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Spillover Effects of Medicare Advantage

By June 5, 2013Commentary

Opponents of the Medicare Advantage system say that CMS is overpaying health plans for managing care, ending up with a higher cost than for a comparable fee-for-service beneficiary.  A number of studies have found that Medicare Advantage plans deliver better quality by both process measures and outcomes than does the fee-for-service system, and beneficiaries appear highly satisfied with Medicare Advantage.  The plans have become quite popular, with over 25% of beneficiaries enrolled in one and they continue to grow rapidly, in part because they tend to provide a greater level of benefits than does the fee-for-service program.  And now new research published by the National Bureau of Economic Research suggests that Medicare Advantage have helpful spillover effects on overall medical spending and utilization.   (NBER Paper)   The spillover effect occurs because the same providers usually serve Medicare Advantage, fee-for-service Medicare beneficiaries and commercial insureds, and typically when providers are required to handle patients in a certain way by one provider, they tend to take that way of treating to their entire population.  The authors used the impact of various Medicare Advantage payment changes to estimate spillover effects.  They find that a 10% increase in Medicare Advantage penetration leads to a 2.5% to 4.7% decline in hospitalization costs.  The lower costs occurred for traditional Medicare and commercial enrollees.  Such a penetration increase also leads to shorter lengths of stay.  The study suggests that when considering the best Medicare Advantage payment rates, these spillover effects should be taken into consideration.

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