When the U.S. government pays more for medical services — as it does for Medicare Advantage — does the quality of those services improve? Not much, says Mark Duggan, a Wharton business economics and public policy professor. That was a key finding that he and co-authors Amanda Starc, a Wharton health care management professor, and Wharton Ph.D. student Boris V. Vabson came to in their recent research paper, “Who Benefits When the Government Pays More? Pass-through in the Medicare Advantage Program.”

In this interview, Duggan explains the study’s findings and some of the policy implications. He notes the increase in competition generated by higher Medicare Advantage payments “doesn’t seem to translate into better benefits for consumers.” The study could have implications for Medicaid, managed care and other government health care spending, Duggan says. It shows there may be many opportunities to cut programs, with minimal adverse impact on consumers, and then use the money saved where it may provide more efficient benefits.

An edited transcript of the conversation appears below.

Knowledge at Wharton: Please give us a brief summary of your research.

Mark Duggan: In my research, I examine the … generosity of government payments to health insurers for a program known as Medicare Advantage. The paper is actually jointly authored with another Wharton faculty member, Amanda Starc, and with a Wharton Ph.D. student, Boris Vabson. Essentially, what we’re trying to figure out is, when the government pays health insurers more to provide Medicare recipients with health care, how much of that additional money ripples through to consumers in the form of better coverage?

At a high level, for the Medicare program, there are 52 million people enrolled in it in the U.S. The vast majority is 65 years old and up. But there are some people who qualify [for the program because they are] disabled. About 30% of those 52 million opt out of what’s called “traditional Medicare” and instead select into one of these private insurance plans.

So, the other 70% are in traditional Medicare where if they go to a hospital or a physician, the government directly pays the hospital or the physician for their care. It’s fee-for-service traditional Medicare. In Medicare Advantage, the program we’re studying, the government just cuts a check per-person per-month to a health insurer. And the health insurer then coordinates and finances that person’s care.

“We see more insurers enter and we see more people enroll, and we see more advertising expenditures. But we actually don’t see much better quality when you pay plans more.”

This is a really big program. It is 30% of all Medicare recipients, and it’s grown a lot. It’s more than doubled over the last eight or nine years. And there have been many studies comparing it with traditional Medicare. For example, are people getting better quality care if they’re in Medicare Advantage than in fee-for-service…? There’s been very little work that has asked, “As you pay these plans more, how much does quality rise, if at all? And what other things happen?”

This is a really important issue because a key feature of Obamacare calls for a reduction in the payments to these plans. There’s going to be pretty significant reductions to their reimbursement over time, and we actually don’t have much evidence on what will happen as a result of that.

So, we have a number of key findings…. One is that when the government pays health insurers more, many more health insurers enter the market. On the one hand, it is great for incumbent health insurers because they get paid more, but on the other hand, it’s potentially not great because they are going to see more competition for Medicare recipients. That is one big effect that we find.

Additionally, we find that more people enroll in Medicare Advantage when the government pays the plans more. Essentially, the reason is that as the plans get more money, it becomes profitable to advertise and market to still more Medicare recipients. But most of the study focuses on the quality of coverage in, let’s say, a high-reimbursement regime versus a low-reimbursement regime. To look at this, we exploit a quirk in the government’s methodology for payment. Essentially, counties that are grouped in metropolitan areas with a population of 250,000 or more typically get about 10.5% more than otherwise identical counties in metro areas just underneath 250,000. So, that turns out to be a really big difference in how much the plans are reimbursed, and we exploit that and telescope in on do we see higher quality coverage in the places with more generous reimbursement than in less?

And we look at a number of different kinds of quality — some having to do with financial characteristics, like what kind of deductibles and co-pays do people have? Others have to do with the breadth of people’s provider networks. Are they able to easily see a physician or a specialist, or a primary care person? Additionally, what’s their overall satisfaction with their plan, and what sorts of services are covered? So, we try to look at a broad set of quality indicators.

Our findings indicate that we see more insurers enter and we see more people enroll, and we see more advertising expenditures. But we actually don’t see much better quality when you pay plans more. The question then naturally rises, “Where does the money seem to go?” And in a final empirical analysis, we try to see how much of it ripples through to profits of health insurers. And we see that a quite significant share of it does.

This is an important area to be studying because there are going to be so many changes to how Medicare Advantage plans and other government health care is reimbursed — how generously it’s reimbursed in the years ahead. And so, we’ve made some progress on that front. This isn’t the last word on this issue but it is, we think, an important piece of evidence for policy makers to weigh as they’re thinking about, “Can we cut reimbursement to these plans or not?”

A Medicare recipient, in choosing between traditional Medicare and a Medicare Advantage plan, will weigh a number of factors. Neither one is likely to dominate the other one. On the one hand, traditional Medicare is going to tend to have more providers in the network. Most physicians, most hospitals contract with traditional Medicare. However, a private insurer may contract with some physicians, perhaps very high-quality physicians who don’t contract with traditional Medicare. And additionally, the Medicare Advantage plan may provide additional benefits above and beyond what traditional Medicare covers.

