August 12, 2025 • 28 mins
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Health Affairs' Rob Lott interviews Steven M. Lieberman of the University of Southern California, Los Angeles on his recent paper that explores how Medicare Advantage has seen significant enrollment growth and what reform efforts can be attempted to rebalance traditional Medicare and MA.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Rob Lott (00:00):
Hello, and welcome to a health podocy. I'm your host,
(00:04):
Rob Lott. Do you remember thebook, A Very Hungry Caterpillar
by Eric Carle? I do. I read itwith my two year old last night.
And as you may recall, thecaterpillar's transformation
starts slowly. On the first day,Monday, he eats just one apple.
(00:29):
On the second day, just twopears. But the caterpillar's
hunger and its growth builds andbuilds on itself until Saturday.
Watch out.
Party time. It eats a chocolatecake, ice cream, salami, a
pickle. Of course, thecaterpillar has a stomachache
afterward, but it's also clearthat it's just about ready to
(00:53):
take the final step in itstransformation. And now I hope
you'll forgive the extendedanalogy, but I couldn't help but
think about Medicare'stransformation as I reread this
book for the thousandth timeyesterday, and not just because
I was about to have thisconversation today. Medicare has
(01:14):
just turned 60, and over thattime, it has grown and changed,
and that change has been fairlyincremental and steady.
But lately, it seems that thepace and the tone of that change
has gotten a lot more chaotic.We're talking about Swiss cheese
and lollipop levels of chaos.And it has me wondering, what's
(01:39):
going to happen next? Is it timeto reset and eat a green leaf,
or are we on the cusp of an evenmore dramatic transformation?
That, at least the implicationsof that very tortured metaphor
for Medicare, is the subject oftoday's health policy.
I'm here today with Stephen M.Lieberman, a nonresident senior
(02:01):
fellow at the USC SchaefferCenter for Health Policy and
Economics. Steven has servedover the years in senior roles
at the Congressional BudgetOffice, Office of Management and
Budget, the National GovernorsAssociation. Together with his
coauthor Rick Mays, he has a newhealth affairs article recently
(02:21):
published ahead of print titled,Inside the Meteoric Rise of
Medicare Advantage. I can't waitto learn all about their take on
all this change.
Steven M. Lieberman, welcome toA Health Odyssey.
Steven Lieberman (02:36):
Thank you, Rob, very much. And as somebody
who has four younggrandchildren, I am very
familiar with HungryCaterpillar, would not have
thought of it as an openingintroduction but it really does
fit quite well.
Rob Lott (02:50):
All right, well I'm at that moment where I just can't
avoid it, I'm glad youappreciated it as well. Maybe we
can start with a little bit ofthe prehistory about Medicare
and how it's changed. Let'sstart with the Tax Equity and
Fiscal Responsibility Act of1982. I feel like forty years or
(03:12):
so is about enough time in thepast to kind of get us started.
How did that pave the way forMedicare Advantage?
And what are maybe some of theother notable trends that were
taking place in the insurancemarkets in the 80s and 90s?
Steven Lieberman (03:27):
Great question. Let me take it in two
parts. What TEFRA was primarilya tax bill, but it had two
fundamental changes forMedicare. One was quite direct,
the creation of the Medicarerisk program, which was the
ability of HMOs to contract on acapitated basis with Medicare.
(03:51):
Up until this point, we only hadHMOs able to engage on a cost
basis and that was very limited.
The second change was moreindirect, and it was the
creation of what are called thesection two twenty two and two
twenty three limits, which werelimits on costs that would be
(04:12):
reimbursed for hospitals andphysicians. And what had
happened in the seventies upthrough the early eighties was
enormous growth in the cost ofhealth care, and particularly
Medicare. And so the two twentythree two twenty two limit, so
called, scared the bejesus outof the hospital industry because
(04:34):
they would have significantlyreduced reimbursement. And so
they led in the next year, in1983, in the Social Security
Amendments of 1983, to thecreation of the Inpatient
Prospective Payment System, orthe DRG system. And the phrase
at the time was anything butTEFRA, to avoid those cost
(04:57):
limits.
And to go to the second part ofyour question, which was what
were the other significanttrends? The first thing is the
effect of the inpatientperspective payment system was
to radically transformincentives and start to get
control of hospital costs.Instead of reimbursing hospitals
(05:21):
for their allowable costs, theywere paid on a fixed payment
basis. And over the next roughlyten or twelve years, almost all
of Medicare payment systems,with the exception of the
physician system, shifted tosome form of prospective
payment. What happened in thelate 1980s was Medicare went
(05:42):
from a very peculiar system tohaving the Medicare fee schedule
created, which took a number ofyears.
There were also some efforts toget control over the cost of
physician services because itturns out that controlling price
(06:03):
did not control costs because ofthe increases in the volume and
intensity of services. So justto finish the answer, I think
it's fair to characterize theearly part of the nineteen
eighties and the nineteennineties with three or four
(06:23):
trends. First was the continuingmassive growth of health care as
a share of GDP along with thecost of Medicare. That drove
lots of efforts to constraincost. And so from a fee for
service perspective, the twomost important trends were the
(06:43):
shift from cost reimbursement toprospective payment, and for the
physicians to the creation ofthe physician fee schedule.
