The Spillover Effects of Medicare Managed Care

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Increasing Medicare Advantage market share by 10 percentage points results in a 2.4 percent decline in area hospitalization costs.

Medicare, which pays for the health care of the vast majority of the elderly U.S. population, has two distinct components. Traditional Medicare pays a set fee for any covered service and patients are free to select the participating provider of their choice. Medicare Advantage, which covers about 27 percent of Medicare beneficiaries, allows them to join one of the private managed care health plans offered in their area. They receive all of their Medicare-covered health care from the plan which, in return for a risk-adjusted per person payment from Medicare, must agree to provide at least as much coverage as traditional Medicare. If private plans improve the efficiency of health care delivery, those improvements could "spill over" to affect the care of other patients served by the same providers.

In The Spillover Effects of Medicare Managed Care: Medicare Advantage and Hospital Utilization (NBER Working Paper No. 19070), Katherine Baicker, Michael Chernew, and Jacob Robbins use changes in Medicare Advantage's payment policy to examine whether increasing enrollment in an area’s Medicare Advantage plans affects hospital costs for other patients in the area. They conclude that a larger Medicare Advantage market share does lower costs by reducing the intensity of care received by traditional Medicare patients, as well as younger patients, during an inpatient stay.

In real terms, Medicare Advantage payment rates rose from an average of $624 a month in 1997 to an average of $860 a month in 2009. Significant changes in the way payments were calculated occurred in 1997, 2003, and 2006. The data for the study suggest that Medicare Advantage HMO market share was slightly lower in 2009 than in 1999, while the market share of the other types of plans increased. Exploiting the changes in payment structure, the authors find that increasing Medicare Advantage benchmark payments by $100 increases the market share of Medicare Advantage plans by 3 to 5 percent.

After combining Medicare enrollment data with data on all hospital admissions from state inpatient data bases for Florida, New York, California, Arizona, and Massachusetts, the authors find that increasing the Medicare Advantage market share by 10 percentage points results in a 2.4 percent decline in area hospitalization costs as measured by total inpatient facility charges multiplied by a hospital’s cost-to-charge ratio. There was a parallel reduction in length of stay, with a 10 percentage point increase in Medicare Advantage penetration leading to a 0.2 day reduction in overall length of stay (compared with an average length of stay of 5 days).

The authors calculate that in the five states studied, increasing Medicare Advantage payments by $100 per patient per month would increase Medicare Advantage enrollment by 400,000, and Medicare Advantage spending by $5 billion. The 5-percentage-point increase in Medicare Advantage market share would reduce the overall costs of hospital care by 2 percent, reducing hospital costs for the remaining traditional Medicare population by about $600 million (although not necessarily reducing the Medicare program's costs).

--Linda Gorman