Just as one example, many of the plans have historically offered things like gym memberships or vision care, and these are additional benefits above and beyond what traditional Medicare covers. Their premium will sometimes be slightly higher than traditional Medicare, but that is partly because they sometimes offer these additional benefits above and beyond traditional Medicare.

There’s no simple comparison because each insurer can tailor the level of benefits that it offers as a function of the characteristics of people. Humana might offer a plan with vision care in one county but without vision care in another country. It might offer a plan with a deductible of so many dollars in one place and [double that] in another place. It just depends. They really have a fair amount of flexibility to tailor their benefits across the counties. But they have to at least provide a level of benefits as generous as traditional Medicare. They can’t undercut traditional Medicare, at least on paper.

Knowledge at Wharton: What were the key takeaways from your research?

Duggan: The first key takeaway is that a firm’s decision to enter a market is highly responsive to how much the government pays. When the government pays more for private health insurance through Medicare, more insurers compete to offer that coverage. A second takeaway is that, at least given the many quality measures that we can look at, we don’t find a ton of evidence that paying plans substantially more leads to much better quality. There’s a lot of research in health economics and related areas trying to figure out when we pay more for medical care in this country, how much do we get in return for it?

“We’re talking about billions of dollars in additional government spending…. I was somewhat surprised to see so little of the benefit passing through to consumers in the form of better benefits.”

And there’s conflicting evidence on that. But within Medicare Advantage, we don’t find a huge payoff on the margin. And so, the take away, as we think about the Affordable Care Act being phased in and reductions in the generosity of reimbursement to the plans, I think there’s been a lot of concern that those reimbursement cuts would harm consumers a fair amount. Our evidence suggests that those effects may not be so great. Not to say that they should be zero, but there’s not the case that for each dollar you reduce reimbursement to the plans, a full dollar is being taken away from consumers in the form of the quality of their coverage.

Knowledge at Wharton: What results surprised you the most?

Duggan: I think it was surprising to me how responsive insurers were to receiving 10.5% more in reimbursement. We estimate that in a typical market, there are about four insurers operating in the somewhat smaller counties. And as soon as you pay them 10.5% more, that increases to about six insurers. That’s a 50% increase in the number of insurers offering coverage. That was surprising to me.

It was also surprising to me, though, that with that additional reimbursement, we didn’t see a big improvement in quality. And we’re talking about billions of dollars in additional government spending as a result of this somewhat higher reimbursement in the places with a population of 250,000 or more. So, I was somewhat surprised to see so little of the benefit passing through to consumers in the form of better benefits. Those would be my two biggest surprises.

Knowledge at Wharton: What are the key practical implications for policy makers?

Duggan: The key implication for business is that as the level of reimbursement for some government service increases — whether it’s health care, defense, infrastructure or what have you — the number of firms that are going to compete for that is going to grow. That is one important implication — that there is a positive and a negative in terms of getting more generous reimbursement for the government.

For consumers, it is important to follow the money and to think about when the government is paying more for some benefit, whether it’s education or health care or something else … is that additional money passing through in the form of let’s say better schooling, better health care or what have you?

It is useful for anyone who is [part of] one of these programs, or a taxpayer who is funding them, to think critically about what are we getting for that extra little bit that we’re paying, because governments are constantly making decisions about how much to allocate to this area versus that area versus another area. It’s incumbent on everyone, not just the people who are on the programs but taxpayers and others, to think critically about where we get the biggest bang for the buck in what the government is doing.

Knowledge at Wharton: What new rules or strategies would you suggest as a result of your research?

Duggan: I think there are a number of changes that will take effect over the next several years as a result of the Affordable Care Act, better known as Obamacare. Chief among them is a reduction in the generosity of reimbursement of Medicare Advantage plans….

“When … policy makers are ready to implement some of those reimbursement cuts … the impact for consumers may not be that negative.”

The concerns that many have had about the adverse effects of those reimbursement reductions on consumers … are somewhat less problematic now than I would have thought before embarking on this research. So far the reductions in reimbursement to the plans have already been delayed twice. One set was supposed to take effect last April, and another was set for this April. And the government has to some extent pushed off somewhat those reimbursement cuts, partially out of a fear of what that would mean for Medicare recipients. And I think that our evidence suggests that the costs of those reimbursement cuts for consumers might not be so great after all.

Knowledge at Wharton: Can your conclusions apply to other groups, besides those targeted in this research?

Duggan: It turns out that more than one in three U.S. residents is insured by Medicare or another government health care program. One example of that is Medicaid, which also insures more than 50 million people in the U.S. And it turns out that more than two-thirds of Medicaid recipients are enrolled in a form of managed care that is somewhat similar to Medicare Advantage, in which basically Medicaid is a state administered program and it primarily provides health insurance for lower income Americans. And so, as with Medicare Advantage, in Medicaid, many state governments pay a fixed amount per member per month to an insurance company that then coordinates and finances care for recipients.

