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Saturday, June 5, 2010

Democrats: Missing the Point about Segmentation in the Medicare Advantage Market

I read a recent Government Accountability Organization (GAO) report about the Medicare Advantage market that Democrats are portraying as an example of private health plans "piling on extra costs to health seniors." Some readers might be shocked at the Democrats accusation. Some readers might be more shocked that I actually read a GAO reports.

The reports notes that healthier Medicare beneficiaries who buy less expensive, lower premium plans have higher out of pocket expenses for hospital visits, skilled nursing facility stays, and other services than seniors in poor health who buy more expensive plans. The Democrats feel that is evidence that "health care reform will protect Medicare beneficiaries from unscrupulous insurers". I feel that a better parallel for this example is to note that college seniors tend to buy cheaper alcohol when hanging out with their friends watching sports than they do when they're on a date with a woman they're trying to impress. There is a time when a case of Pabst Blue Ribbon will get you a fist bump and a time when a nice bottle of red wine will get you invited back to her place. Democrats are really missing the point of market segmentation.

With health insurance, you either pay more upfront in the form of a higher premium to minimize the risk of having to pay more if you get sick or you do the opposite. If you are sicker, you are probably more likely to buy better health insurance because you know that you are likely to use it. This GAO report describes this perfectly. Healthier seniors buy cheaper plans that have a higher copays and out of pocket costs for hospital services or skilled nursing facilities. The plans are cheaper because they cover less services and according to the report, the 43% in good health prefer those plans. For the 20% in poor health, they will pay more upfront in order to have lower costs when they are likely to enter the hospital.

To underscore this example of segmentation, 55% of the plans that seniors in good health chose, had fitness discount benefits. Only 28% of the of the plan that seniors in poor health chose had fitness discounts. In other words, a healthy senior would rather pay a lower premium for a plan with a fitness discount than one with a good hospital benefit that they are not likely to use.

I should stop acting indignant when political parties spin reports to support their point of view. It's like getting indignant when your cat doesn't listen to you. But I can get indignant when political parties seem to completely misunderstand the data or think so poorly of the average citizen that we believe their illogical point of view.

The most interesting question that the report helped address is whether it is worth it to pay more for a Medicare Advantage plan with richer benefits. When we buy insurance, we always wonder if we should we pay more for the lower deductible an our auto insurance or will we never use it?

The report noted that the average premium for a plan that a healthy senior chose was $24/month, for a moderately healthy senior it was $37/month, and $31/month for a senior in poor health. For seniors in poor health, this likely includes Special Needs Plans (SNP) which receive more money from Medicare so they charge lower premiums. They also have less healthy, low income members so are not a good comparable. The best comparison is the $24/month plan for a health senior and $37/month for the moderately health senior. The difference per year is $156.

The report indicates that for the plans that a healthy senior would select compared to a moderately healthy senior are:
  • $97 more for a hospital stay for the plans a healthy senior would select
  • $14 more for an inpatient psychiatric stay
  • $60 more for a skilled nursing facility stay
  • $320 more for renal dialysis for the year
It looks like the healthier seniors are saving money with their plan selection. If a healthy senior has a hospital stay and a skilled nursing facility stay in a given year, they will break even from their premium savings ($156 vs $157). Otherwise, they will be ahead financially.

From talking with seniors, they make very calculated decisions when selecting a Medicare plan. They literally take out a calculator, look at the premium difference and how much they project to spend in out of pocket costs for services they are likely to use. They don't rely on Democrats to protect them.

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