The other trend that happenedwas the enormous growth of
managed care. And while HMO caredid not grow that enormously,
(07:08):
preferred provider organizationsand other forms of managed care
grew enormously. So in 1988, inthe employer sector, literally
78%, I believe, of employerinsurance was classic indemnity
insurance, which is whattraditional Medicare is. By '9
(07:30):
by 02/2005, we were down toforget I think it's in the
paper, I think it's less around5%. So we basically saw the
elimination of traditionalindemnity insurance.
What that gave rise to was abacklash against managed care
(07:52):
particularly in the mid to late1990s.
Rob Lott (07:58):
Got it. Okay. So just like a ton of transformation,
public opinion sort of having arole there, but also just sort
of the the freight train of thekind of bureaucratic policies
leading to health systemsproviders kind of responding to
(08:18):
those incentives. Let's now moveahead to the creation of
Medicare Advantage. I believethat came through the Balanced
Budget Act of 1997.
Can you sort of put us in thatmoment there? What were you
doing at the time? And I'mcurious if there was like an
explicit argument in favor ofthe creation of a program like
(08:42):
Medicare Advantage, or was itmore of sort of just like the
next step in this inevitableprocess of transformation?
Steven Lieberman (08:49):
So let me start with a slight technical
correction. The BB the ViolenceBudget Act of 1997 created what
was renamed the so calledMedicare Risk Program to become
Medicare Plus Choice. TheMedicare Modernization Act in
2003 changed it changed the nameto Medicare Advantage, I would
(09:11):
argue that while there wereimportant changes in each of
those statutes, the name changewas not the important part of
it.
Rob Lott (09:21):
Got it,
Steven Lieberman (09:21):
okay, fair So what I was doing, I had been the
person at the office ofmanagement and budget, this
career person in charge ofMedicare and Medicaid, and then
I got kicked upstairs and becamea career assistant director at
OMB, I left in early ninety twoand went out west primarily to
(09:44):
Arizona and then California torun managed care, because I had
the perception that theinteresting work was going to be
at the delivery system level,not at no longer at the federal
level. So in ninety five, ninetysix, ninety seven, I was
primarily involved in helpingbuild Medicare, what are now
(10:05):
called Medicare Advantageprograms in different parts of
the country. What we had in themid nineties was twelve percent
of the Medicare population in1997 was enrolled in Medicare
Plus Choice, now MedicareAdvantage. I'm just gonna call
it MA without worrying about thename changes.
Rob Lott (10:27):
All right, let be stipulated.
Steven Lieberman (10:30):
Thank you. What happened was those benefits
were quite disproportionatelyconcentrated in a few states
that had extensive managed care.So places like California and
Arizona, which had very highlevels of HMO penetration,
(10:53):
became the places where therewas lots of Medicare Advantage
enrollment. And what happenedwas people like Senator Grassley
from Ida from Iowa were veryjealous of the fact that his
constituents couldn't get accessto the extra benefits that were
(11:14):
starting that were available inMedicare Advantage plans. So the
BBA so just to finish up, wasone of the things I did in 1996
and 1997 was to work with twoorganizations to create what we
(11:35):
call provider sponsoredorganizations as demonstrations
to let non HMOs participate.
That actually was a provision inthe BB Act, in the Balanced
Budget Act. As far as I know,I'm not sure there are any
provider sponsored organizationsthat are MA organizations. But
at any rate, to get back to whatwas what was driving it, the
(11:57):
problem was the misallocation,the unequal distribution of
Medicare Advantage throughoutthe country. There were about
200 counties out of the 30 over3,000 counties in the country
where there was significantMedicare Advantage penetration.
(12:20):
And as we point out in thepaper, in three states, a very
large share of the overallpopulation of enrollees.
So that was the problem. Part ofthe solution was to allow
organizations other than HMOs toparticipate, and there was a
(12:40):
change in how payments weremade.
Rob Lott (12:43):
Got it. I think today we sort of envision there being
a dynamic between traditionalMedicare and Medicare Advantage
as kind of a competitiveuniverse because there's this
sort of heavyweight matchupbetween these two enormous
entities sort of vying for thesame pool of beneficiaries. How
(13:05):
was that relationship envisionedas this program came about in
the late 90s and early 2000s?
Steven Lieberman (13:12):
So I don't think anyone at the time had any
perception that MedicareAdvantage would grow the way it
has. And to underscore thatpoint, when the in 1997, as I
mentioned, I believe 12% of theMedicare population was in
Medicare Advantage, both thenumber and the percent actually
(13:35):
fell after the BBA was enacted,in part because the Balanced
Budget Act in 'ninety seven hadsignificant cuts to Medicare
traditional Medicare fee forservice, which lowered Medicare
Advantage payment rates, and infact, in that period it's the
only time that Medicare costsactually fell from one year to
(13:57):
the next, after which obviouslythe growth trend has returned.
