medical imaging (including X- rays and CT scans) in recent years, and it has driven up the growth of overall Medicare spending.

Premium support would place a limit on Medicare spending and let seniors decide whether the traditional Medicare plan or a private health plan would be a better buy. They would continue to receive all of their Medicare benefits no matter what plan they chose. Seniors would pay more if they chose an expensive plan, but that would be their decision.

The Kaiser report emphasizes a worst-case scenario. To reach their conclusion, the authors assume that no beneficiary would change health plans even if a less expensive option would save them hundreds of dollars a month.

But Mom wouldn’t buy tomatoes that were too expensive. She wouldn’t buy health insurance that was too expensive either, if she had a choice. The study authors recognize that, and show that if a quarter of seniors shifted to a less expensive plan about 35 percent of beneficiaries would pay higher premiums to remain with their current plan. A less dramatic number, but one that is more consistent with reality.

Is that the best premium support can do? Fortunately, no.

Health plans and providers would also respond to the shift to premium support. Knowing that the government was no longer paying an unlimited subsidy, they would compete for customers by cutting out waste, getting smarter about how to provide the right care at the right time, and reducing premiums.

The Kaiser study reports that when the cost of health plans falls, more beneficiaries have to pay more, not less. They assume that plans under premium support will find a way to save 5 percent, a modest amount compared to the 30 percent of health spending that the Institute of Medicine says is squandered every year. But the study shows that if costs drop 25 percent, then 93 percent of Medicare beneficiaries would pay more—and the extra payment would be much greater than before.

Yes, you read that right. Lower health plan costs would increase what Medicare beneficiaries have to pay—but only if they insist on paying more for the same benefits that are offered less expensively elsewhere.

The reason is simple. The Kaiser study does not show what sensible seniors could save if they simply follow their supermarket instincts and select the best deal. The study shows how much seniors would lose if they keep their old plan in the face of much better options. My Mom isn’t that dumb.

What about health plans? Can we really expect them to find much more than 5 percent of unnecessary spending to cut out?

There is reason to be optimistic. Consider how dramatically inpatient care changed in the 1980s when Medicare changed the way it paid hospitals. By shifting from paying hospitals their cost plus a margin to a fixed payment, hospitals no longer had an incentive to provide unnecessary services. Hospital stays plummeted, since an extra day was now an extra cost. No more being admitted on a Friday and waiting until Monday for a test or procedure.

It is clear that premium support will create even larger incentives to cut waste and improve cost-efficiency. That could result in nearly all plans offering lower bids than we see today, and the differences could be substantial. That means savings for the Mom’s of America, and savings for their children who are stuck with the tax bill.

11 thoughts on “The problem with Kaiser’s premium support study? Seniors are smarter than that—and so are health plans

  1. re: ” The program’s spending is growing much faster than the country’s ability to pay for it, and the money that is being spent is often wasted and fails to deliver high value health care. ”

    isn’t this TRUE of ALL Health Care in the US, not JUST Medicare?

    re: ” Health plans and providers would also respond to the shift to premium support. Knowing that the government was no longer paying an unlimited subsidy,”

    they don’t pay “unlimited” right now, 20% of costs are NOT PAID FOR by the govt. NEITHER is optical, dental or hearing, NOR nursing homes “covered”.

    Here’s the bigger problem. AEI and those of similar philosophy simply fail to deal with the realities and instead hew to a world that does not exist right now (by failing to acknowledge how the program actually works right now much less the rest of health care – non Medicare AND by promoting a solution that exists nowhere in the real world right now except for 3rd world countries.

    How do you reconcile the ideology here with the rest of the real world where every other industrialized country on the planet insures that everyone has access to BASIC health care including those who would be summarily rejected by insurance companies engaging in free market principles?

    Seniors can “shop” all they want but insurance companies will just drop them when they get sick much like other kinds of free-market insurance does when a subscriber starts to cost them money.

    Now, until and unless the US is willing to repeal EMTALA and MedicAid, the whole free-market concept being espoused is a farce because what those two programs mean is that we DO have government insurance and universal healthcare but about as dumb as can be implemented.

    What some folks seem to be believing is that the mere concept of insurance is a socialist plot of some kind especially if the govt does it and not the free market.

    Medicare DOES need to charge more than it does now but cutting Medicare and MedicAid is basically treating the symptoms of out-of-control health care costs for everyone but we’re picking on the old and vulnerable to exact cost-savings rather than dealing with the fundamental problem that health care in this country alone out of all the rest of the industrialized countries choose to continue to believe that the free market will provide insurance to everyone when the reality is that free market insurance does not do that – and that’s why we have 30-40 million uninsured or relying on EMTALA or MedicAid which in turn is a big reason why life expectancy in this country lags other industrialized countries.

  2. re: premium support

    Why haven’t we included TRICARE and the VA in this ?

    with Medicare, Tricare(including spouses/family) , and the VA which of them have the most out of control costs and unfunded liabilities on a per capita basis?

