The enormous success of Medicare Advantage — and the potential risks — explained.
Medicare is undergoing a subtle but fundamental transformation from government program to public benefit provided by private companies, a shift with major implications for both patients and taxpayers.
The driver of that change, an alternative version of the program known as Medicare Advantage, has been the subject of scrutiny in recent weeks. President Joe Biden and House Republicans have been bickering over the administration’s proposed changes to payments for the private plans that sell Medicare Advantage plans. Fresh fears over Medicare’s solvency have renewed the debate about how much the plans cost the federal government. And a new STAT investigation adds to concerns about how private companies oversee the public benefits they are supposed to provide.
Underlying all of those concerns is the fact of Medicare Advantage’s explosive growth. Almost half of people on Medicare, 31 million Americans, are now enrolled in a Medicare Advantage plan, nearly double the share of 10 years ago. It is widely assumed that Medicare Advantage will cover a majority of the program’s beneficiaries within the next few years.
Medicare has traditionally been a government-run insurance program for people over 65 and those with long-term disabilities. Medicare Advantage allows private insurers to offer their own plans that provide Medicare benefits as well as some additional perks not available in the original program. The secret to the program’s success is simplicity. Traditional Medicare is a fragmented program; Part A covers hospital care and Part B covers outpatient services. Patients must enroll in a separate Part D plan for prescription drug coverage that is administered by private insurers. Most people also purchase supplemental coverage, extra insurance that helps reduce their out-of-pocket costs.
Medicare Advantage, also known as Part C, combines those benefits into one insurance plan that also includes an annual limit on out-of-pocket costs, something that does not technically exists in regular Medicare.
But the benefits to patients seem to come at a cost to taxpayers. Though the health insurance industry disputes these findings, MedPAC, the independent committee tasked with overseeing Medicare on Congress’s behalf, found Medicare Advantage plans cost the federal government more money per patient than the original program would have if those same people had stuck with the traditional benefits.
Private companies are also making healthy margins on their Medicare business. A Kaiser Family Foundation analysis found that insurers were making more money per patient in Medicare Advantage than with their individual or employer-sponsored plans. Humana, which covers 5 million beneficiaries, or roughly one in five people who have elected to go with the Medicare alternative, recently announced it was dropping the rest of its portfolio to focus exclusively on the Medicare Advantage market and Medicaid managed care, a version of that government program that is similarly run by private insurers with state supervision.
Patients have clearly found something to like in what Medicare Advantage offers. The program was established in 1997 to give people a streamlined alternative, a private option less overt than more recent GOP voucher proposals.
But scholarly research and news investigations have revealed notable downsides in turning over a program that covers America’s seniors, the people who need and use the most health care, to private companies. Medicare Advantage enrollees are more likely to report trouble affording health care than people on traditional Medicare. Some of the behavior by Medicare Advantage plans, such as using AI to decide when to stop covering services for their enrollees, may be becoming more common in the private sector but is still unheard of for public programs.
The trade-off the United States seems to be making is accepting more administrative bloat and more stringent provision of benefits in exchange for a more navigable Medicare plan. The trade-off is one other countries have made as they designed universal health care programs. (A similar trend is underway in Medicaid.)
But as concern grows about Medicare facing a potential financial cliff, and evidence mounts about the costs of Medicare Advantage, the risks of the trade-off are becoming clearer. Medicare is no longer what it used to be: Once the epitome of government-run health insurance, its benefits are on the verge of being primarily funneled through private companies. Any attempts to change the program will have to wrestle with that reality.
How Medicare Advantage got so popular
Pilot programs for private insurers’ administration of Medicare date to the 1970s, but the Medicare Advantage program was created by the Balanced Budget Act of 1997, at a time when concerns about Medicare’s solvency ran high. Originally known as Medicare Choice or Part C, it was renamed Medicare Advantage in 2003, when Medicare was expanded to cover prescription drugs.
The idea was to provide patients with a simpler Medicare plan. If you have traditional Medicare, you are combining Part A, for which most people don’t pay a premium, and B, for which most people do, with a separate Part D drug plan, and potentially supplemental coverage too. With Medicare Advantage, people can enroll in a single insurance plan that would provide the full menu of benefits.
Some Medicare Advantage plans also include dental, hearing, and vision benefits, services that are not covered by the traditional program but can be critical for seniors. Medicare Advantage plans also set annual caps on out-of-pocket costs, which don’t apply in traditional Medicare. (Supplemental coverage or Medicaid instead lower costs for most — but not all — Americans who opt for the original version of the program.)