So I think the answer is peopledid not envision a great, you
know, rush to MedicareAdvantage. People didn't
envision that Medicare Advantagebenefits would be basically 20%
(14:21):
greater than the benefits thatwere available in traditional
Medicare.
Rob Lott (14:25):
Got it, okay, and in your paper you describe this
(15:06):
rapid growth, the title calls ita meteoric rise. Obviously we
know now that more than 50% ofbeneficiaries are in Medicare
Advantage programs compared to,traditional Medicare, and a big
amount of that growth has comein recent years. Can you say a
little bit about what exactly isgoing on? What's driving that
(15:28):
growth today? And what do weknow for sure?
What do we kinda suspect? What'syour hunch? And how do you kinda
put all that together and intothe bigger puzzle?
Steven Lieberman (15:40):
I'll try to be clear about what I what's
factual and what's myassumptions. What's factual, and
I think MEDDPAC has done anextraordinarily good job along
with some other researchers, tohighlight the fact that there
are three ways in which MedicareAdvantage benefits are
(16:01):
significantly greater, and thepayments for an individual who's
enrolled in Medicare Advantageare significantly greater than
what that person would have costin traditional Medicare.
Rob Lott (16:13):
And just to clarify, when you say payments, you're
saying the government's paymentsto the insurance company
compared to what the governmentwould pay to cover a traditional
Medicare beneficiary.
Steven Lieberman (16:30):
Precisely. And so the biggest source of that
actually, and it's changed inthe last couple of years, is
what's called favorableselection. And so without
getting too wonky about it,Medicare adjusts the capitation,
the fixed monthly amounts thatit pays to insurers based on
(16:52):
their health health status andsome other demographic
characteristics. The problemwith that system so obviously,
if you have somebody who has isexpected to high have very high
costs, you pay them much morethan somebody who's expected to
have very low cost. The problemwith that is and this to me is
(17:14):
one of the most fascinatingthings, is if you were to rank
Medicare, traditional Medicarebeneficiaries from the least
expensive to the most expensiveand put them into quintiles, 20%
groupings.
The top quintile accounts forabout three quarters of cost.
The bottom quintile accounts forless than 1% of cost, an
(17:36):
extremely skewed distribution.And to get slightly wonky, the
mean is three or three and ahalf times the median. Wow. And
so that distribution, when youjust look at all Medicare,
Medicare beneficiaries withoutrisk adjustment, one of the
pieces of research that I didwith my colleague Paul Ginsberg
(17:57):
and Sam Valdez is thatdistribution is virtually
identical when you look only atbeneficiaries that have the
identical risk score.
So the problem is that eventhough you're using the average
to adjust payments, the peoplewho move into Medicare Advantage
(18:18):
are significantly below average.In fact, research has shown, on
average, they have about halfthe expected cost of the average
person. That results in about 10percentage points, according to
MedPAC, of overpayment. Thesecond major source of
overpayment is what's calledcoding intensity, or known as
(18:39):
upcoding. Because in fee forservice, providers get paid for
services.
They don't get paid based ondiagnoses. Slight exception to
that for hospital admissions,but let's keep this general. In
contrast, Medicare Advantagecompanies get paid on diagnoses,
(19:03):
which is what drives the riskadjustment system. So there and
there's a recent paper in theJournal of the American Medical
Association by Rick Cronig andhis colleagues, which compared
up coding, coding intensity, infee for service traditional
Medicare to Medicare Advantage,and by specific Medicare
Advantage organizations. Andwhat that analysis, which builds
(19:27):
on a lot of other work, shows isthat the Medicare Advantage
coding is much greater than infee for service, and that
there's a real issue where twoof the largest Medicare
Advantage organizations are themost aggressive up coders, and
(19:48):
which can generate up to 50%more payment, which creates two
issues, and I'll make this realquick.
One is it obviously increasesthe payments to Medicare
Advantage plans.
Rob Lott (20:03):
Incentive to find more intense code.
Steven Lieberman (20:07):
Right. So between favorable selection and
up coding, on that results inover in sort of $84,000,000,000
in 2025, according to MEDDPAC,of higher payment, or about a
20% overpayment. And there's oneother source that I'll come to
in a moment. And that is thebiggest reason for why Medicare
(20:30):
Advantage benefits are becauseMedicare Advantage organizations
are getting paid over $2,200 perbeneficiary, more than
traditional Medicare peoplewould cost, that allows them to
finance additional benefits. Thesecond problem that I just want
to highlight is about half theMedicare Advantage
organizations, again accordingto MedPAC, up code by less than
(20:55):
an adjustment that is used tooffset a portion of the up
coding that applies to allpayments.
Those half the organizationsonly enroll about 15% of
Medicare Advantagebeneficiaries. The other half of
Medicare Advantage organizationsthat enroll about 85% of
beneficiaries up codesignificantly. And the problem
(21:19):
is that the more you up code,the more revenue you get. So it
creates a very unequal playingfield, not just between Medicare
Advantage and traditionalMedicare, but among Medicare
Advantage organizations. Thethird source, and I probably
it's not worth going into, isthe star ratings, which is
$15,000,000,000 and nottechnically an overpayment,
(21:42):
because it's statutory.