    If free market health care will save money why do we not avail the VA and TRICARE also of that “better way”?

    For that matter, why not give uninsured who show up at ERs a voucher for medical care instead of billing other insured for the costs?

    Why not do the same thing for MedicAid when it comes to nursing homes?

    what we need here is more acceptance of realities and a genuine quest for solutions instead of “ideological” solutions that are more experimental than anything else as there are no other real world analogs – on the planet.

  3. It really doesn’t matter how smart seniors are, if they don’t have the information they need to make an intelligent decision. Compare these three health plans:

    - $950/month for a health plan with a $1,000 deductible and $4,000 out of pocket annual maximum
    - $900/month for a plan with a $2,000 deductible and $4,000 out of pocket annual maximum
    - $800/month for a plan with a $4,000 deductible and $6,000 out of pocket annual maximum

    Which is best? If you don’t get sick at all, #3 is obviously best, with $9,600 in premiums, and #1 is worst. But if you are really sick, and hit each plan’s annual out-of-pocket maximum, #3 costs you the most and #2 the least. If you spend $4,000/year on health care, #1 is the cheapest option.

    Unfortunately, you must choose at the beginning of the year, before you know what you will actually need. Also, money might not be the only factor in choosing a plan. Plan #1 might be the only one that your doctor accepts, and you really like your doctor.

    The idea that insurance companies will somehow cut costs if Medicare goes to a premium support system is also questionable. There is already a robust market for insurance that seems to work pretty much on the premium support model: health insurance through employers in the under-65 market. Employers do not write a blank check for insurance policies. They shop around for the lowest-cost policies.

    Insurers in this market will have a clear competitive advantage if they can reduce costs while preserving the quality of care. Yet the cost of this insurance keeps going up faster than the general rate of inflation. Employees are still being asked to pay more every year for their coverage.

    I have my employer’s lowest-cost health plan, a so-called “consumer-driven health plan” where my employer puts $1,000/year into an account. If I don’t use it all, it carries over to the next year, and if I build up the account enough, it could cover my out-of-pocket maximum completely in a year where I need a lot of care. So I have an incentive as a consumer to make careful choices about what I do and don’t need. But it still works on the fee-for-service model, where doctors get more money the more tests and procedures they do. Good luck trying to find out how much a complex treatment costs before you undergo it and get the bills.

    Here too the market can fail due to the inequality of knowledge. I know how to pick good produce in the market. But I haven’t been through years of med school. How do I know whether my mild hernia really needs surgery to avoid the risk of it becoming a major hernia, or if I can still afford to take a wait-and-see attitude? Only a handful of consumers have the knowledge (or at least the research skills) to figure out when their doctor’s advice is really the best for their health, and when it’s really the best for the doctor’s pocketbook. (And even when the doctor is on salary, as with Kaiser Permanente, how does one know whether _this_ doctor’s medical knowledge is completely up to date?)

    The kinds of reforms envisioned here – where insurers refuse to pay for care that does not follow their standards of best practices – do seem to be needed in order to counter the incentive doctors have to perform procedures of marginal necessity. Yet they seem to me to be precisely the reforms that the Republicans screamed about during the debate over the Affordable Care Act. Interfering with the relationship between a doctor and patient! Death panels!

    Here too there the consumer is flying blind, unlike the produce in the supermarket that can bee seen and squeezed. How do I know in advance whether the cheaper Plan A will slap on the “experimental” label and refuse to pay for what my doctor and I both agree is the best cutting-edge treatment for the cancer that was detected a month after I signed up for the plan? Perhaps the more expensive Plan B would have allowed the treatment. But at the time I bought the plan, I knew neither that I would be facing this choice, nor what each plan would decide about this it.

    If the author’s mother has any advice for me on how to make such decisions under such circumstances, I’m all ears.

  4. Mr. Stein is absolutely correct that no one can make good decisions without good information. An organized marketplace, like the Affordable Care Act’s exchanges but with more sensible rules, is essential for both Medicare and the under-65 insurance markets. His skepticism about private plans finding ways to deliver care more efficiently is also justified, but remember how all health care has been financed for the last 60 year. Insurers have been the agents of the payer, not the consumer. Medicare inherited this system and added a layer of politics guaranteeing that it would simply pay and ask questions later–mostly never. As a country, we cannot afford that model. As patients, we need an effective voice. That’s what premium support provides. Medicare can change the ground rules, and health plans and providers will either find better ways to deliver care or be driven out of business. Also, keep in mind that this is still Medicare, and the government will continue to provide consumers protection. So seniors will still be guaranteed full benefits in a program that many think they understand (even though it is far more complicated that many observers realize). The critical question for premium support on Medicare is whether government will find the right balance between consumer protection and over-regulating an over-regulated market.

    • We already have a primarily private “free market” for people who are not seniors and how successful are they at becoming “informed” consumers ?

