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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
Hello, and welcome to a health podocy. I'm your host, Rob Lott. Do you remember the book, A Very Hungry Caterpillar by Eric Carle? I do. I read it with my two year old last night.
Rob Lott:And as you may recall, the caterpillar's transformation starts slowly. On the first day, Monday, he eats just one apple. On the second day, just two pears. But the caterpillar's hunger and its growth builds and builds on itself until Saturday. Watch out.
Rob Lott:Party time. It eats a chocolate cake, ice cream, salami, a pickle. Of course, the caterpillar has a stomachache afterward, but it's also clear that it's just about ready to take the final step in its transformation. And now I hope you'll forgive the extended analogy, but I couldn't help but think about Medicare's transformation as I reread this book for the thousandth time yesterday, and not just because I was about to have this conversation today. Medicare has just turned 60, and over that time, it has grown and changed, and that change has been fairly incremental and steady.
Rob Lott:But lately, it seems that the pace and the tone of that change has gotten a lot more chaotic. We're talking about Swiss cheese and lollipop levels of chaos. And it has me wondering, what's going to happen next? Is it time to reset and eat a green leaf, or are we on the cusp of an even more dramatic transformation? That, at least the implications of that very tortured metaphor for Medicare, is the subject of today's health policy.
Rob Lott:I'm here today with Stephen M. Lieberman, a nonresident senior fellow at the USC Schaeffer Center for Health Policy and Economics. Steven has served over the years in senior roles at the Congressional Budget Office, Office of Management and Budget, the National Governors Association. Together with his coauthor Rick Mays, he has a new health affairs article recently published ahead of print titled, Inside the Meteoric Rise of Medicare Advantage. I can't wait to learn all about their take on all this change.
Rob Lott:Steven M. Lieberman, welcome to A Health Odyssey.
Steven Lieberman:Thank you, Rob, very much. And as somebody who has four young grandchildren, I am very familiar with Hungry Caterpillar, would not have thought of it as an opening introduction but it really does fit quite well.
Rob Lott:All right, well I'm at that moment where I just can't avoid it, I'm glad you appreciated it as well. Maybe we can start with a little bit of the prehistory about Medicare and how it's changed. Let's start with the Tax Equity and Fiscal Responsibility Act of 1982. I feel like forty years or so is about enough time in the past to kind of get us started. How did that pave the way for Medicare Advantage?
Rob Lott:And what are maybe some of the other notable trends that were taking place in the insurance markets in the 80s and 90s?
Steven Lieberman:Great question. Let me take it in two parts. What TEFRA was primarily a tax bill, but it had two fundamental changes for Medicare. One was quite direct, the creation of the Medicare risk program, which was the ability of HMOs to contract on a capitated basis with Medicare. Up until this point, we only had HMOs able to engage on a cost basis and that was very limited.
Steven Lieberman:The second change was more indirect, and it was the creation of what are called the section two twenty two and two twenty three limits, which were limits on costs that would be reimbursed for hospitals and physicians. And what had happened in the seventies up through the early eighties was enormous growth in the cost of health care, and particularly Medicare. And so the two twenty three two twenty two limit, so called, scared the bejesus out of the hospital industry because they would have significantly reduced reimbursement. And so they led in the next year, in 1983, in the Social Security Amendments of 1983, to the creation of the Inpatient Prospective Payment System, or the DRG system. And the phrase at the time was anything but TEFRA, to avoid those cost limits.
Steven Lieberman:And to go to the second part of your question, which was what were the other significant trends? The first thing is the effect of the inpatient perspective payment system was to radically transform incentives and start to get control of hospital costs. Instead of reimbursing hospitals for their allowable costs, they were paid on a fixed payment basis. And over the next roughly ten or twelve years, almost all of Medicare payment systems, with the exception of the physician system, shifted to some form of prospective payment. What happened in the late 1980s was Medicare went from a very peculiar system to having the Medicare fee schedule created, which took a number of years.
Steven Lieberman:There were also some efforts to get control over the cost of physician services because it turns out that controlling price did not control costs because of the increases in the volume and intensity of services. So just to finish the answer, I think it's fair to characterize the early part of the nineteen eighties and the nineteen nineties with three or four trends. First was the continuing massive growth of health care as a share of GDP along with the cost of Medicare. That drove lots of efforts to constrain cost. And so from a fee for service perspective, the two most important trends were the shift from cost reimbursement to prospective payment, and for the physicians to the creation of the physician fee schedule.