Rob Lott (21:43):
Right. So a lot of factors there that have sort of
incentivized the growth ofMedicare Advantage. Some have
argued that there's really somuch variation in MA plans where
some are basically just payingtheir providers at a fee for
service basis, whilst othershave implemented their own
(22:05):
alternative payment models sortof under the MA hood there, that
it can be very hard to compareplan to plan and that it can be
very hard as well to makegeneralizations about the
quality of care that MedicareAdvantage provides writ large or
the outcomes. And so I'mwondering if you have thoughts
(22:25):
on, are we able to make some ofthose judgments and comparisons
about quality and how MA haschanged the care that people
receive writ large?
Steven Lieberman (22:36):
It is it's a great question, and it the
unfortunately, thedifferentiation among the plans
makes it hard to have a broadanswer other than the
generalization that, on average,Medicare Advantage plans have
not been shown to have improvedquality compared to traditional
(23:00):
Medicare. But one of theconfounding issues is it's hard
to compare beneficiaries becauseof the degree of up coding. So
you're not clear that you'recomparing comparable things.
There are organizations that Ithink one of the things it's
fair to say is that mostMedicare Advantage organizations
(23:24):
emphasize primary care. And mostMedicare Advantage organizations
also use their a variety oftechniques to manage
utilization, such as priorauthorization.
The problem is that someorganizations do that well and
(23:46):
appropriately. Some do itarguably as a way to control
cost more than clinical quality.So it's just an example of why
it is very hard to generalize.
Rob Lott (23:59):
Okay. Well, against that backdrop, can you say a
little bit about maybe someareas that are perhaps ripe for
policy reform in relation to MA?Are we just gonna continue down
this path of rapid growth, or doyou see any particular problems
perhaps becoming so urgent thatit might actually inspire
(24:20):
Congress to make some changes?
Steven Lieberman (24:24):
Well, it is very difficult to predict what
Congress, and particularly thisCongress, will do. Fair enough.
And I think it is interestingthat in spite of MEDDPAC, for
years, very authoritativelyconveying that there are, you
(24:44):
know, approaching a$100,000,000,000 a year of
overpayments to MedicareAdvantage plans. That that was
nowhere on the congressionalagenda, which I suspect has
something to do with the factthat the insurance industry is a
very powerful lobby. The factthat it is argued, not
(25:07):
necessarily correctly, thatreducing payments to Medicare
Advantage plans will reducebenefits.
And the third ideological factormight be a preference for
private solutions versusgovernment solutions. But let me
quickly identify four thingsthat are likely to be
(25:28):
unsustainable. The first of themis with the growth of Medicare
Advantage, we now have and I'mgoing to switch the number a
little bit as you point out,it's a little over 50% of
everybody but because peoplehave to be in both Part A and
Part B to be eligible forMedicare Advantage, actually
(25:48):
it's over 55% of people who areeligible are in Medicare
Advantage. What that means isthe number of people in
traditional Medicare at thecounty level is falling. And
this goes back to work I didthree years ago, but about
almost two thirds of countieshad fewer than 5,000 people,
(26:12):
which was the minimum risk poolsize, the minimum size that is
for that an ACO, an accountablecare organization, has to have.
So there's a as MedicareAdvantage enrollment continues
to grow, it's over 70% in somecounties and indeed one state,
you don't have enough peopleleft in fee for service to
(26:34):
provide an adequate basis forsetting rates, because the rates
are based on average riskadjusted cost in a county. And
what makes that even moreproblematic is research has
shown that there's been overfifteen years a very persistent
pattern of favorable selection,which means the people who
(26:55):
remain in fee for service areless healthy and are more
expensive. So that's an argumentthat says at some point, as
Medicare Advantage continues togrow, it's no longer it should
it no longer becomes viable toset rates based on average fee
for service costs at the countylevel. Second is, I think the up
(27:18):
the coding differentials, atsome point, people are going to
pay attention to that. We'llhopefully both reform how risk
adjustment is done to eliminatesome of those incentives, but
also to take away some of theunfairness in terms of both the
attractiveness of MedicareAdvantage versus traditional
(27:39):
Medicare, which has not expandedits benefits, and to make the
competition within MedicareAdvantage fairer.
The third thing is, as Imentioned, I think, and this
relates in some ways to thecoding, because it's associated
with the risk adjustment system,is to fix favorable selection
and risk adjustment. So I thinkthose are And the fourth is we
(28:03):
need to improve the way qualityis measured and compensated.
Rob Lott (28:08):
Well, those are great marching orders perhaps for
policymakers looking for ways tostrengthen the program and
improve the experience ofbeneficiaries. Steve Lieberman,
thank you so much for taking thetime to chat with us today. I
really appreciate it.
Steven Lieberman (28:27):
Thank you, Rob. I've enjoyed it.