      I don’t see it.

      One very excellent place to try out this “experiment” is TRICARE – the military health care system where the “theory” about premium support and the free market could be easily tested.

      Those folks have a much better opportunity at doing this since they are not at a stage in life where they are likely to need increased health care.

      Singapore has some semblance of a blended system where the govt requires disclosure from health care providers as to performance, quality and cost.

      But what we have here is a fervent belief that we “can” have a free market system to deliver the supposed benefits of such a system – but we don’t even recognize that we already have the ability to have such a system with private employer-provided health insurance and yet all of those covered have no real ability to be informed consumers because there is no law that requires disclosure of costs (among other things).

      The primary statistics that ARE available to consumers these days is Medicare data that requires the collection and disclosure of such data.

      Without Medicare requiring that – what would happen?

      we already know because non-Medicare health care does not disclosure unless forced.

      Those that advocate a “magical” free market do not help their own case when such obvious counter-examples are easily shown.

      If those folks are actually serious – they’d want proposals that would actually work instead of “magic” free market ideas.

    • @Joe Antos – First, allow me to thank you for reading and responding to my comment.

      I’m afraid I still fail to see how premium support is sufficiently different from what my employer does to make a difference by itself. My employer decides that it will spend $X per employee per year, chooses a few group plans, and lets us make up the difference between $X and the cost of the plan we choose. Kaiser, which does not operate on the fee-for-service model, is one of the offerings. Yet for me, it has not been the cheapest option, because my health has been much better than average for my age. Yes, I know that one day my luck might change.

      A simple premium support model (as I understand the term; _please_ correct me if I’m wrong) would let us choose any plan available to us in addition to the group plans the company negotiates. Other than the additional administrative overhead of verifying the bona fides of the outside insurer and setting them up in accounts payable, I don’t know why any company would object to that. Yet I don’t see how this would reform the behavior of those plans without additional rules and/or incentives being enacted. In that case, though, can’t we enact those rules and/or incentives – in both the Medicare and non-Medicare realms – without premium support?

      If we can reduce the cost of non-Medicare health care by $X/person/year, it will have the same growth-boosting effects as cutting an employer’s payroll taxes by $X/employee/year. So if we can do what you envision, why aren’t the Republicans all over this as a pro-growth economic policy?

      My company tries to be my effective voice in choosing a range of appropriate plans. If they are paying $X/year to subsidize my insurance no matter what plan I pick, I cannot see that they have a financial incentive to do anything other than pick what they think are the best deals for the majority of their employees. (Any one employee’s personal situation might be different, granted). They have a financial incentive to keep good employees happy with their choices. So I’m not seeing how the insurers’ incentives really change that much just because they get a check from my company (made up of their subsidy plus my payroll deduction) rather than from me directly.

      The whole area of health care is far more complicated than many people realize (or at least are willing to admit). In the immortal words of Walt Kelly, we have met the enemy and he is us. People rationally opt out of insurance when young and healthy, but then find that this behavior makes premiums much more burdensome when they reach their 50s and 60s – hence the Obamacare mandates.

  5. Re: Larry G’s comment. Medicare is not an insurance program. Insurance is risk based. Medicare is not. So to compare Medicare with insurance is not correct. We do not really have health insurance in the US. We have programs where we prepay into a pool and hope to collect from the pool in some future time. That is why Obamacare needs to coerce the young to pay more than they would otherwise have to pay in order to prevent the elderly from paying premiums that reflect the risk they present to the plan. Over my lifetime I paid more into the Medicare program than many other people did, yet my benefits are no better than the people who paid less. I am a healthy senior but my medicare premium is the same as someone on death’s door. That is not insurance. Medicare is a welfare program for people over 65 or who are disabled. It should be compared to other welfare programs not to insurance. Further, to compare life expectencies of people in the US with people in Sweden, Denmark or Germany is not helpful. I would bet that a person in Minnesota of German descent has a life expectency equal to or greater than a person living in Germany. The same goes for a Swede in Wisconsin, etc.

    • re: risk based insurance.

      what would you call health care in every other industrialized country on the planet?

      how about EMTALA? Do you think ER care for anyone including those who are not “coerced” is risk-based?

      How about TRICARE and Employer-provided health insurance?

      do you think those are “risk-based”?

      Name the top 3 countries in the world that have ONLY risk-based insurance for health care?

      Can you find any that are not 3rd world?

      re: paying into Medicare

      Have you paid into Medicare Part B?

      do you think if Medicare Part B was risk-based that you’d be able to afford it now?

      let’s be honest and truthful in our answers.

  6. Unquestionably believe that which you said. Your favorite justification seemed to be on the web the easiest thing to be aware of. I say to you, I certainly get irked while people think about worries that they just don’t know about. You managed to hit the nail upon the top as well as defined out the whole thing without having side-effects , people can take a signal. Will probably be back to get more. Thanks

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