And I think our findings for Medicare Advantage suggest that — now, we didn’t study Medicaid, so I hesitate to extrapolate from one program to another — but to the extent that the contracting details are similar in Medicaid as in Medicare, it seems plausible that the level of reimbursement to these plans — changing it either up or down may not have a huge effect on Medicaid recipients.

And this is just more general. The U.S. spends vastly more on medical care than any other country on the planet. As a share of our economy, there’s nothing close. And partly because of that, it’s not so surprising when we look at what we’re getting for that last $100 or last $500 dollars on the margin — we often find not much.

And so, the Medicare Advantage findings may have implications for Medicaid managed care [and for] government spending on health care more generally — that on the margin we’re already spending so much more than other places that there are a lot of opportunities to cut with minimal adverse impact on consumers.

Knowledge at Wharton: Is there any story in the news right now that is relevant to your research?

Duggan: Well, this paper was itself featured on the news a couple of times. But very recently, just a week or two ago, the federal government decided to hold off on part of the reduction in Medicare Advantage reimbursement that was called for in the Affordable Care Act. And I think there were well-intentioned reasons for that — a concern that if they paid the plans less, fewer people would end up enrolled in the plans, and those who were enrolled would see lower quality. I think our research is pretty relevant to that. It was a pretty big news item because it’s another example — there have been a number of things in Obamacare that have been delayed in one way or another — of such a delay. Our research suggests that when … policy makers are ready to implement some of those reimbursement cuts, that the impact for consumers may not be that negative.

Knowledge at Wharton: What misperceptions might your study dispel?

Duggan: There’s a general view that as the government pays more for health care or for many services, that this is likely to benefit the people enrolled in the program, the people attending the school, the people driving on the road or what have you. And so, to the extent there is some conventional wisdom, it may be that reductions in let’s say Medicare spending will harm Medicare recipients. And we’re not going to extrapolate to all components of Medicare, but at least in this pretty big part that accounts for 30% of Medicare recipients … our findings pretty clearly indicate that paying somewhat less doesn’t necessarily harm consumers. And conversely, paying somewhat more doesn’t necessarily benefit consumers all that much.

That’s important because the country is going to grapple with some pretty difficult decisions — maybe not tomorrow, maybe not next year, but in the not too distant future given the demographic changes — about how we’re going to reform Medicare, Medicaid and Social Security. More evidence about what are the implications of either paying less in Medicare or other changes in entitlement programs that will make them somewhat more fiscally sustainable — more of that kind of research — is going to be important.

“Our findings pretty clearly indicate that paying somewhat less doesn’t necessarily harm consumers. And conversely, paying somewhat more doesn’t necessarily benefit consumers all that much.”

Knowledge at Wharton: What sets your research apart from other analysis on this topic?

Duggan: I think there’s been a fair amount of work comparing Medicare Advantage with traditional Medicare. There’s been much less work asking the question, “How much better does Medicare Advantage become as we pay health insurers more?” So, I think that’s something that really helps to differentiate our research from other studies. And [it] also tries to drill down and understand how companies are impacted by more generous payment from the government. When the government offers to pay more for a product, in this case health insurance for Medicare recipients, we see companies respond to that. They enter it somewhat more aggressively. But surprisingly to us, the increase in competition that is generated by that additional payment doesn’t seem to translate into better benefits for consumers.

It’s not like this will be the last research written on this topic, but I think really understanding in the U.S. health care system and what we get on the margin for additional spending is really important because it’s a huge chunk of the economy and it’s going to grow bigger and bigger as a result of demographics and other factors.

Knowledge at Wharton: What will you look at next? How will you follow up your research?

Duggan: One thing we’re eager to know is, which are the firms who are on the [margin] bubble for entering the Medicare Advantage market versus not entering? There are some insurers that seem to operate whether reimbursement is generous or somewhat stingy. But then there are marginal firms that come in when the government pays somewhat more. Understanding who these firms are — or whether they offer a somewhat different level of quality, perhaps a lower level of quality than the incumbent firms — might help us to understand better why we’re reaching the conclusions that we are. So, how do the incumbent firms differ from the firms that are on the bubble…? That’s one area we’d like to work on.

Additionally, in related work I would like to perform similar analyses for the state-based health insurance exchanges. A big part of Obamacare is the set up — we’ve heard about healthcare.gov — through which about 35 states enrolled people for their insurance exchanges and then another 15 states kind of did their own exchanges. These are brand-new marketplaces through which more than seven million people have enrolled for health insurance. Another area that I’m eager to work on … is to understand what determines how many firms are entering these exchanges — different markets in these exchanges — and how those decisions by health insurers influence the quality of coverage that’s available, and the level of premiums.

I think some geographic markets are benefitting from the presence of many different health insurers, whereas others have just one or two. There are parts of the U.S., entire states that are served by just one or two health insurers. It will be important to understand those consumers being short-changed relative to their counterparts in places with somewhat more competition. That this isn’t exactly related to Medicare Advantage, but it is essentially trying to understand how the design of a government marketplace, a government administered marketplace — effects the quality and price of a very important product, which is health insurance.