Beneficiaries pay monthly premiums to purchase a Medicare Advantage plan; people with lower incomes qualify for subsidies. There are notable limitations in coverage. In traditional Medicare, for example, patients can go to any doctor or hospital that accepts Medicare; Medicare Advantage has more limited provider networks, and patients can be on the hook for higher costs if they are treated at an out-of-network doctor or hospital.
Premiums cover only about 10 percent of Medicare Advantage’s costs. The federal government pays Medicare Advantage plans a flat rate for the expected cost of covering their particular customers and the insurers are required to adhere to certain rules about benefits and costs. But companies still have flexibility about how to run their plans and have a financial incentive to limit expenses. The less money they spend, the more they get to keep for themselves.
Still, customers will vote with their feet and, after slower-than-expected initial uptake, Medicare Advantage is now growing so quickly that it will soon be the dominant form of Medicare.
Why the movement? In a 2021 analysis published in Health Affairs, Ken Terry and David Muhlestein observed that “we’re witnessing the rapid privatization of Medicare” and offered an explanation: Medicare Advantage plans “offer beneficiaries a better deal than traditional Medicare.”
The premiums people pay for a Medicare Advantage plan can be significantly lower than the combined cost of supplemental coverage and a Part D plan — less than $50 compared to more than $200 on average, per Terry and Muhlestein — with the added benefit of having only a single insurance card. According to a 2022 Commonwealth Fund survey, the additional benefits offered by Medicare Advantage plans (such as dental or vision) and the limits on out-of-pocket costs were the most common reasons seniors gave for choosing the alternative over the original program.
In general, patients with traditional Medicare and people with Medicare Advantage say they have similar satisfaction with their benefits. On some metrics, the latter group excels; people with a Medicare Advantage plan are more likely to have a regular doctor and to say they have received preventive health care services. With a few exceptions for particular medicines, Medicare Advantage customers report fewer problems accessing their prescription drugs too.
But people enrolled in Medicare Advantage also experience a unique set of problems compared to people who choose the original program.
The potential downsides of Medicare Advantage’s growth
Those problems, based on the available research, start with cost. A higher percentage of Medicare Advantage enrollees report having problems affording care (about 19 percent, per a 2021 KFF analysis) than those on traditional Medicare (15 percent), though people on the original program without supplemental coverage had the most problems with affordability (30 percent). (Most people on Medicare do purchase this coverage.) Black Americans and people with lower incomes were more likely to report having trouble paying for health care while enrolled in Medicare Advantage.
Other findings appear worrisome too. Medicare Advantage patients are less likely to receive medical care at the highest-rated facilities for their particular needs, compared to people with traditional Medicare, a reflection of more restrictive provider networks. Families also reported more satisfaction with end-of-life care when using traditional Medicare.
Specific business practices by Medicare Advantage plans, and their consequences for patients, have also been called into question by investigative reporting and government inquiries over the past few years, practices that seem to run counter to Medicare’s function as an entitlement program for Americans over 65 and those with long-term disabilities.
This week, STAT reported on the increasing use of AI algorithms by these plans to determine when to cut off benefits for a customer. The lead example of their reporting was an 85-year-old woman with a broken left shoulder, whose insurer followed an algorithm that said she should be ready to leave a nursing facility and return home within 17 days.
On the 17th day of her stay, the insurer said it would no longer cover the bills for her stay, even though her doctors and nurses observed that the woman was still in extreme pain and incapable of doing basic activities, such as dressing herself or going to the bathroom. It took more than a year, and a federal judge’s order, for the patient to receive payments for the three additional weeks she needed to stay in the nursing facility. Doctors shared other stories of patients who saw benefits withdrawn at the end of their life, leaving their families to fight over the leftover bills for years after their loved one had died.
A report from federal investigators published in April 2022 found that tens of thousands of Medicare Advantage customers were denied coverage for services they should have been entitled to. A significant number of prior authorization denials (13 percent) and payment denials (19 percent) reviewed by the investigators were for services that should have been covered by the program but were not.
“Denied requests that meet Medicare coverage rules may prevent or delay beneficiaries from receiving medically necessary care and can burden providers,” they wrote. “Even when denials are reversed, avoidable delays and extra steps create friction in the program.”
In addition, as the New York Times reported in October, most of the largest Medicare Advantage insurers have been the subject of federal audits that found they improperly billed the program and of litigation that accused them of fraud. Taken together, the plans overbilled Medicare by between $12 billion and $25 billion in 2020, depending on the estimate.
