Both Parties Should Love Medicare Payment Reforms

The political demagoguery over Medicare Advantage needs to end.

 Closeup of Medicare enrollment form and pen

The rate setting process has become too politicized, and it must stop.

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The Obama administration’s recent notice of cuts to private Medicare plans has unleashed a political firestorm and a new wave of attacks against the Affordable Care Act. Even senior Democrats who voted for the law have opposed the cuts. But for members of both parties, a more constructive approach would be to reform how payments to these plans are made in the first place.

Seniors can get their Medicare benefits from the traditional Medicare program or Medicare Advantage, which offers a choice of private plans. Private plans submit bids for how much Medicare should pay them for covering a senior. Medicare pays plans their bids up to a limit — which used to be 13 percent higher than costs under traditional Medicare.

The Affordable Care Act is now gradually reducing this limit so that coverage under private plans doesn’t cost much more than under traditional Medicare. This policy was a longstanding recommendation of the independent Medicare Payment Advisory Commission.

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These cuts in subsidies to private plans don’t cut anyone’s Medicare benefits. If plans submit bids below the limit, they receive rebates they can use to provide extra non-Medicare benefits, such as gym memberships. Plans might cut these non-Medicare benefits — which most seniors don’t receive — instead of cutting their administrative costs and profits. But the subsidy cuts help pay for new essential benefits for all seniors: free preventive care, free wellness visits and better drug coverage.

According to the nonpartisan Congressional Budget Office, reversing the subsidy cuts would increase the federal budget deficit by $156 billion over 10 years. But unfortunately, Republicans who purport to care about the national debt — and who abhor government subsidies to prop up private industry — abandon their principles when it suits their political purposes. By increasing Medicare spending, reversing the subsidy cuts would also increase premiums for all seniors, which are linked to program spending.

So the Obama administration is now implementing a policy that is fiscally responsible. But this policy accounts for less than half of the total proposed cuts to private plans. Another important factor is slowing growth in Medicare costs.

The administration projects that costs per senior will actually go down next year. If costs are going down, why shouldn’t payments to private plans go down too? If the price of a gallon of milk drops from $4 to $3, no one in their right mind would still pay $4.

But regardless of the merits of the cuts, it’s clear that the rate setting process has become too politicized. Last year, the administration reversed proposed cuts after a similar uproar. To delay the health law’s cuts, the administration has also paid “quality bonuses” to plans covering 93 percent of enrollees, offsetting the impact. Because Wall Street trades on news of decisions by government officials, an unsavory industry of “political intelligence” has blossomed. And the insurance industry runs massive ad campaigns scaring seniors.

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This must stop. Market competition should determine payments to private Medicare plans. The payment limit should be the average bid submitted by private plans in an area. This change would not only fully eliminate subsidies, but also encourage price competition.

This competitive bidding for Medicare Advantage would actually save about $10 billion more than current law. And unlike some proposed Medicare reforms, competition among private plans wouldn’t undermine or erode traditional Medicare, or result in premium increases for seniors who want to keep their current doctors.

This is one reform to the Affordable Care Act that both parties can embrace. Republicans get to support free market principles over corporate welfare. Democrats get to support additional savings that could pay for a short-term extension of unemployment benefits or other priorities.

The insurance industry thrives under the status quo because it can lobby and campaign for more government money. An added virtue of competitive bidding for Medicare Advantage is that it will weaken this political influence — and a debate on reform would expose what this controversy is really all about.