Rob Lott (28:30):
To our listeners, thanks for tuning in. If you
enjoyed this episode, recommendit to a friend, subscribe, and,
of course, tune in next week.Thanks, everyone. Thanks for
listening. If you enjoy today'sepisode, I hope you'll tell a
friend about a health policy.
Hello, and welcome to a health podocy. I'm your host,
(00:04):
Rob Lott. Do you remember thebook, A Very Hungry Caterpillar
by Eric Carle? I do. I read itwith my two year old last night.
And as you may recall, thecaterpillar's transformation
starts slowly. On the first day,Monday, he eats just one apple.
(00:29):
On the second day, just twopears. But the caterpillar's
hunger and its growth builds andbuilds on itself until Saturday.
Watch out.
Party time. It eats a chocolatecake, ice cream, salami, a
pickle. Of course, thecaterpillar has a stomachache
afterward, but it's also clearthat it's just about ready to
(00:53):
take the final step in itstransformation. And now I hope
you'll forgive the extendedanalogy, but I couldn't help but
think about Medicare'stransformation as I reread this
book for the thousandth timeyesterday, and not just because
I was about to have thisconversation today. Medicare has
(01:14):
just turned 60, and over thattime, it has grown and changed,
and that change has been fairlyincremental and steady.
But lately, it seems that thepace and the tone of that change
has gotten a lot more chaotic.We're talking about Swiss cheese
and lollipop levels of chaos.And it has me wondering, what's
(01:39):
going to happen next? Is it timeto reset and eat a green leaf,
or are we on the cusp of an evenmore dramatic transformation?
That, at least the implicationsof that very tortured metaphor
for Medicare, is the subject oftoday's health policy.
I'm here today with Stephen M.Lieberman, a nonresident senior
(02:01):
fellow at the USC SchaefferCenter for Health Policy and
Economics. Steven has servedover the years in senior roles
at the Congressional BudgetOffice, Office of Management and
Budget, the National GovernorsAssociation. Together with his
coauthor Rick Mays, he has a newhealth affairs article recently
(02:21):
published ahead of print titled,Inside the Meteoric Rise of
Medicare Advantage. I can't waitto learn all about their take on
all this change.
Steven M. Lieberman, welcome toA Health Odyssey.
Steven Lieberman (02:36):
Thank you, Rob, very much. And as somebody
who has four younggrandchildren, I am very
familiar with HungryCaterpillar, would not have
thought of it as an openingintroduction but it really does
fit quite well.
Rob Lott (02:50):
All right, well I'm at that moment where I just can't
avoid it, I'm glad youappreciated it as well. Maybe we
can start with a little bit ofthe prehistory about Medicare
and how it's changed. Let'sstart with the Tax Equity and
Fiscal Responsibility Act of1982. I feel like forty years or
(03:12):
so is about enough time in thepast to kind of get us started.
How did that pave the way forMedicare Advantage?
And what are maybe some of theother notable trends that were
taking place in the insurancemarkets in the 80s and 90s?
Steven Lieberman (03:27):
Great question. Let me take it in two
parts. What TEFRA was primarilya tax bill, but it had two
fundamental changes forMedicare. One was quite direct,
the creation of the Medicarerisk program, which was the
ability of HMOs to contract on acapitated basis with Medicare.
(03:51):
Up until this point, we only hadHMOs able to engage on a cost
basis and that was very limited.
The second change was moreindirect, and it was the
creation of what are called thesection two twenty two and two
twenty three limits, which werelimits on costs that would be
(04:12):
reimbursed for hospitals andphysicians. And what had
happened in the seventies upthrough the early eighties was
enormous growth in the cost ofhealth care, and particularly
Medicare. And so the two twentythree two twenty two limit, so
called, scared the bejesus outof the hospital industry because
(04:34):
they would have significantlyreduced reimbursement. And so
they led in the next year, in1983, in the Social Security
Amendments of 1983, to thecreation of the Inpatient
Prospective Payment System, orthe DRG system. And the phrase
at the time was anything butTEFRA, to avoid those cost
(04:57):
limits.
And to go to the second part ofyour question, which was what
were the other significanttrends? The first thing is the
effect of the inpatientperspective payment system was
to radically transformincentives and start to get
control of hospital costs.Instead of reimbursing hospitals
(05:21):
for their allowable costs, theywere paid on a fixed payment
basis. And over the next roughlyten or twelve years, almost all
of Medicare payment systems,with the exception of the
physician system, shifted tosome form of prospective
payment. What happened in thelate 1980s was Medicare went
(05:42):
from a very peculiar system tohaving the Medicare fee schedule
created, which took a number ofyears.
There were also some efforts toget control over the cost of
physician services because itturns out that controlling price
(06:03):
did not control costs because ofthe increases in the volume and
intensity of services. So justto finish the answer, I think
it's fair to characterize theearly part of the nineteen
eighties and the nineteennineties with three or four
(06:23):
trends. First was the continuingmassive growth of health care as
a share of GDP along with thecost of Medicare. That drove
lots of efforts to constraincost. And so from a fee for
service perspective, the twomost important trends were the
(06:43):
shift from cost reimbursement toprospective payment, and for the
physicians to the creation ofthe physician fee schedule.
