GOV. ROMNEY: It strikes me the best deal for [future generations of seniors] is to let them either buy current Medicare or to have a private plan — a lot like Medicare Advantage today. I like Medicare Advantage.
DAVID GREGORY: But that didn’t drive down prices, Governor.
MR. ROMNEY: Oh, it sure did. Actually, what you’re seeing Medicare today, with Medicare Part D, the prescription drug benefit, is that Congress, in putting this together, said, ‘Look, we’re going to allow companies to compete for a package of prescription drug benefits.’ And the cost that they’ve come up with is far less than anyone predicted. Look, competition works.
— Exchange between GOP presidential candidate Mitt Romney and “Meet the Press” host David Gregory, aired Sept. 9, 2012
GOP presidential candidate Mitt Romney faced questions about his policy proposals during an interview that aired Sunday on NBC’s “Meet the Press.” The exchange above deals with Romney’s support for the Medicare-overhaul plan his running mate, Rep. Paul Ryan (R-Wis.), proposed this year.
The Ryan plan would eventually cap government payments toward Medicare and provide future generations of seniors with premium-support payments — that Democrats label a “voucher” — to purchase coverage through traditional Medicare or on the private market.
Gregory asked Romney: “If competitive bidding in Medicare fails to bring down prices, you have a choice of either passing that cost on to seniors or blowing up the deficit. What would you do?”
Instead of selecting choice A or B, Romney pointed to Medicare Advantage and Medicare Part D as proof that competitive bidding works to bring down costs. Let’s look at how those entitlement programs impact federal spending and determine how much they really compare to the Ryan plan.
We’ll start by pointing out that Medicare Advantage has not reduced Medicare spending. The program, which is used by 27 percent of Medicare beneficiaries, actually costs the government more per senior than traditional fee-for-service Medicare.
To understand why this happens despite the competitive bidding process, let’s look at how Medicare Advantage works. (Reporter Sarah Kliff examined this issue in an article for The Washington Post’s Wonkblog).
First, the Center for Medicare and Medicaid Services establishes the maximum amount the government will pay for a list of defined benefits basically matching those of traditional Medicare. This “benchmark” is always higher than what the government pays for Medicare. For instance, it might be 112 percent of the traditional-Medicare price.
Private insurers submit bids for how much they’re willing to pay for the defined benefits, generally staying below the benchmark — the average bid in 2011 was 2 percent less than the cost of traditional Medicare. Seniors who participate in Medicare Advantage then select plans from among the bidders, and the government sends Medicare money to help cover the beneficiaries.
This should lead to savings, right? Not under the current system. That’s because the government doesn’t just pay the low bid amount; it also sends the insurance company a rebate: 75 percent of the difference between the bid and the high benchmark.
The provider must use the rebate to reduce out-of-pocket costs or to provide extra benefits such as gym memberships, dental care, hearing coverage and so on.
Under this formula, the average government payment for Medicare Advantage was 107 percent of the price for traditional fee-for-service Medicare in 2011. So Medicare Advantage has cost the government more than traditional Medicare despite the relatively low bids from private insurers.
Medicare Advantage has worked out well for insurance companies, as they have reported greater profits than they anticipated. Private insurers brought in a net combined revenue of $3.4 billion by taking part in the program in 2006, which was about 66 percent higher than they estimated, according to a 2008 report from the Government Accountability Office.
We should point out that the Affordable Care Act trims spending on Medicare Advantage to eventually put the payments on par with traditional Medicare. This is part of the health-care law’s $716 billion in reduced Medicare spending that Republicans have complained about; much of the rest of the trims comes from reduced payments to hospitals and other providers.
Democrats argue that the private Medicare Advantage plans provide no clear benefits over Medicare despite costing the government more money through rebates.
Republicans contend that cutting back on Medicare Advantage will eliminate choices for seniors. That’s because the rebates would go away, and beneficiaries would no longer receive the extra benefits such as gym memberships and hearing coverage.
Ironically, the rebates prevent what Republicans really want — which is for private-market competition to work some cost-reducing magic on the Medicare system.
The Ryan plan actually preserves the “Obamacare” cuts to Medicare Advantage. This may seem to contradict the Republican opposition to the reductions, but conservatives argue that they just want the savings to go toward deficit reduction, whereas the Obama administration uses them to expand Medicaid and provide subsidies for people who can’t afford coverage under the new insurance mandate.
