Medicare Advantage premiums must make Republicans want to cry

Medicare Advantage would appear to be a fantastic success—senior premiums are dropping and enrollment is increasing.

Listening to Health and Human Services Secretary Sebelius last week, you would think private Medicare plans were a Democratic idea and this is their success. Many industry observers, including me, have worried that Medicare Advantage benefits would shrink and premiums would rise because the new health care law reduced federal payments to the plans by $136 billion over the next decade.

“The Medicare Advantage program is stronger than ever,” said Secretary Sebelius. “Premiums are down on average, enrollment is up, and thanks to the Affordable Care Act we have unprecedented new tools to ensure that seniors and people with disabilities are getting the best value out of their coverage.”

Of course, privatizing Medicare has always been a Republican idea and most Democrats would like nothing better than to kill it dead out of fear that Medicare Advantage plans will undermine the financial integrity of Medicare—private plans get paid more than Medicare gets for the same enrollees—and that the private plans risk turning the Medicare entitlement into a two-tiered program—one for the rich and one for the poor.

And, Democrats can’t wait to use the Paul Ryan Premium Support plan, which would rely exclusively on private Medicare plans, as an election issue charging that the Republicans want to kill Medicare as we know it.

But instead the Obama administration used last week’s announcement of lower Medicare Advantage premiums and solid enrollment growth as evidence of just how successful they’ve been at running the program and how overdone Republican charges were that the Medicare cuts in the Affordable Care Act would wreck private Medicare.

There is that old saying, “Sometimes it’s better to be lucky than good.”

First, the entire health insurance industry is experiencing an unexpected drop in health care trend rates—costs are escalating far less than expected. When that happens, health insurers generally see their bottom line improve in the form of windfall profits.

What Medicare pays Medicare Advantage plans is a function of the last year’s experience. With the expectation that care costs would be higher than they turned out to be, private plans were inadvertently paid more, as well as charged seniors more, than they needed. That typically goes on for as long as health care cost trend decelerates.

The good results in Medicare Advantage were also helped by the Obama administration, which declared a “Lake Wobegon” moment. They took $6.7 billion intended to be paid as bonuses to the highest quality plans under the new health law and instead declared just about all of them “above average” or better and infused those billions among almost all Medicare Advantage contractors, further improving their bottom lines.