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Robert Farley
By Robert Farley October 17, 2008

That's a fair estimate

In the final presidential debate Oct. 15, 2008, moderator Bob Schieffer of CBS News asked each candidate for specifics about programs they would cut in order to balance the federal budget.

"We spend $15-billion a year on subsidies to insurance companies," Sen. Barack Obama said. "It doesn’t – under the Medicare plan – it doesn’t help seniors get any better. It’s not improving our health care system. It’s just a giveaway."

Obama used the same example when asked a similar question in the first debate.

"We right now give $15-billion every year as subsidies to private insurers under the Medicare system," Obama said. "Doesn’t work any better through the private insurers. They just skim off $15-billion. That was a giveaway and part of the reason is because lobbyists are able to shape how Medicare works."

Obama is talking about the Medicare Advantage (MA) program, which pays private insurance companies a set rate to treat Medicare beneficiaries who sign up. It was conceived as a cost containment measure on the theory that competition between HMOs, PPOs and other private plans would drive down costs. In fact, MA plans have consistently cost the government more per beneficiary than traditional fee-for-service Medicare costs. About 18 percent of beneficiaries now belong to MA plans.

The Medicare Payment Advisory Commission, an independent Congressional agency, estimated that in 2008, the MA program cost 13 percent more than traditional Medicare. A Commonwealth Fund report estimates that that translates, on average, to nearly $1,000 more for each person in the MA program, for a national total of more than $8.5-billion last year (and a total $33-billion from 2004 to 2008).

Insurance companies argue that people enrolled MA programs get better service.

"One of the important things to keep in mind is that Medicare Advantage provides additional benefits and services not available in traditional fee-for-service programs," said Robert Zirkelbach, a spokesman for America’s Health Insurance Plans.

Zirkelbach argues that the plan offers better hearing, vision and dental coverage and a disease management plan. MA plans have also proven useful in some rural areas that are short on health care providers. Some plans refund all, or part, of their clients' Part B Medicare premium, which can save people hundreds of dollars a year.

The tradeoff is that beneficiaries are often limited to using hospitals and doctors in the plans' network. While beneficiaries' out-of-pocket costs are often less under MA plans, that is not always the case. Some services, like nursing home rehabilitation, can be more expensive than under traditional Medicare.

Brian Biles, a professor in the Department of Health Policy at George Washington University and a former senior vice president of the Commonwealth Fund, said  that while MA participants may get about 13 percent more value from extra benefits in the MA plan, it costs about 13 percent more. So it isn't necessarily any more efficient than traditional Medicare, just more costly, Biles argues.

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"Why should some people get an extra $1,000 in Medicare coverage and some not?" Biles said.

In testimony before the House of Representatives on June 28, 2007, CBO director Peter R. Orszag said Medicare is, in effect, subsidizing the added cost of the Medicare Advantage program.

But is it better? Orszag wasn’t convinced. "Many Medicare Advantage plans offer disease management, care coordination, and preventive care programs, but little information is available on the degree to which the plans generate better health outcomes than the traditional Medicare program," he said.

The Congressional Budget Office estimates that if the government refused to pay MA plans more than traditional Medicare costs, that the taxpayers would save $9.5-billion in 2009, $54-billion over the 2009-2012 period, and $150-billion over 10 years. It was that last projection that Obama apparently used to come up with his $15-billion figure.

Joseph Antos, a health policy expert at the conservative American Enterprise Institute, believes that if the additional money paid for MA plans is eliminated or severely reduced, "half the plans will drop out in two years."

That won’t sit well with people in those plans, he said, and it’s likely to be strongly opposed by congressmen from rural districts – Republicans and Democrats alike – who have a high percentage of constituents in the MA program.

Antos also takes issue with Obama’s characterization of the extra money paid for MA as giveaways to insurance companies.

"In general, the extra money that goes to these plans ends up benefiting the beneficiaries to some extent," Anton said.

The programs tend to have a lower co-payment for prescription drugs and premiums for medical services.

"Does some of that stick to their (insurance company) fingers, of course," Antos said.

It's Obama's interpretation when he calls the added payments for MA programs insurance company "subsidies" or "giveaways." But Obama is on solid ground when he estimates that the government spends about $15-billion a year extra on the private MA program than on traditional Medicare, particularly as we move forward in coming years. And so we rate his statement True.


Our Sources

CNN, Transcipt of final presidential debate , Oct. 15, 2008

New York Times, Transcript of first presidential debate , Sept. 26, 2008

Medicare Payment Advisory Commission, Update on the Medicare Advantage Program , March 2008

The Commonwealth Fund, The Continuing Cost of Privatization: Extra Payments to Medicare Advantage Plans in 2008 , September 2008

Congressional Budget Office, Testimony of CBO Director Peter R. Orszag before the
Committee on the Budget, U.S. House of Representatives
, June 28, 2007

America’s Health Insurance Plans, The Value of Medicare Advantage by Karen Ignagni, president and CEO of America's Health Insurance Plans, July 16, 2007

Interview with Robert Zirkelbach, spokesman for America’s Health Insurance Plans, Oct. 16, 2008

Interview with Joseph Antos, a health policy expert at the conservative American Enterprise Institute, Oct. 16, 2008

Interview with Brian Biles, a professor in the Department of Health Policy at George Washington University and a former senior vice president of the Commonwealth Fund, Oct. 17, 2008

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