The other trend that happenedwas the enormous growth of
managed care. And while HMO caredid not grow that enormously,
(07:08):
preferred provider organizationsand other forms of managed care
grew enormously. So in 1988, inthe employer sector, literally
78%, I believe, of employerinsurance was classic indemnity
insurance, which is whattraditional Medicare is. By '9
(07:30):
by 02/2005, we were down toforget I think it's in the
paper, I think it's less around5%. So we basically saw the
elimination of traditionalindemnity insurance.
What that gave rise to was abacklash against managed care
(07:52):
particularly in the mid to late1990s.
Rob Lott (07:58):
Got it. Okay. So just like a ton of transformation,
public opinion sort of having arole there, but also just sort
of the the freight train of thekind of bureaucratic policies
leading to health systemsproviders kind of responding to
(08:18):
those incentives. Let's now moveahead to the creation of
Medicare Advantage. I believethat came through the Balanced
Budget Act of 1997.
Can you sort of put us in thatmoment there? What were you
doing at the time? And I'mcurious if there was like an
explicit argument in favor ofthe creation of a program like
(08:42):
Medicare Advantage, or was itmore of sort of just like the
next step in this inevitableprocess of transformation?
Steven Lieberman (08:49):
So let me start with a slight technical
correction. The BB the ViolenceBudget Act of 1997 created what
was renamed the so calledMedicare Risk Program to become
Medicare Plus Choice. TheMedicare Modernization Act in
2003 changed it changed the nameto Medicare Advantage, I would
(09:11):
argue that while there wereimportant changes in each of
those statutes, the name changewas not the important part of
it.
Rob Lott (09:21):
Got it,
Steven Lieberman (09:21):
okay, fair So what I was doing, I had been the
person at the office ofmanagement and budget, this
career person in charge ofMedicare and Medicaid, and then
I got kicked upstairs and becamea career assistant director at
OMB, I left in early ninety twoand went out west primarily to
(09:44):
Arizona and then California torun managed care, because I had
the perception that theinteresting work was going to be
at the delivery system level,not at no longer at the federal
level. So in ninety five, ninetysix, ninety seven, I was
primarily involved in helpingbuild Medicare, what are now
(10:05):
called Medicare Advantageprograms in different parts of
the country. What we had in themid nineties was twelve percent
of the Medicare population in1997 was enrolled in Medicare
Plus Choice, now MedicareAdvantage. I'm just gonna call
it MA without worrying about thename changes.
Rob Lott (10:27):
All right, let be stipulated.
Steven Lieberman (10:30):
Thank you. What happened was those benefits
were quite disproportionatelyconcentrated in a few states
that had extensive managed care.So places like California and
Arizona, which had very highlevels of HMO penetration,
(10:53):
became the places where therewas lots of Medicare Advantage
enrollment. And what happenedwas people like Senator Grassley
from Ida from Iowa were veryjealous of the fact that his
constituents couldn't get accessto the extra benefits that were
(11:14):
starting that were available inMedicare Advantage plans. So the
BBA so just to finish up, wasone of the things I did in 1996
and 1997 was to work with twoorganizations to create what we
(11:35):
call provider sponsoredorganizations as demonstrations
to let non HMOs participate.
That actually was a provision inthe BB Act, in the Balanced
Budget Act. As far as I know,I'm not sure there are any
provider sponsored organizationsthat are MA organizations. But
at any rate, to get back to whatwas what was driving it, the
(11:57):
problem was the misallocation,the unequal distribution of
Medicare Advantage throughoutthe country. There were about
200 counties out of the 30 over3,000 counties in the country
where there was significantMedicare Advantage penetration.
(12:20):
And as we point out in thepaper, in three states, a very
large share of the overallpopulation of enrollees.
So that was the problem. Part ofthe solution was to allow
organizations other than HMOs toparticipate, and there was a
(12:40):
change in how payments weremade.
Rob Lott (12:43):
Got it. I think today we sort of envision there being
a dynamic between traditionalMedicare and Medicare Advantage
as kind of a competitiveuniverse because there's this
sort of heavyweight matchupbetween these two enormous
entities sort of vying for thesame pool of beneficiaries. How
(13:05):
was that relationship envisionedas this program came about in
the late 90s and early 2000s?
Steven Lieberman (13:12):
So I don't think anyone at the time had any
perception that MedicareAdvantage would grow the way it
has. And to underscore thatpoint, when the in 1997, as I
mentioned, I believe 12% of theMedicare population was in
Medicare Advantage, both thenumber and the percent actually
(13:35):
fell after the BBA was enacted,in part because the Balanced
Budget Act in 'ninety seven hadsignificant cuts to Medicare
traditional Medicare fee forservice, which lowered Medicare
Advantage payment rates, and infact, in that period it's the
only time that Medicare costsactually fell from one year to
(13:57):
the next, after which obviouslythe growth trend has returned.
So I think the answer is peopledid not envision a great, you
know, rush to MedicareAdvantage. People didn't
envision that Medicare Advantagebenefits would be basically 20%
(14:21):
greater than the benefits thatwere available in traditional
Medicare.
