Medicare Advantage: Wha’ Happened?

October 16th, 2009 | Healthcare Reform | Medicare

Fred Willard's routine about a failed sitcom called "Wha' Happened?"in Waiting for Guffman is an excellent metaphor for the Medicare Advantage Program. As my last Post on this subject suggested, MA's predecessors had some not insignificant success in driving down Average Length of Stay. In addition, there were arguably some equally significant changes – for a time – in how utilization was viewed in the medical community. Like any successful capitalist-oriented system, this success was in part motivated by economic incentives. Why were these significant successes in large part reversed?

Wha' Happened? A little-understood phenomenon called the Underwriting Cycle probably explains a lot of it. Insurance – and Health Insurance – like the numerous other sectors of the Economy, has a Business Cycle. (This Health Insurance cycle closely tracks the performance of the S&P 500.) Utilization-restricting payments to providers – Capitation – are favored by Health Insurers when profit margins are tight: at the Bottom of the Underwriting Cycle. When profit margins are Fat: at the Top of the Underwriting Cycle, Health Insurers favor fee-for-service, because the profits inherent in the Capitation risk-shift inure to the Provider under Capitation rather than the Insurer. When margins are tight, Health Insurers only profit by limiting Provider payments via low capitation rates or poor fee-for-service rates. Poor fee- for-service rates tend to lead to excessive utilization which makes up for the low rates, while in capitation there is no way for Providers to make up for the low rate other than controlling utilization.

The near collapse of the Health Insurance Industry at the end of the 1990s (e.g., Oxford, Harvard Pilgrim) led to both an extreme need for profit and Consolidation of weaker players. Thus, the increasing market power of Insurers due to their Antitrust exemption coupled with the need to take back the utilization-limiting profits inherent in Capitation from providers contributed to the demise of the Capitation model.

The final straw breakin' the ol' Camel's back was the Medicare Modernization Act of 2003. Health Insurers were looking for a vein of Gold and found it in the MMA, which modified the historical Capitation model for Medicare HMOs and made it a cost-plus Model wherein the Insurers' profit was more or less guaranteed off the top. As I said in an earlier post, don't take my word for it, read it for yourself at

To borrow a paraphrase of an old proverb that the MMA missed:The camel who's nose is in the tent tonight will probably be all the way in a few night's hence. The sudden concern about Antitrust issues seems to be designed to get the camel out of the tent and back into the cold reality of Competition. They are awnry critters, however….

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