Lecture 15: Health Care III, Redistribution

Quick Overview

The introduction of Medicare Advantage (Part C) aimed to shift risk from the government to private HMOs via capitated payments, initially set at 95% of traditional Medicare costs, but this immediately led to massive government losses due to adverse selection as only the healthiest enrollees enrolled, a problem exacerbated later when payments were raised to 120% of traditional costs, shifting the program's focus from cost-saving to expanding enrollment, while political barriers like replacing hidden employer taxes with overt taxes and entrenched industry interests prevent a straightforward transition to single-payer reform.

Key Points: Medicare Advantage plans operate as capitated arrangements where the government pays a fixed amount to HMOs, shedding financial risk, in exchange for enrollees accepting limited doctor networks but gaining coverage for Medicare cost-sharing, including uncapped doctor coinsurance. Studies show Medicare Advantage delivers much less costly care than traditional fee-for-service Medicare without a meaningful negative effect on patient outcomes like mortality and hospitalizations. The initial government strategy to pay 95% of the average traditional Medicare cost failed spectacularly because adverse selection caused only the healthiest people to enroll, leading the government to pay more for the selected group than the average cost baseline predicted, resulting in massive losses. Following adjustments, including cutting the payment rate to 90% (which caused some plans to drop out) and later raising it to 120% of traditional Medicare costs (under the bill including Part D), enrollment in Medicare Advantage subsequently took off, becoming a major profit center for insurance companies. Transitioning to single-payer healthcare faces three major political barriers: the difficulty of replacing the 'hidden tax' of employer-sponsored insurance (lower wages) with an overt tax, the political resistance from 80% of people unwilling to give up existing functional insurance (like the backlash to banning non-real insurance under the ACA), and the opposition from the entrenched $1.2 trillion insurance industry. The concept of premium support, analogous to educational vouchers, offers government cost certainty by providing a fixed voucher amount, but this system can exacerbate equity issues as adverse selection causes the sickest people to end up in the most expensive plans, potentially leading to a death spiral. Solving the two fundamental problems of health insurance markets—adverse selection and consumer confusion in choosing plans—is technically possible through risk adjustment (tying reimbursement to health level) and decision support tools (AI), but implementation remains extremely difficult in practice.