Who Belongs in Managed Care? Using Premium Policy to Achieve an

Efficient Assignment in Medicare

Jacob Glazer

Tel Aviv University

Boston University

Thomas G. McGuire

Harvard Medical School

April 17, 2009

Traditional Medicare

Part Automatic Financing CoverageProvider Payment

A Yes Payroll tax Inpatient, Other facilities Prospective

B No Gen rev, Premiums Physicians devices Fee schedule

D No Gen rev, Premiums Drugs No controls

Notes: A, B, D all have cost sharing. Cost sharing for A and B can be avoided by individual Medigap plans, employer-provided plans, or Medicaid.

Medicare Advantage

• Created by MMA (2003) to replace M+C. • Private plans must cover A + B services, can

supplement, plans can be MA or MA-PD• HMOs, PPOs, (13.3/17.1) Provider Sponsored

Organizations, Regional PPOs, PFFS, SNPs • Recently recovered to 1997 enrollment pre M+C,

with growth almost all in PFFS. • HMO premiums less than Part B amount, many

at zero. • Medicare plan payments f(benchmark, bid, risk

adjustment) > ffs costs.

Single Premium and Plan Sorting

MA TM

Person Cost Value Cost Value

Smith 0 5 10 12 Smith in MA if PTM>7

Jones 0 5 8 17 Jones in TM if PTM<12

Miller 0 5 2 9 Miller in TM if PTM <4 (uh oh)

• Fully risk-adjusted incremental cost would work• Preview of result: no single premium (no matter how set) can work, and, cannot be corrected by plan payment policy.

Joining MA Among 65+ non-Medicaid

NHIS MCBS

Hispanic 0.348 (1.86) 0.555 (2.70)

Black 0.225 (1.52) 0.332 (3.26)

Health status fair 0.199 (1.27) -0.253 (3.62)

Health status poor -0.042 (0.19) -0.398 (4.11)

Income >25K -0.296 (3.30) -0.578 (14.83)

Income <25K (ref.)

Education <11 years 0.552 (3.34) 0.632 (6.15)

Balsa, Cao, McGuire (2007), other variables not shown. T-stats in parentheses.

Minority more likely

Poor health less likely

Low SES more likely

Beneficiaries and Efficient Health Care

Rationing and Efficiency in Traditional Medicare and Medicare Advantage

Figure 1: Spending and Inefficiencies in Traditional Medicare

C

1

*spx *

srx

TMspx

TMsrx

Sick

C

1

*hrx

TMhrx

Healthy

*hpx

TMhpx

srv′

spv′

TMspL

TMsrL

TMhrL

hpv′hrv′

TMhpL

Figure 2: Spending and Inefficiencies in Medicare Advantage

1

*spx *

srxsx

Sick

λ

1

*hrx

Healthy

*hpx

srv′

spv′

MAspL

MAsrL

MAhrLhpv′

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hx

Efficiency

The Fundamental Problem with a Single Premium

An Income-Based Premium Can Implement Any Efficient Allocation

Proposition 3: Proof continued

Reinterpretation: An Income-Related Premium to Join TM

Normalize the MA plan premium to zero, and charge beneficiaries to join TM. Specifically, set the premium for TM to the rich to be

MA Plan Choosing A Premium Interferes with Efficiency

Proposition 4: Proof continued