Rob Lott (14:25):
Got it, okay, and in your paper you describe this
(15:06):
rapid growth, the title calls ita meteoric rise. Obviously we
know now that more than 50% ofbeneficiaries are in Medicare
Advantage programs compared to,traditional Medicare, and a big
amount of that growth has comein recent years. Can you say a
little bit about what exactly isgoing on? What's driving that
(15:28):
growth today? And what do weknow for sure?
What do we kinda suspect? What'syour hunch? And how do you kinda
put all that together and intothe bigger puzzle?
Steven Lieberman (15:40):
I'll try to be clear about what I what's
factual and what's myassumptions. What's factual, and
I think MEDDPAC has done anextraordinarily good job along
with some other researchers, tohighlight the fact that there
are three ways in which MedicareAdvantage benefits are
(16:01):
significantly greater, and thepayments for an individual who's
enrolled in Medicare Advantageare significantly greater than
what that person would have costin traditional Medicare.
Rob Lott (16:13):
And just to clarify, when you say payments, you're
saying the government's paymentsto the insurance company
compared to what the governmentwould pay to cover a traditional
Medicare beneficiary.
Steven Lieberman (16:30):
Precisely. And so the biggest source of that
actually, and it's changed inthe last couple of years, is
what's called favorableselection. And so without
getting too wonky about it,Medicare adjusts the capitation,
the fixed monthly amounts thatit pays to insurers based on
(16:52):
their health health status andsome other demographic
characteristics. The problemwith that system so obviously,
if you have somebody who has isexpected to high have very high
costs, you pay them much morethan somebody who's expected to
have very low cost. The problemwith that is and this to me is
(17:14):
one of the most fascinatingthings, is if you were to rank
Medicare, traditional Medicarebeneficiaries from the least
expensive to the most expensiveand put them into quintiles, 20%
groupings.
The top quintile accounts forabout three quarters of cost.
The bottom quintile accounts forless than 1% of cost, an
(17:36):
extremely skewed distribution.And to get slightly wonky, the
mean is three or three and ahalf times the median. Wow. And
so that distribution, when youjust look at all Medicare,
Medicare beneficiaries withoutrisk adjustment, one of the
pieces of research that I didwith my colleague Paul Ginsberg
(17:57):
and Sam Valdez is thatdistribution is virtually
identical when you look only atbeneficiaries that have the
identical risk score.
So the problem is that eventhough you're using the average
to adjust payments, the peoplewho move into Medicare Advantage
(18:18):
are significantly below average.In fact, research has shown, on
average, they have about halfthe expected cost of the average
person. That results in about 10percentage points, according to
MedPAC, of overpayment. Thesecond major source of
overpayment is what's calledcoding intensity, or known as
(18:39):
upcoding. Because in fee forservice, providers get paid for
services.
They don't get paid based ondiagnoses. Slight exception to
that for hospital admissions,but let's keep this general. In
contrast, Medicare Advantagecompanies get paid on diagnoses,
(19:03):
which is what drives the riskadjustment system. So there and
there's a recent paper in theJournal of the American Medical
Association by Rick Cronig andhis colleagues, which compared
up coding, coding intensity, infee for service traditional
Medicare to Medicare Advantage,and by specific Medicare
Advantage organizations. Andwhat that analysis, which builds
(19:27):
on a lot of other work, shows isthat the Medicare Advantage
coding is much greater than infee for service, and that
there's a real issue where twoof the largest Medicare
Advantage organizations are themost aggressive up coders, and
(19:48):
which can generate up to 50%more payment, which creates two
issues, and I'll make this realquick.
One is it obviously increasesthe payments to Medicare
Advantage plans.
Rob Lott (20:03):
Incentive to find more intense code.
Steven Lieberman (20:07):
Right. So between favorable selection and
up coding, on that results inover in sort of $84,000,000,000
in 2025, according to MEDDPAC,of higher payment, or about a
20% overpayment. And there's oneother source that I'll come to
in a moment. And that is thebiggest reason for why Medicare
(20:30):
Advantage benefits are becauseMedicare Advantage organizations
are getting paid over $2,200 perbeneficiary, more than
traditional Medicare peoplewould cost, that allows them to
finance additional benefits. Thesecond problem that I just want
to highlight is about half theMedicare Advantage
organizations, again accordingto MedPAC, up code by less than
(20:55):
an adjustment that is used tooffset a portion of the up
coding that applies to allpayments.
Those half the organizationsonly enroll about 15% of
Medicare Advantagebeneficiaries. The other half of
Medicare Advantage organizationsthat enroll about 85% of
beneficiaries up codesignificantly. And the problem
(21:19):
is that the more you up code,the more revenue you get. So it
creates a very unequal playingfield, not just between Medicare
Advantage and traditionalMedicare, but among Medicare
Advantage organizations. Thethird source, and I probably
it's not worth going into, isthe star ratings, which is
$15,000,000,000 and nottechnically an overpayment,
(21:42):
because it's statutory.
