Is this any way to run 17% of the U.S. economy?

Most readers probably don’t follow Medicare Advantage pricing — I know I didn’t until getting educated by one of the HEP portfolio companies (Censeo), which provides services to Medicare Advantage plans.    I also occasionally have CNBC on while I’m working in my office in the morning (a habit from my days in the MSNBC business).    When I saw the graphic of many health plans up over 6% in early trading, I decided to write this post.

Background:  in Feb. CMS announced in a preliminary ruling, that the amount they would reimburse plans for Medicare Advantage (MA) members would go DOWN 2.3%.    Yesterday CMS announced their final ruling — and that is MA pricing would actually INCREASE by 3.3%, hence the big gains in stock prices.    You can get more detail from CNBC here and the WSJ editorial take on the politics here.

What economic factors have changed in the last 60 days to support a swing of 5.5% on pricing of health costs for nearly 14M Medicare Advantage members?    This situation is a clear example of why the country needs to steadily move to more ‘market’ based pricing of health services instead of having them set by government central planners.     Let me identify a few of the negatives I see:

  • when ‘price’ setting is arbitrary — all the power/energy migrates to Washington DC.    Stakeholders all lobby and pressure both the agency (CMS) and Congress for protection.   Who pays — we all do!   I understand there are many examples of this negative (subsidies for sugar cane, milk, ethanol — you name favorite program) but the fact that Medicare pricing (not just for MA plans) is set by a govt. agency subject to political pressure on all sides and disconnected from the value creation/discovery of the marketplace has pervasive, unintended and negative consequences for the health sector.
  • where is the discussion/data of whether Medicare Advantage plans are actually better in terms of quality of care, cost and outcomes than traditional fee for service Medicare?        The MA plans are popular with folks eligible for Medicare, which is why enrollment has doubled since 2006 and exceeds 25% of the eligible Medicare population.     Apparently, CMS subsidizes MA members (e.g. pays plans more than fee for service Medicare) and this is supposed to decline over time (cuts anywhere?).    There is an old policy brief here, which I don’t think tells the real story.    Where is the data comparing both cost and quality trends of like populations in MA vs. FFS?    Has there been innovation by MA plans to provide better coordinated/managed care for categories of ill people?    What have we learned?
  • investors in Humana (and others) should be upset — how are investors (and management) supposed to make capital allocation decisions when decisions are set by central planners and subject to political pressure?
  • how are physicians and health systems supposed to make investment and capital allocation decisions around providing better ‘coordinated care’ — when it is not the economics driving decision making but some other, unpredictable set of forces?

John Goodman at NCPA has written consistently on the need for innovation on the “supply side” of health — namely how services get packaged, how entrepreneurial physicians would be incented to innovate and how consumers could discover what works for them — but all this can’t happen because “price” and “package” is set by a combo of CMS or health plans.

I want to see more innovation and better quality of care with better outcomes for the same or less cost.   I think it is possible.    We would get more innovation faster if Washington DC wasn’t the center of all decision making and planning.   Health is too important.

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