Steven Lieberman:The other trend that happened was the enormous growth of managed care. And while HMO care did not grow that enormously, preferred provider organizations and other forms of managed care grew enormously. So in 1988, in the employer sector, literally 78%, I believe, of employer insurance was classic indemnity insurance, which is what traditional Medicare is. By '9 by 02/2005, we were down to forget I think it's in the paper, I think it's less around 5%. So we basically saw the elimination of traditional indemnity insurance.
Steven Lieberman:What that gave rise to was a backlash against managed care particularly in the mid to late 1990s.
Rob Lott:Got it. Okay. So just like a ton of transformation, public opinion sort of having a role there, but also just sort of the the freight train of the kind of bureaucratic policies leading to health systems providers kind of responding to those incentives. Let's now move ahead to the creation of Medicare Advantage. I believe that came through the Balanced Budget Act of 1997.
Rob Lott:Can you sort of put us in that moment there? What were you doing at the time? And I'm curious if there was like an explicit argument in favor of the creation of a program like Medicare Advantage, or was it more of sort of just like the next step in this inevitable process of transformation?
Steven Lieberman:So let me start with a slight technical correction. The BB the Violence Budget Act of 1997 created what was renamed the so called Medicare Risk Program to become Medicare Plus Choice. The Medicare Modernization Act in 2003 changed it changed the name to Medicare Advantage, I would argue that while there were important changes in each of those statutes, the name change was not the important part of it.
Rob Lott:Got it,
Steven Lieberman:okay, fair So what I was doing, I had been the person at the office of management and budget, this career person in charge of Medicare and Medicaid, and then I got kicked upstairs and became a career assistant director at OMB, I left in early ninety two and went out west primarily to Arizona and then California to run managed care, because I had the perception that the interesting work was going to be at the delivery system level, not at no longer at the federal level. So in ninety five, ninety six, ninety seven, I was primarily involved in helping build Medicare, what are now called Medicare Advantage programs in different parts of the country. What we had in the mid nineties was twelve percent of the Medicare population in 1997 was enrolled in Medicare Plus Choice, now Medicare Advantage. I'm just gonna call it MA without worrying about the name changes.
Rob Lott:All right, let be stipulated.
Steven Lieberman:Thank you. What happened was those benefits were quite disproportionately concentrated in a few states that had extensive managed care. So places like California and Arizona, which had very high levels of HMO penetration, became the places where there was lots of Medicare Advantage enrollment. And what happened was people like Senator Grassley from Ida from Iowa were very jealous of the fact that his constituents couldn't get access to the extra benefits that were starting that were available in Medicare Advantage plans. So the BBA so just to finish up, was one of the things I did in 1996 and 1997 was to work with two organizations to create what we call provider sponsored organizations as demonstrations to let non HMOs participate.
Steven Lieberman:That actually was a provision in the BB Act, in the Balanced Budget Act. As far as I know, I'm not sure there are any provider sponsored organizations that are MA organizations. But at any rate, to get back to what was what was driving it, the problem was the misallocation, the unequal distribution of Medicare Advantage throughout the country. There were about 200 counties out of the 30 over 3,000 counties in the country where there was significant Medicare Advantage penetration. And as we point out in the paper, in three states, a very large share of the overall population of enrollees.
Steven Lieberman:So that was the problem. Part of the solution was to allow organizations other than HMOs to participate, and there was a change in how payments were made.
Rob Lott:Got it. I think today we sort of envision there being a dynamic between traditional Medicare and Medicare Advantage as kind of a competitive universe because there's this sort of heavyweight matchup between these two enormous entities sort of vying for the same pool of beneficiaries. How was that relationship envisioned as this program came about in the late 90s and early 2000s?
Steven Lieberman:So I don't think anyone at the time had any perception that Medicare Advantage would grow the way it has. And to underscore that point, when the in 1997, as I mentioned, I believe 12% of the Medicare population was in Medicare Advantage, both the number and the percent actually fell after the BBA was enacted, in part because the Balanced Budget Act in 'ninety seven had significant cuts to Medicare traditional Medicare fee for service, which lowered Medicare Advantage payment rates, and in fact, in that period it's the only time that Medicare costs actually fell from one year to the next, after which obviously the growth trend has returned. So I think the answer is people did not envision a great, you know, rush to Medicare Advantage. People didn't envision that Medicare Advantage benefits would be basically 20% greater than the benefits that were available in traditional Medicare.
