Three reasons Medicare Advantage premiums dropped

It’s a rare phenomenon in health policy these days: insurance premiums that are dropping. But that’s what happened yesterday, when the Obama administration announced that Medicare Advantage premiums would decrease by 4 percent in 2012 as enrollment increased 1 percent.

Reduced premiums and increased enrollment are the exact opposite of what insurers and Republicans predicted would happen to Medicare Advantage after the passage of the Affordable Care Act. The health reform law reduced payments to Medicare Advantage plans — privately-run alternatives to traditional, fee-for-service Medicare — by about $136 billion over the next decade. Right before the law passed, American’s Health Insurance Plans predicted that “millions of seniors in Medicare Advantage will lose their coverage, and millions more will face higher premiums and reduced benefits.”

So what accounts for the drop? Dig into the data and you’ll see the decrease in premiums doesn’t have a lot to do with policy decisions made in the Affordable Care Act. Rather, it’s three outside factors that are putting downward pressure on Medicare:

Medicare costs are growing slower. Both in Medicare and in private insurance, the recession has correlated with patients using fewer medical services. This looks to be particularly true in Medicare, where seniors could have more limited resources living on a fixed iincome. The newest S&P Healthcare Eonomic Indicies data came out today, and you can see that Medicare spending looks to be rising at a slower rate than it was a few years ago:

Healthier seniors. The Medicare risk pool is becoming younger, and collectively healthier, making them a cheaper group to insure. Medicare doesn’t “age-rate” — charge its older subscribers more — because they presumably have higher medical costs. As this chart (prepared by managed care analysts at CitiGroup) shows, there’s a swell of 65-year-olds. They tend to have lower medical costs than their older counterparts but don’t pay a higher premium for that:

Lower prescription drug prices. Most Medicare Advantage plans include a prescription drug component, alongside insurance for doctor visits and hospital stays. That portion of the plan is going to become less expensive as some big-name drugs come off patent in the next few months. Four of Medicare’s most prescribed drugs — Lipitor, Zyprexa, Seroquel and Plavix — are set to go generic later this year. This is probably a reason that Medicare Part D, the stand-alone prescription drug benefit, saw its premiums decrease for 2012, too.