Medicare and Medicare Advantage

By Bill Johnston

In December 2023, the New England Journal of Medicine published an insightful paper about the two medical insurance options offered to citizens 65 and older: Medicare and Medicare Advantage. “The Predominance of Medicare Advantage” was written by by Gretchen Jacobson, Ph.D., and David Blumenthal, MD, MPP.

In 2024, for the first time in the history of Medicare, the private, mostly for-profit Medicare Advantage plans will have more than half of the beneficiaries. This historic milestone represents an excellent opportunity to factually assess the overall performance of our two different national medical insurance programs.

The article discusses the federal government’s two health insurance programs: the traditional, public, non-profit Medicare Program and the largely for-profit, private Medicare Advantage program (HMOs & PPOs). The authors intend to determine how to improve both insurance options. I have edited and summarized the article for clarity and brevity, and to add my observations. Also included is supplemental material to further explain essential points and subheadings.

The Medicare Advantage plan companies contract with CMMS to insure beneficiaries. Advantage plans pay medical providers a fixed amount prospectively for each covered beneficiary, regardless of the care provided. Private plans are thereby financially incentivized to find ways to reduce quantity or price. The possibility of saving money was a significant rationale for CMMS to contract with Advantage insurers.

All Advantage plans limit provider networks, and most require beneficiaries to receive prior authorization to cover the costs of specialized care. Complaints about such prior authorization requirements have increased recently. In contrast, traditional Medicare generally allows beneficiaries to use any provider that accepts Medicare payments without needing approval before receiving services.

But Did you know?

How do the results compare between Medicare and Medicare Advantage?

Surprisingly, the private Medicare Advantage program has not saved the federal government money. According to the Medicare Payment Advisory Commission, Advantage plans cost Medicare $27 billion more in 2023 than public Medicare for the same number and type of patients. Risk-coding differences alone increased payments to Advantage plans by $80 billion between 2007-2021.

Higher Advantage costs increase federal spending on all of Medicare and Part B premiums and deductibles for all beneficiaries, even those in traditional Medicare, because Part B premiums and deductibles are calculated based on the projected spending for both traditional Medicare and Advantage.

Advantage Plans have also benefited from favorable selection. Higher-spending enrollees leave Medicare Advantage for traditional Medicare over time as their health needs become more significant. Adding favorable selection to the estimated cost would cause estimates of overpayments to Medicare Advantage plans to exceed 6% substantially.

The high total costs of Medicare Advantage have coincided with a surge in insurer profitability. Some prominent private insurers have even dropped out of the private employer-based insurance market to concentrate on the more profitable Medicare Advantage.

The following are rising concerns about the Medicare Advantage program:

There are questions about the future of our health care system.

• Can CMMS afford the Medicare Advantage Program?
  It cannot afford it with the current business model. The incremental costs result in higher federal expenditures and deficits and higher costs to all beneficiaries. These costs add political pressure to trim Medicare benefits and increase federal taxes. The power of the private Advantage industry and the vast numbers of older voters enrolled in Medicare Advantage plans also make it politically challenging to alter the program’s course dramatically.
• Would it be fairer and wiser to cover supplementary services directly for traditional Medicare and Advantage patients?
  Yes. Older and disabled Americans are very attracted to Advantage plan design aspects, such as extra benefits and caps on out-of-pocket spending. Legislative efforts to cover such services under traditional Medicare have failed repeatedly because of their explicit cost. Still, the federal government now pays for them less visibly through its higher payments to private plans.
• Have the profits and surpluses earned by Advantage plans become excessive?
  Probably. These profits and surpluses seem at least in part the result of federal policy decisions and may not, in all cases, represent actual efficiencies or higher value.
• Has Traditional Medicare proven more cost-effective than Medicare Advantage?
  Yes. There are strong indications private Advantage plans have not competed with public Medicare on a level playing field.
• Should Medicare Advantage plans start to submit claims data to the Centers for Medicare and Medicaid Services?
  Yes. Claims data from traditional Medicare provide an invaluable source of information on the care of Medicare patients, & how the American healthcare system behaves more generally.