Why Is Congress about to Declare War on Seniors?

From the earliest days of Obamacare, many progressives argued for a public option. The idea was simple: let a government-run plan compete on a level playing field against private insurance.

Progressives believed that the public plan would be less costly, because it wouldn’t have to earn a profit and because of their general faith that government does things better. And they were willing to put their convictions to the market test.

The idea of a level playing field is crucial. If government subsidies to the public plan are the same as subsidies to the private plans, then consumers can make unbiased choices of which plan best meets their needs. Consumer sovereignty, not bureaucratic preference, would determine the outcome.

What few progressives seemed to notice at the time is that such an experiment had already been underway for many years and it continues to this very day—in Medicare.

Medicare Advantage (MA) plans are managed by private insurers and they compete against traditional (government-run) Medicare. Currently, these plans are covering 27 million people, or 43 percent of all beneficiaries. The Medicare Trustees predict that by the end of this decade, more than one out of every two enrollees will be in a private plan.

It’s not hard to understand why. In traditional Medicare, enrollees typically pay three premiums to three plans: one premium for Part B (for doctor coverage), one to Part D (for drug coverage) and one for supplemental insurance to fill in the gaps in Parts A, B, and D—often called “medigap.” Even after all that, their benefits are not as robust as what people get in a typical MA plan.

By contrast, enrollees in MA plans pay one premium to one plan. Typically, the premium is no more than their Part B premium. They don’t have to purchase medigap insurance, which averaged $1,800 last year.

In general, Medicare Advantage plans are more cost-effective and provide higher-quality care. They also often furnish such extra benefits as hearing, vision and dental care (services not covered by traditional Medicare—as all of us are being reminded by Joe Namath, William Shatner and other celebrities in MA advertisements during the current open enrollment period).

The idea behind public/private competition in Medicare was a bipartisan concept that first emerged in Congress about a quarter of a century ago. Through the years, there have been many concerns about where the subsidies to the two types of insurance were exactly equal and there have been quite a few adjustments in pursuit of that goal.

But over all that time, Republicans and Democrats have always agreed that the playing field should be level. Until now.

As part of their super-large spending plan, progressives in Congress are now proposing to add hearing, vision and dental (HV&D) benefits to traditional Medicare. Although the details keep changing, a fair estimate is that this benefit is worth about $1,000 per enrollee.

Under the initial proposal, Medicare Advantage plans would get an additional $1,000 subsidy to keep the playing field level. But in the latest iteration, risk-adjusted payments to MA plans would be reduced by roughly the same amount as the cost of the new benefits.

That means that progressives in Congress are planning to spend an additional $1,000 per enrollee on beneficiaries in traditional Medicare, but spend no additional money on Medicare Advantage enrollees.

In economic terms, the flip side of a subsidy is a penalty. If you give a subsidy to people who make one choice, you are effectively imposing a cost on everyone who makes a different choice. In this case, the Democrats’ proposal does more than tilt the playing field. It makes seniors worse off whenever they switch from one system to the other.

Consider a senior in an MA plan who chooses to switch to traditional Medicare under the new proposal. Once the switch is made, she will qualify for the new $1,000 HV&D benefit. But in making that move she will have to give up the HV&D benefits she got from her MA plan, plus pay the out-of-pocket cost of Medigap coverage. So, in return for a new $1,000 benefit, she will lose about twice that much in forgone MA coverage and additional premiums.

Now consider a senior in traditional Medicare who switches to Medicare Advantage. This is a choice that was always available, but now the choice comes with a $1,000 penalty (the reduction in subsidy under the new funding scheme).

And compared to the current system, the new funding plan will encourage seniors to choose higher-cost, lower-quality care—to the detriment of both seniors and taxpayers.

Despite much misleading rhetoric, it has always been possible for public plans (funded, say, by city or state governments) to enter the Obamacare exchanges and compete against private plans. But public plans have been successful only when the plan has been a health system that has been in business for some length of time (rather than an inexperienced newbie). And even in those cases there seems to be no impact on premiums or quality of care.

Our experience with Medicare shows that when a public plan—basically operating under a model that has changed very little in 55 years—competes against modern integrated health plans, the elderly and the disabled continue to migrate to the private sector.

Progressives don’t like that result. Their plans to change it will make us all worse off.