Yesterday, Mitt Romney did his white board presentation comparing President Obama’s plans for Medicare to his own. Romney painted a bleak picture of Medicare under Obama, and offered his own vision for the program that provides health insurance to 48 million Americans. Romney said his plan for Medicare would be “very much like what we have today with Medicare Advantage”.

Currently, nearly 30% of Medicare beneficiaries are enrolled in Medicare Advantage plans across the country. Medicare Advantage enrollment is around 50%  in cities such as Phoenix, Tucson, Philadelphia, Buffalo, and Miami (and many more).

Medicare Advantage plans receive a base payment of around $800 per month from Medicare for each person enrolled with them. In Florida, plans get $1,100 per person per month. With this “premium” paid by Medicare, Advantage plans pay the medical bills for their members.

People enrolled in Medicare Advantage plans have co-pays for every medical service they receive, and this is very similar to the kind of health insurance they had through their employers (if they worked for a large employer and had good coverage).  If people are healthy, they will have very low out-of-pocket costs in a given year. If they get sick, their out-of-pocket costs are currently capped at $6,700 per year (or lower depending on their plan).

I think Medicare Advantage could be a good business model for Medicare except for a few things:

Capping Medicare costs: Payments to Advantage plans are risk adjusted, so Medicare pays more for people who are sicker and more costly for the plans. Medicare’s payout is not capped under the current system.  Ryan and Romney would cap what Medicare pays for each person’s coverage, so the risk would shift from Medicare to insurance companies.  Why would insurance companies take on this risk?  I suppose they would raise their premiums each year to make sure they make a profit. But if Medicare “vouchers” do not increase enough, will seniors have to pay the difference? What if they can’t pay the higher premium each year?

Competition is costly: Ryan and Romney say competition among Advantage plans will keep costs down, but competition requires advertising and big salaries for management. Today’s Advantage plans have administrative costs (including profit) of around 15% of their total revenue.  Original Medicare, which doesn’t do much advertising and doesn’t pay million dollar salaries, has administrative costs of around 4-5% of its budget.

Profits: Advantage plans get to make a profit from doing business with Medicare. If Advantage plans have a 5% profit margin, let’s do the math. Medicare spent $486 billion in 2011.  $486 billion x .05% =  over $24 billion. That’s profit going to insurance companies rather than staying in the Medicare Trust Fund.

Questions for Mitt:

I’d like to ask Mitt Romney how he can justify $24 billion every year going to insurance company profits under his version of Medicare.

Mitt also pointed out in his whiteboard presentation that Obamacare payment cuts to Medicare Advantage plans will cause insurance companies to cancel plans around the country. He said four million people will lose their Advantage plan under Obama.

I’d like to ask Mitt Romney if he thinks it’s okay for Medicare to spend more money on seniors in Medicare Advantage plans than those on Original Medicare. If Advantage plans are not saving Medicare money, is that a good deal for Medicare? And if it’s not a cost-saving model now, how will it be under his version of the program?