Rob Lott:Got it, okay, and in your paper you describe this rapid growth, the title calls it a meteoric rise. Obviously we know now that more than 50% of beneficiaries are in Medicare Advantage programs compared to, traditional Medicare, and a big amount of that growth has come in recent years. Can you say a little bit about what exactly is going on? What's driving that growth today? And what do we know for sure?
Rob Lott:What do we kinda suspect? What's your hunch? And how do you kinda put all that together and into the bigger puzzle?
Steven Lieberman:I'll try to be clear about what I what's factual and what's my assumptions. What's factual, and I think MEDDPAC has done an extraordinarily good job along with some other researchers, to highlight the fact that there are three ways in which Medicare Advantage benefits are significantly greater, and the payments for an individual who's enrolled in Medicare Advantage are significantly greater than what that person would have cost in traditional Medicare.
Rob Lott:And just to clarify, when you say payments, you're saying the government's payments to the insurance company compared to what the government would pay to cover a traditional Medicare beneficiary.
Steven Lieberman:Precisely. And so the biggest source of that actually, and it's changed in the last couple of years, is what's called favorable selection. And so without getting too wonky about it, Medicare adjusts the capitation, the fixed monthly amounts that it pays to insurers based on their health health status and some other demographic characteristics. The problem with that system so obviously, if you have somebody who has is expected to high have very high costs, you pay them much more than somebody who's expected to have very low cost. The problem with that is and this to me is one of the most fascinating things, is if you were to rank Medicare, traditional Medicare beneficiaries from the least expensive to the most expensive and put them into quintiles, 20% groupings.
Steven Lieberman:The top quintile accounts for about three quarters of cost. The bottom quintile accounts for less than 1% of cost, an extremely skewed distribution. And to get slightly wonky, the mean is three or three and a half times the median. Wow. And so that distribution, when you just look at all Medicare, Medicare beneficiaries without risk adjustment, one of the pieces of research that I did with my colleague Paul Ginsberg and Sam Valdez is that distribution is virtually identical when you look only at beneficiaries that have the identical risk score.
Steven Lieberman:So the problem is that even though you're using the average to adjust payments, the people who move into Medicare Advantage are significantly below average. In fact, research has shown, on average, they have about half the expected cost of the average person. That results in about 10 percentage points, according to MedPAC, of overpayment. The second major source of overpayment is what's called coding intensity, or known as upcoding. Because in fee for service, providers get paid for services.
Steven Lieberman:They don't get paid based on diagnoses. Slight exception to that for hospital admissions, but let's keep this general. In contrast, Medicare Advantage companies get paid on diagnoses, which is what drives the risk adjustment system. So there and there's a recent paper in the Journal of the American Medical Association by Rick Cronig and his colleagues, which compared up coding, coding intensity, in fee for service traditional Medicare to Medicare Advantage, and by specific Medicare Advantage organizations. And what that analysis, which builds on a lot of other work, shows is that the Medicare Advantage coding is much greater than in fee for service, and that there's a real issue where two of the largest Medicare Advantage organizations are the most aggressive up coders, and which can generate up to 50% more payment, which creates two issues, and I'll make this real quick.
Steven Lieberman:One is it obviously increases the payments to Medicare Advantage plans.
Rob Lott:Incentive to find more intense code.
Steven Lieberman:Right. So between favorable selection and up coding, on that results in over in sort of $84,000,000,000 in 2025, according to MEDDPAC, of higher payment, or about a 20% overpayment. And there's one other source that I'll come to in a moment. And that is the biggest reason for why Medicare Advantage benefits are because Medicare Advantage organizations are getting paid over $2,200 per beneficiary, more than traditional Medicare people would cost, that allows them to finance additional benefits. The second problem that I just want to highlight is about half the Medicare Advantage organizations, again according to MedPAC, up code by less than an adjustment that is used to offset a portion of the up coding that applies to all payments.
Steven Lieberman:Those half the organizations only enroll about 15% of Medicare Advantage beneficiaries. The other half of Medicare Advantage organizations that enroll about 85% of beneficiaries up code significantly. And the problem is that the more you up code, the more revenue you get. So it creates a very unequal playing field, not just between Medicare Advantage and traditional Medicare, but among Medicare Advantage organizations. The third source, and I probably it's not worth going into, is the star ratings, which is $15,000,000,000 and not technically an overpayment, because it's statutory.
