top of page

How Medicare Advantage plans impact traditional Medicare

AARP prepared a Special Bulletin this month to inform readers about Medicare’s open enrollment options during this year's open enrollment period, which runs from October to December. Overall, the articles were well-written and did a superb job of explaining the choices for members.

My interest in the Bulletin is to highlight an important point somewhat buried in all the information: Medicare Advantage Plans, as currently constructed, are crushing the traditional Medicare program and costing taxpayers billions more than traditional Medicare. Those increased costs to taxpayers are for the most part going into the profits of private insurers like United, Humana and Evalence to name of few. The Medicare program is struggling financially and yet it is giving away billions in profits to private insurers.

Let’s begin with the facts. Traditional Medicare has been on a steady decline in favor of Medicare Advantage (MA), which is private insurance, since 2008. Today, MA covers more than 50 percent of Medicare recipients. In other words, Medicare has in effect outsourced more than half of the program to private insurance companies. The primary reason consumers are selecting MA is because these plans cost less and cover more services. How is MA able to achieve these results?

  • The first reason is that MA offers patients a restricted network of providers to save money.

  • The second reason is that MA uses their volume of patients to pay the providers less for their services.

  • The third reason is that MA plans wisely focus on primary care as the key to offering better care at lower prices. They are investing billions into acquiring their own primary care practices.

  • The fourth reason is that MA uses more restrictive access to expensive services by requiring pre-certification before services are allowed.

  • The fifth reason is that MA plans to aggressively market their product to consumers.

These practices save significant dollars for MA plans which go mostly into the private insurers' profits. However, my greatest concern is that Medicare pays the MA plans billions more per year than the cost of traditional Medicare. Substantial research by the Commonwealth Fund (and others) documents “MA plans cost the government and taxpayers more than traditional Medicare on a per beneficiary basis. In 2022, that additional cost was 4 percent [but it has been as high as] 17 percent.” (Medicare Advantage Policy Primer May 3, 2022).

Based on the increasing and massive profits from MA plans, it appears that their cost savings and increased payment go heavily into these private insurers' profits.

So why does Medicare pay these MA plans so much? The answer is the manipulation of coding. According to the Commonwealth Fund, “the government pays MA a set rate per person, per year under what is called a risk contract.” That payment amount is adjusted to reflect risk and uses coding to determine the risk level. Unfortunately, coding is easily susceptible to manipulation and MA plans have mastered that manipulation to their benefit, according to published studies. In fact, the Congressional Budget Office (CBO) recommended that the benchmark payments to these plans be reduced by 10 percent in December 2022. This CBO strategy has been criticized by some, arguing that private insurers will merely raise premiums, which would disproportionately impact lower-income individuals on Medicare.

The facts also indicate that costs for traditional Medicare are going up at a rate of 8 percent per year while MA plans are experiencing increases of only 4 percent per year. So MA plans are spending less on beneficiaries and being paid more for that less expensive care by the government. It is important to acknowledge that MA plans are better at managing healthcare expenses than traditional Medicare, primarily because of the five strategies discussed above. Unfortunately, those savings go into private insurers' profits-not to lower costs for taxpayers.

The trajectory of these facts only compounds the financial disaster for taxpayers due to the Medicare population dramatically increasing over the next seven years. Reforming Medicare is painful but not reforming it will be more painful.

The solutions to these problems go well beyond this article, which is why I wrote the book The Journey’s End. This book offers pragmatic solutions to these challenges.

2 views0 comments


bottom of page