Though Medicare Advantage was first established as a tool for reining in spending, these private plans instead seem to be perpetuating the program’s solvency crisis.
According to MedPac, since 2004, Medicare has always paid more to Medicare Advantage plans for the cost of covering their customers than the program would have spent if the same beneficiaries had instead been enrolled in traditional Medicare. Some years, the private plans were receiving a nearly 20 percent markup compared to the original benefit structure.
Those high payments are drawing more attention with an insolvency crisis for Medicare Part A, which covers hospital bills, on the horizon. Part A is funded almost entirely through the program’s dedicated payroll taxes. If those benefits cost more than the government receives in Medicare payroll taxes in a given year, as can happen in an economic downturn, the difference comes out of a trust fund earmarked specifically for Part A. The Medicare trustees, who issue annual reports on the program’s finances, project that Medicare spending will begin outpacing revenue again in 2024, requiring the program to dip into the trust fund. The trust fund is projected to be fully depleted by 2028 without further policy changes.
The growth of Medicare Advantage is contributing to the financial crunch. Those plans receive funding based on the type of service provided to their customer, which means money for hospital care comes from Part A. Annual Part A payments to Medicare Advantage plans are expected to increase from about $176 billion in 2022 to $336 billion by 2030.
With revived concerns over Medicare’s solvency and evidence of excess spending in Medicare Advantage, policymakers are starting to look at making changes to the program. But that won’t be easy.
The health insurance industry will resist big changes or cuts to Medicare Advantage
Health insurers are going to fiercely defend their Medicare Advantage business against any proposed cuts, as the recent flap over the Biden administration’s proposed payment changes reveals. That’s because Medicare Advantage is now the industry’s most profitable line of business. United Healthcare, the nation’s largest health insurer and the largest seller of Medicare Advantage plans, has been aggressively expanding its offerings for people in the program.
That has made insurers very protective of their Medicare Advantage business. Insurers are not quite the lobbying force they were before the Affordable Care Act, but they remain highly influential and they have found allies among Republicans who have always preferred to see Medicare become more of a private operation.
That alliance has targeted in the past month proposed payment changes by the Biden administration. As KFF analysts explained in a recent analysis, the White House wants to crack down on overpayments with adjustments to the complicated formula that determines when Medicare Advantage plans need to pay back the federal government for improper billing. The insurance industry has painted that proposal as a cut, even though the Biden administration estimates that, when the entirety of their proposed payment plan is taken into consideration, Medicare Advantage plans will still see a 1 percent increase in payments from the federal government in 2024.
Health insurers have warned of premium increases and benefit cuts “though there is no clear evidence to suggest that,” according to the KFF analysts. They have been joined by Republicans, who have sought to turn the tables on Biden by accusing him of proposing Medicare cuts after the president had criticized Republican plans to cut spending for the program.
“Joe Biden is trying to gut Medicare benefits. Seniors can’t trust Democrats to protect Medicare,” one Republican campaign spokesperson told Roll Call last month. The Better Medicare Alliance, a lobbying group for Medicare Advantage plans, has started running TV ads asking seniors to petition the White House to reverse the proposed payment changes.
Though independent fact-checkers have concluded calling the Biden proposal a cut is inaccurate, the entire episode demonstrates Medicare Advantage’s growing political clout and previews the fight that would likely meet any efforts to seriously alter the program.
The policy structure of Medicare Advantage is not without precedent. States have outsourced much of the administration of Medicaid to managed care plans. Countries like the Netherlands have set up health systems that use private insurers, operating under strict government oversight, to provide insurance benefits to their citizens. Giving people more choice and a more streamlined experience can have its benefits, as evidenced by the popularity of Medicare Advantage in the US.
But asking private actors, with profit motivations, to administer government benefits to which people are supposed to be entitled brings risks. People are more likely to have trouble affording health care and their claims are more likely to be denied; that is true in places like the Netherlands, compared to other countries with more direct government administration, and that is true of Medicare Advantage when compared to the traditional Medicare program.
To date, policymakers have seemed content to let Medicare Advantage grow without much moderation. Medicare beneficiaries have been attracted to its comparative simplicity. But the costs of funding the program, amid the political environment’s shift toward more fiscal restraint, and the problems experienced by patients have put the program under the microscope.
It is difficult, at this point, to imagine the Medicare program without Medicare Advantage. The question is whether policymakers can make it more cost-effective and crack down on insurer behavior that runs counter to the program’s objectives. Recent events suggest that if they try, they will have a fight on their hands.