Is Obama Trying To Privatize Medicare By Stealth?

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Privatizing Medicare is an anathema to the left wing of the Democratic Party. There was a period, back in the 1990s when it appeared that Democrats would cooperate with Republicans in fundamental reform of this entitlement program and it appeared that President Clinton might go along. But no more. Keeping Medicare in the public sector is a non-negotiable demand for the left today, except among those who actually know something about how health care is delivered.

One person who doesn’t seem to know much about how health entitlement programs work is Paul Krugman, editorial writer for The New York Times. In a recent column he wrote:

One classic example of government doing it better [than the private sector] is health insurance. Yes, conservatives constantly agitate for more privatization — in particular, they want to convert Medicare into nothing more than vouchers for the purchase of private insurance — but all the evidence says this would move us in precisely the wrong direction. Medicare and Medicaid are substantially cheaper and more efficient than private insurance; they even involve less bureaucracy.

Krugman has written assertions like this before. He doesn’t seem to learn from his mistakes.

About of one-third of Medicare enrollees (Kaiser report) and about three-fourths of all the Medicaid enrollees (Kaiser report, p. 16) in the country are already enrolled in private, managed care plans. For all of the Medicare enrollees and for many of the Medicaid enrollees these programs work like a voucher program – the beneficiaries can pick and choose among plans. Even those who remain in traditional Medicare and Medicaid are likely participating in a plan that is administered by a private company ― entities such as BlueCross, Cigna and other insurers.

In other words, Medicaid is already largely privatized and that process has continued under Barack Obama – surprisingly, without controversy. The reason: the states believe they are getting higher quality care for a lower price. State-specific studies in California, Florida, Nevada and South Carolina find that private plans produce better outcomes. A whole slew of state-studies, some commissioned by the states themselves, find that private plans reduce Medicaid costs.

Medicare is almost completely privatized on the administrative side, but the insurance function is only one-third privatized. It is here that there is a problem. In the 2008 election, one of candidate Obama’s campaign promises was to reduce Medicare’s payments to private, Medicare Advantage (MA) plans, and that was actually part of the Affordable Care Act (ObamaCare). Yet apparently even the Obama administration appreciates the potential benefits of privatization of Medicare. The only problem is avoiding howls from the political left, including writers like Krugman.

Ken Thorpe is a health economist at Emery University. He normally approaches health policy issues from the left of center, he was involved in the design of Hillary Care and he has been supportive of Obamacare. I tend to approach health policy from a free enterprise perspective and I was opposed to both Hillary Care and Obamacare. But there is one thing the two of us agree on. One place in our health care system where providers really are reducing costs and raising quality is in the Medicare Advantage program. And more often than not successful MA plans are plans that contract with independent doctor associations, initiated and managed by entrepreneurs.

We need more of this activity. But how to get it done? Unable to expand Medicare Advantage, the Obama administration has instead chosen a stealth approach: promoting private sector Accountable Care Organization’s (ACOs). It has been promoting them vigorously:

  • The number of ACOs has grown from a handful of pilot programs in 2011 to 744 in the first quarter of this year. (See the first chart.)
  • The number of people covered by ACOs has grown almost tenfold – from 2.6 to 23.5 million. (See the second chart.)

Looking forward, the estimates are all over the map — from a reduction in ACO activity to a majority of Americans being enrolled in ACOs by 2018.

                                        Source: Leavitt Partners Center for Accountable Care Intelligence

Source: Leavitt Partners Center for Accountable Care Intelligence

Number of ACO Covered Lives, 2011 to January 2015

Source: Leavitt Partners Center for Accountable Care Intelligence

Source: Leavitt Partners Center for Accountable Care Intelligence

So what is an ACO? I wish I could say that it is an MA plan under a different name and in truth ACOs and MA plans do have a lot in common. In fact, IntegraNet of Houston, one of the most successful Medicare Advantage contractors in the country, also managed the nation’s most profitable ACO last year. But ACOs are burdened by far too many regulations and a reward structure that discourages the kind of entrepreneurial activity that has made the country’s best MA programs so successful.

Still, without much fanfare or publicity, the administration seems to be inching in the right direction. As I previously noted:

The experience with the ACOs has been so disappointing the Obama Administration has announced that it is making important changes, including a change in the risk adjustment formulas. ACO payment formulas in the future will look more like Medicare Advantage risk adjustment. Other changes could further allow ACOs to do some of the same things MA plans are now doing.

If that trend continues, the administration may achieve through the back door what it dare not endorse in the full light of day.

Originally posted on Forbes on April 15, 2015.