Medicare Advantage is great. Except for taxpayers
Every year, from mid-October to early December, millions of Medicare beneficiaries get the chance to pick a new health plan. With dozens to choose from and a blizzard of advertising, more seniors are going with the simplest, cheapest option: privately run plans known as Medicare Advantage.
Such plans are a one-stop-shop. They typically offer perks excluded from traditional Medicare, such as vision and dental coverage, with low or zero premiums and caps on out-of-pocket spending. Despite more limited networks of doctors and hospitals, most seniors who’ve signed up say they’re happy with the choice.
Yet Medicare Advantage has drawbacks — notably, its exorbitant cost. Government reports show the program routinely overcharges taxpayers relative to original Medicare — to the tune of $27 billion this year alone — at a time when the system’s solvency is at risk.
With more than half of enrollees now covered by Medicare Advantage — a share expected to grow briskly — the program could well displace traditional Medicare in the coming years. A better balance between the interests of beneficiaries and taxpayers will be critical for it to thrive as it should.
Private alternatives to traditional Medicare have existed since the program’s inception in 1966. Congress established what’s now called Medicare Advantage three decades ago to offer seniors more choice and (in theory) to keep Medicare’s ballooning budget in check. The government would pay commercial insurers to deliver more efficient care, the thinking went.
But Medicare Advantage has never saved the government money. Congress’ internal advisory committee estimates overpayment to Medicare Advantage plans will reach hundreds of billions of dollars in the decade through 2033. Independent researchers have found that insurers make more than double per patient in the program compared with individual or employer-sponsored plans. Last year, a major commercial insurer announced it would exit the market to focus exclusively on its MA business.
How did Medicare Advantage become, as one study put it, a “money machine”? (Or, less charitably, a “great big rip-off”?)
Insurers submit bids to Medicare that cover the estimated cost of providing standard services to an average beneficiary. Medicare calculates a payment “benchmark” for a given county. (The benchmark can be adjusted higher for certain factors.) If a plan bids below the benchmark, it can receive a “rebate” from the government — funds that are required to pay for extra perks and lower premiums. What’s left goes toward profits and administrative costs. Plans receive bigger payments for riskier enrollees with higher expected health spending.
Without careful oversight, such a system can be easily abused. Insurers have overestimated projected spending, coded enrollees as sicker than they actually are, and delivered fewer services than promised, pocketing the difference. Gnarly prior authorization requirements and other coverage denials also reduce outlays and pad profits. The extent of such practices isn’t clear to seniors when they sign up.
President Joe Biden’s administration is focused on improving oversight. Its new rules targeting deceptive advertising were a step in the right direction, and recent congressional hearings have shed light on abuses that wrongly limit coverage. But too little has been done to change core incentives. Attempts to address overpayment earlier this year were scaled back amid fierce industry opposition.
The best way forward would be to phase out the benchmark system, which — counterintuitively — is designed to overpay. In some areas, benchmarks are set higher than average Medicare costs. This inducement was originally intended to expand coverage. With the program now ubiquitous, it no longer makes sense. (As more beneficiaries move into MA plans, such calculations will become meaningless in any event.) Medicare should instead enable plans to compete directly with each other on premiums as they would in the commercial market. Such a change would allow both taxpayers and beneficiaries to share in savings, which could amount to as much as $230 billion over a decade.
Medicare Advantage is popular for good reason and should remain an alternative to traditional Medicare. With the right payment reforms, the program should work in the best interests of everyone involved.
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