So, what does this all mean for Romney’s statement? Theoretically, competition among private insurers could reduce Medicare costs. But Medicare Advantage does not necessarily prove that point. The current program pays more for each senior than traditional Medicare does, despite the low bids coming from insurance companies.
Some experts also question whether private providers are really operating on a level playing field with traditional Medicare when they make their bids. David Cutler, a Harvard economics professor who served as senior health-care adviser to the 2008 Obama campaign, suspects that insurance companies may be finding ways to cherry-pick the healthiest seniors — even though Medicare Advantage is set up to prevent this type of thing.
“We really don’t know for sure whether it’s efficiency or selection [that keeps the private bids low],” Cutler said. “If they’re just selecting healthier people, it’s not actually any cheaper.”
The problem with cherry-picking is that it would leave traditional Medicare with the least healthy of seniors, making the program more expensive. Meanwhile, the government would be subsidizing profits for non-government providers.
Even conservative economists agree that private insurers are finding ways to cherry-pick the healthiest Medicare users.
“I think there really is some of that going on,” said Robert Moffit, director of the Heritage Foundation’s Center for Health Policy Studies and a former assistant secretary for the Department of Health and Human Services during the Reagan administration. “Is it all that decisive? I don’t think so, because there have been constant efforts to do better risk adjustment.”
Conservatives and liberals largely agree that benchmark-driven rebates make Medicare Advantage unnecessarily expensive. Moffit said the government should dump that payment system and give any savings from competitive bidding directly to seniors and the government.
But beyond all the issues with cost, Medicare Advantage simply doesn’t work like the Ryan proposal. That plan would turn Medicare into a premium-support system for future generations of seniors, with the government calculating its contribution based on a formula of GDP growth plus 0.5 percent. (This likely would be the less than the rate of growth for health-care costs, but it is equal to the rate in President Obama’s budget.) Beneficiaries would have to pay the difference between that amount and the cost of their plan, regardless of whether they use a private option or traditional Medicare.
The best case scenario with the Ryan plan is that it creates downward pressure on the market, and vouchers end up covering most or all the cost of health care for the elderly. The worst case scenario is that out-of-pocket expenses grow rapidly for future generations of seniors.
Either way, Romney seems to be dodging the real issue by focusing on competitive bidding. The biggest concern with the Ryan proposal is that seniors’ out-of-pocket expenses would rapidly increase.
Now let’s look at Medicare Part D, since Romney also brought it up. That program, created under the George W. Bush administration, allows seniors to use Medicare benefits to pay for privately administered drug plans.
The average price for prescriptions under this program have come in lower than projected. Furthermore, costs have actually declined or remained constant over the past several years despite a sharp rise in overall health-care costs, according to a statement from the Department of Health and Human Services. Meanwhile, overall health-care spending has risen sharply.
Experts generally attribute the decline in prescription costs to several factors: competition among private plans, the expanded use of less-expensive generic drugs and slowed growth in the price of pharmaceuticals over the past decade or so — the trend actually predates the Bush-era prescription-drug program by one year. As such, Medicare Part D only goes so far in proving Romney’s point about competitive bidding.
The Pinocchio Test
The Medicare Advantage and Medicare Part D programs don’t necessarily prove that the Ryan plan would save money through private-sector competition.
For one thing, those entitlement programs don’t work the same way as the Ryan proposal. Furthermore, if Romney really wants to make a comparison, the Medicare Advantage plan in its current form costs the government more for each beneficiary than traditional Medicare — but not as a direct result of competitive bidding.
Granted, the bids for Medicare Advantage have come in well below the costs of traditional Medicare, and the price tag for Medicare Part D has been lower than the government expected. But Medicare Advantage insurers may be serving healthier beneficiaries than those using traditional Medicare, and the rate of growth for drug prices started slowing before Medicare Part D took effect, which has helped the program exceed expectations.
This does not disprove the notion that competitive bidding could help reduce Medicare costs for the government. But Romney’s remarks certainly lacked the full context of this issue.
We debated whether or not to subject Romney’s remarks to our rating system, but the GOP candidate used the price-reduction issue to dodge Gregory’s question: Are you willing to pass additional Medicare costs to seniors? The Republican presidential candidate earns one Pinocchio.
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