Rob Lott (21:43):
Right. So a lot of factors there that have sort of
incentivized the growth ofMedicare Advantage. Some have
argued that there's really somuch variation in MA plans where
some are basically just payingtheir providers at a fee for
service basis, whilst othershave implemented their own
(22:05):
alternative payment models sortof under the MA hood there, that
it can be very hard to compareplan to plan and that it can be
very hard as well to makegeneralizations about the
quality of care that MedicareAdvantage provides writ large or
the outcomes. And so I'mwondering if you have thoughts
(22:25):
on, are we able to make some ofthose judgments and comparisons
about quality and how MA haschanged the care that people
receive writ large?
Steven Lieberman (22:36):
It is it's a great question, and it the
unfortunately, thedifferentiation among the plans
makes it hard to have a broadanswer other than the
generalization that, on average,Medicare Advantage plans have
not been shown to have improvedquality compared to traditional
(23:00):
Medicare. But one of theconfounding issues is it's hard
to compare beneficiaries becauseof the degree of up coding. So
you're not clear that you'recomparing comparable things.
There are organizations that Ithink one of the things it's
fair to say is that mostMedicare Advantage organizations
(23:24):
emphasize primary care. And mostMedicare Advantage organizations
also use their a variety oftechniques to manage
utilization, such as priorauthorization.
The problem is that someorganizations do that well and
(23:46):
appropriately. Some do itarguably as a way to control
cost more than clinical quality.So it's just an example of why
it is very hard to generalize.
Rob Lott (23:59):
Okay. Well, against that backdrop, can you say a
little bit about maybe someareas that are perhaps ripe for
policy reform in relation to MA?Are we just gonna continue down
this path of rapid growth, or doyou see any particular problems
perhaps becoming so urgent thatit might actually inspire
(24:20):
Congress to make some changes?
Steven Lieberman (24:24):
Well, it is very difficult to predict what
Congress, and particularly thisCongress, will do. Fair enough.
And I think it is interestingthat in spite of MEDDPAC, for
years, very authoritativelyconveying that there are, you
(24:44):
know, approaching a$100,000,000,000 a year of
overpayments to MedicareAdvantage plans. That that was
nowhere on the congressionalagenda, which I suspect has
something to do with the factthat the insurance industry is a
very powerful lobby. The factthat it is argued, not
(25:07):
necessarily correctly, thatreducing payments to Medicare
Advantage plans will reducebenefits.
And the third ideological factormight be a preference for
private solutions versusgovernment solutions. But let me
quickly identify four thingsthat are likely to be
(25:28):
unsustainable. The first of themis with the growth of Medicare
Advantage, we now have and I'mgoing to switch the number a
little bit as you point out,it's a little over 50% of
everybody but because peoplehave to be in both Part A and
Part B to be eligible forMedicare Advantage, actually
(25:48):
it's over 55% of people who areeligible are in Medicare
Advantage. What that means isthe number of people in
traditional Medicare at thecounty level is falling. And
this goes back to work I didthree years ago, but about
almost two thirds of countieshad fewer than 5,000 people,
(26:12):
which was the minimum risk poolsize, the minimum size that is
for that an ACO, an accountablecare organization, has to have.
So there's a as MedicareAdvantage enrollment continues
to grow, it's over 70% in somecounties and indeed one state,
you don't have enough peopleleft in fee for service to
(26:34):
provide an adequate basis forsetting rates, because the rates
are based on average riskadjusted cost in a county. And
what makes that even moreproblematic is research has
shown that there's been overfifteen years a very persistent
pattern of favorable selection,which means the people who
(26:55):
remain in fee for service areless healthy and are more
expensive. So that's an argumentthat says at some point, as
Medicare Advantage continues togrow, it's no longer it should
it no longer becomes viable toset rates based on average fee
for service costs at the countylevel. Second is, I think the up
(27:18):
the coding differentials, atsome point, people are going to
pay attention to that. We'llhopefully both reform how risk
adjustment is done to eliminatesome of those incentives, but
also to take away some of theunfairness in terms of both the
attractiveness of MedicareAdvantage versus traditional
(27:39):
Medicare, which has not expandedits benefits, and to make the
competition within MedicareAdvantage fairer.
The third thing is, as Imentioned, I think, and this
relates in some ways to thecoding, because it's associated
with the risk adjustment system,is to fix favorable selection
and risk adjustment. So I thinkthose are And the fourth is we
(28:03):
need to improve the way qualityis measured and compensated.
Rob Lott (28:08):
Well, those are great marching orders perhaps for
policymakers looking for ways tostrengthen the program and
improve the experience ofbeneficiaries. Steve Lieberman,
thank you so much for taking thetime to chat with us today. I
really appreciate it.
Steven Lieberman (28:27):
Thank you, Rob. I've enjoyed it.
Rob Lott (28:30):
To our listeners, thanks for tuning in. If you
enjoyed this episode, recommendit to a friend, subscribe, and,
of course, tune in next week.Thanks, everyone. Thanks for
listening. If you enjoy today'sepisode, I hope you'll tell a
friend about a health policy.
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