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Using Private Health Plans for Public Payment Programs

By July 11, 2019Commentary

Over a third of Medicare beneficiaries now receive their health benefits through Medicare Advantage private health care plans.  A much larger number of Medicaid recipients, over 80% by some estimates, are also enrolled in private health plans.  Much of this growth occurred because of dissatisfaction with the quality of care and the cost of the open-ended, fee-for-service versions of these programs.  And research generally shows that the plans have been successful in improving outcomes and creating a slower trend of spending growth.  A new paper at the National Bureau of Economic Research further explores this issue.   (NBER {Paper)   The authors used the case of the staggered introduction of use of managed care plans for disabled Medicaid beneficiaries in Texas to compare the government-run version and the privately provided one in the transition period of 2004 to 2010.  The authors sought to see if quality and cost differences existed in the government run and private plan arms for this complex population.

Compared to when it was a public program, the private coverage for disabled Medicaid recipients increased outpatient utilization by 8% and increased use of prescription drugs.  The private plans tended to pay providers more, which likely increased access, and they did not limit the number of drugs a beneficiary could be prescribed.  At the same time inpatient use declined by 8%, concentrated in admissions related to chronic diseases, which are often considered to be avoidable if outpatient care is doing a good job.  In this study it also appeared that increasing access to medications was related to the avoidance of hospitalizations.  Overall spending increased by about 12%, due to higher capitation payments to the plans, most of which was used on medical services reimbursement.  I would expect, however, that the trend of spending would slow because states tend to dictate low increases in payments in later years.  Quality of care was deemed better in the private plans by the authors.

There is no question in my mind that using private entities to do most government functions will result in better, more efficient outcomes.  Government employees are overly protected from any scrutiny of their performance and governments are riddled with the bureaucratic mindset that inhibits innovation.  Unfortunately, most privatization efforts are designed and led by these same people of limited vision and, often, intelligence.  So you get stupidity.  In health care for example, CMS and the states would spend less on the provision of benefits by private plans if they had pure bidding competition–the lowest bid, assuming it meets all other criteria, is what people get paid.  Instead, CMS for Medicare and the states for Medicaid, have often designed systems that use goofy benchmarks and limited competitive bidding, so they are probably paying more than they should.  Texas had a particularly weird system in which the state continued to pay for some services directly, limiting a private plan’s ability to impact utilization and spending.  In addition, this study really isn’t an accurate comparison–the authors should calculate what it would have cost the state in the public arm if utilization had been consistent with what it was in the private plans.  But it is fairly clear that the patients in these private plans are getting extra benefits and better care coordination and management, resulting in better outcomes.

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