The Magazine

Medicare's New Critics

Why is the Obama administration trashing a health program that works?

Oct 5, 2009, Vol. 15, No. 03 • By FRED BARNES
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Medicare Advantage (MA) is the crown jewel of government health care programs. It allows seniors to choose a health insurance plan that fits their needs. It gives them extra benefits, including eyeglasses and hearing aids, and pays for preventive care such as physical exams. Under MA, seniors don't need to buy supplementary Medigap insurance. It covers prescription drugs, in many cases beyond what the regular Medicare prescription drug program does. It requires lower deductibles and copayments, and thus is more affordable. Roughly one in four Medicare beneficiaries has signed up for MA. That's 10.6 million seniors. A disproportionately high percentage of them are poor African Americans and Hispanics.

You'd think President Obama and his congressional allies would love MA. It provides almost everything they've been demanding in health care for years. But Obama is trashing it. He claims it will give $177 billion in "overpayments" to insurance companies over the next 10 years. He wants to cut that amount from Medicare Advantage. The Democratic bill drafted by Senate Finance Committee chairman Max Baucus would cut $113 billion. House Democrats would slash $160 billion.

Frugality, however, is not their motive for bludgeoning MA. There are three things about it that Obama and Democrats loathe: (1) It's a Republican program, enacted as part of President Bush's prescription drug bill in 2003; (2) it brings free market competition and private, profit-making insurers into Medicare; (3) it uses a pool of money they'd rather spend on other programs.

And they won't tolerate even the mildest of criticism of their plans from providers. After Humana wrote its MA patients about the possible effect of the cuts, Baucus asked the Obama administration to bar insurers from communicating with seniors. HHS dutifully issued a gag order. Mitch McConnell, the Senate Republican leader, called this "an outrage" and a violation of the First Amendment right of free speech. He and seven other Republican leaders promised to hold up nominations to Department of Health and Human Services (HHS) posts until the order is lifted.

The Humana letter was entirely inoffensive--except to those eager to gut MA. "Congress is considering significant cuts to Medicare Advantage now," it said, "and your Members of Congress will want to know why this program is valuable to you because those cuts could mean higher costs and benefit reductions to many on Medicare Advantage." Indeed they could.

The letter was an honest warning, while Obama's attacks on MA have been distortions. His only excuse could be that he's been misinformed about the way MA works. But for the supposed master of the health care issue, that would be a weak alibi.

The $177 billion he wants to cut is neither "a 14 percent premium" for insurance companies nor a subsidy for them. The 14 percent is the extra amount Medicare spends on average for MA seniors. It allows them to choose either additional benefits or cost reductions. Obama claims they get "services that Medicare already provides." Not true. They get more.

And if the 14 percent is an "overpayment," it's chiefly an overpayment to seniors who join MA, not to insurers. Their profit margin in MA is a modest 4 percent. Another Obama complaint is that MA "doesn't follow free market principles" and "is not competitively bid." This is a distortion, at best, and confusing. MA injects competition into Medicare. Insurers compete on price and the attractiveness of their product. In effect, they make competitive bids. Seniors are the consumers. They choose.

Despite the president's insistence that no one would lose benefits under Obamacare, the Congressional Budget Office reported last week that the proposed cuts would mean MA-enrolled seniors would lose some of their extra benefits. In truth, they'd probably lose more than that as there would be less competition as insurers dropped out. But if MA grew as expected, without the cuts, it would add 3.4 million beneficiaries, CBO said. Obama's plan would limit growth to 600,000. Also, the loss of benefits would probably cause some in MA to return to regular Medicare, which no doubt would please Obama and Democrats.

MA was designed to allow seniors to buy private insurance that gives them better and more comprehensive care than traditional fee-for-service Medicare. The only rub is that MA costs the taxpayers more. Under MA, HHS sets a benchmark. It's a ceiling on how much Medicare will pay for each MA senior. Offers by providers are routinely lower than the benchmark, but insurers don't collect the difference. Seniors get 75 percent in more benefits or cost savings and the remaining 25 percent is returned to the government.