Medicare Advantage pays less than Fee for Service

According to conventional wisdom among health policymakers and health economists, traditional fee-for-service (FFS) Medicare ought to be able to extract lower per unit prices than privately operated Medicare Advantage plans due to the former’s monopsony buying power. A new scientific study provides some of the earliest empirical evidence on this hypothesis and turns the theory on its head.

Medicare beneficiaries have had access to private coverage through health maintenance organizations since the 1970s, termed Medicare+Choice in 1997, and re-branded Medicare Advantage in 2003. Currently, 31% of all Medicare beneficiaries receive their Medicare Part A (hospital) and Part B (physician) services this way. With 17.6 million enrollees, Medicare Advantage is a larger program than the Affordable Care Act’s HealthCare.Gov Marketplaces.

The new study from Health Affairs compared the prices (i.e. the allowed charges) for hospital care for patients using the Health Care Cost Institute database which includes over one-quarter of the privately insured non elderly population and almost one-third of the elderly Medicare Advantage population from all 50 states.

The authors reported prices for a set of hospital diagnosis related groups and constrained the analysis to specific metropolitan areas to make the results as internally valid as possible. In 2012, Medicare Advantage plans paid about 92% of what FFS Medicare paid for similar services. Commercial insurers (arguably serving a different, non elderly patient population) paid over 160% of the FFS Medicare price.

While FFS Medicare is accepted nearly universally by hospitals, Medicare Advantage – like other private plans – has narrower networks. When adjusting for this factor, the impact of hospital mix accounted for one-third (or 2.4 percentage points) of the price difference between FFS Medicare and Medicare Advantage. Thus, Medicare Advantage ultimately pays about 5% lower prices for similar hospital services than FFS Medicare.

What are the implications for policymakers? With discussions shifting from ways to increase coverage to ways to decrease costs, incentives to move beneficiaries to Medicare Advantage could save over $4 billion in hospital admissions every year. However, prior to doing so, it is imperative to know if Part B and prescriptions drug prices are similarly constrained by Medicare Advantage.

commentary by Cedric Dark

Abstract

There is ongoing debate about how prices paid to providers by Medicare Advantage plans compare to prices paid by fee-for-service Medicare. We used data from Medicare and the Health Care Cost Institute to identify the prices paid for hospital services by fee-for-service (FFS) Medicare, Medicare Advantage plans, and commercial insurers in 2009 and 2012. We calculated the average price per admission, and its trend over time, in each of the three types of insurance for fixed baskets of hospital admissions across metropolitan areas. After accounting for differences in hospital networks, geographic areas, and case-mix between Medicare Advantage and FFS Medicare, we found that Medicare Advantage plans paid 5.6 percent less for hospital services than FFS Medicare did. Without taking into account the narrower networks of Medicare Advantage, the program paid 8.0 percent less than FFS Medicare. We also found that the rates paid by commercial plans were much higher than those of either Medicare Advantage or FFS Medicare, and growing. At least some of this difference comes from the much higher prices that commercial plans pay for profitable service lines. PMID: 27503970

Baker, LC, et al. Health Affairs. 2016; 35 (8): 1444-1451.