Rob Lott:Right. So a lot of factors there that have sort of incentivized the growth of Medicare Advantage. Some have argued that there's really so much variation in MA plans where some are basically just paying their providers at a fee for service basis, whilst others have implemented their own alternative payment models sort of under the MA hood there, that it can be very hard to compare plan to plan and that it can be very hard as well to make generalizations about the quality of care that Medicare Advantage provides writ large or the outcomes. And so I'm wondering if you have thoughts on, are we able to make some of those judgments and comparisons about quality and how MA has changed the care that people receive writ large?
Steven Lieberman:It is it's a great question, and it the unfortunately, the differentiation among the plans makes it hard to have a broad answer other than the generalization that, on average, Medicare Advantage plans have not been shown to have improved quality compared to traditional Medicare. But one of the confounding issues is it's hard to compare beneficiaries because of the degree of up coding. So you're not clear that you're comparing comparable things. There are organizations that I think one of the things it's fair to say is that most Medicare Advantage organizations emphasize primary care. And most Medicare Advantage organizations also use their a variety of techniques to manage utilization, such as prior authorization.
Steven Lieberman:The problem is that some organizations do that well and appropriately. Some do it arguably as a way to control cost more than clinical quality. So it's just an example of why it is very hard to generalize.
Rob Lott:Okay. Well, against that backdrop, can you say a little bit about maybe some areas that are perhaps ripe for policy reform in relation to MA? Are we just gonna continue down this path of rapid growth, or do you see any particular problems perhaps becoming so urgent that it might actually inspire Congress to make some changes?
Steven Lieberman:Well, it is very difficult to predict what Congress, and particularly this Congress, will do. Fair enough. And I think it is interesting that in spite of MEDDPAC, for years, very authoritatively conveying that there are, you know, approaching a $100,000,000,000 a year of overpayments to Medicare Advantage plans. That that was nowhere on the congressional agenda, which I suspect has something to do with the fact that the insurance industry is a very powerful lobby. The fact that it is argued, not necessarily correctly, that reducing payments to Medicare Advantage plans will reduce benefits.
Steven Lieberman:And the third ideological factor might be a preference for private solutions versus government solutions. But let me quickly identify four things that are likely to be unsustainable. The first of them is with the growth of Medicare Advantage, we now have and I'm going to switch the number a little bit as you point out, it's a little over 50% of everybody but because people have to be in both Part A and Part B to be eligible for Medicare Advantage, actually it's over 55% of people who are eligible are in Medicare Advantage. What that means is the number of people in traditional Medicare at the county level is falling. And this goes back to work I did three years ago, but about almost two thirds of counties had fewer than 5,000 people, which was the minimum risk pool size, the minimum size that is for that an ACO, an accountable care organization, has to have.
Steven Lieberman:So there's a as Medicare Advantage enrollment continues to grow, it's over 70% in some counties and indeed one state, you don't have enough people left in fee for service to provide an adequate basis for setting rates, because the rates are based on average risk adjusted cost in a county. And what makes that even more problematic is research has shown that there's been over fifteen years a very persistent pattern of favorable selection, which means the people who remain in fee for service are less healthy and are more expensive. So that's an argument that says at some point, as Medicare Advantage continues to grow, it's no longer it should it no longer becomes viable to set rates based on average fee for service costs at the county level. Second is, I think the up the coding differentials, at some point, people are going to pay attention to that. We'll hopefully both reform how risk adjustment is done to eliminate some of those incentives, but also to take away some of the unfairness in terms of both the attractiveness of Medicare Advantage versus traditional Medicare, which has not expanded its benefits, and to make the competition within Medicare Advantage fairer.
Steven Lieberman:The third thing is, as I mentioned, I think, and this relates in some ways to the coding, because it's associated with the risk adjustment system, is to fix favorable selection and risk adjustment. So I think those are And the fourth is we need to improve the way quality is measured and compensated.
Rob Lott:Well, those are great marching orders perhaps for policymakers looking for ways to strengthen the program and improve the experience of beneficiaries. Steve Lieberman, thank you so much for taking the time to chat with us today. I really appreciate it.
Steven Lieberman:Thank you, Rob. I've enjoyed it.
Rob Lott:To our listeners, thanks for tuning in. If you enjoyed this episode, recommend it to a friend, subscribe, and, of course, tune in next week. Thanks, everyone. Thanks for listening. If you enjoy today's episode, I hope you'll tell a friend about a health policy.