Medicare Advantage, which funnels government healthcare benefits through privately-run, managed-care insurers, has grown so fast that within months it’s expected to be the dominant form of coverage for seniors.
That’s largely because the plans, most of them HMOs, offer lower out-of-pocket costs, plus added benefits not covered by original Medicare, such as dental, vision and prescription drugs. Some Advantage plans even throw in gym memberships.
The one thing that Medicare Advantage has not done is curb the government’s healthcare spending, even though that was a big selling point in Washington when it was approved in the mid-1990s as Medicare Part C.
Today Medicare spends considerably more for an Advantage member than it does for a comparable enrollee in original Medicare Parts A and B.
As a result, a program born out of a desire to deliver better care and more choices for seniors while reducing government costs is instead generating hefty income for private health insurers and keeping Medicare on a path to insolvency by decade’s end.
“The status quo will continue to put untenable pressure on Medicare financing,” said David Lipschutz, associate director of the Center for Medicare Advocacy in Washington.
He said the Biden administration has done more than others to address issues related to excessive Medicare Advantage payments and aggressive marketing schemes, but most analysts say they’re likely to have little effect.
Medicare’s budget woes have been building for years, and the current battle over the nation’s debt ceiling may put renewed focus on restraining the skyrocketing costs for entitlement programs. Federal expenditures for Medicare in all forms are likely to reach $1 trillion this year, second only to Social Security as Washington’s most costly element in the so-called safety net.
But Medicare and Social Security are politically so explosive that almost no one in Washington is willing to talk about the issues publicly, let alone propose spending cuts that will draw the ire of millions of older voters. Biden has promised to keep both programs off limits to Republicans seeking to slash government spending as part of the debt-ceiling talks.
There are also health spending pressures that neither side can do much about. The number of seniors is growing as the U.S. population ages. They are living longer and seeking more expensive medical care to help them lead better and more productive lives.
Against that challenging backdrop, the shift to Medicare Advantage represents a profound change with far-reaching consequences. It already counts as members nearly half of all 65 million people who are 65 and over and eligible for Medicare. More than 3.3 million Californians have Medicare Advantage.
“Today Medicare looks more like a marketplace of private plans than a national public health program,” said Tricia Neuman, Medicare policy expert at KFF, the San Francisco nonprofit healthcare research organization. She said it’s not clear whether Medicare Advantage is delivering better long-term health outcomes.
When it was introduced more than two decades ago, Medicare Advantage had been devised as a money-saving plan. Traditional Medicare pays doctors and hospitals a fee for each service they render, but with Medicare Advantage, private health plans — most operating as health maintenance organizations — are paid a set amount per patient per month, regardless of how many, or how few, medical services are used.
Like other managed care plans, participants typically select primary physicians from a network of providers, and must obtain referrals to visit specialists.
That fixed amount covers everything a doctor or other provider does for a patient. It’s called capitation, and the idea was to encourage medical providers to be more efficient.
Initially, capitation rates for Medicare Advantage were set at 95% of the average cost of an enrollee in original Medicare.
But later, officials added a so-called risk-adjustment process. Not wanting to incentivize insurers to go after only healthier people, Medicare created a complex payment formula that factored in local demographics, health plan quality ratings and the medical status of enrollees. In general, the sicker the member, the bigger the capitation.
That worked almost too well. Advantage plans enrolled a lot of sicker people, including many lower-income beneficiaries.
And they began writing down every medical condition in a member, often too aggressively and sometimes inappropriately “upcoding” to boost the capitation amount.
Over the years some of the largest Medicare Advantage plans have been accused of deliberately making patients look sicker than they really are, for example recording diagnoses of patients who had not been seen in weeks or adding medical conditions after cursory assessments and incomplete tests.
What’s more, health plans also figured out what they needed to do to get high quality ratings for bonus payouts. Last year 90% received four or five stars.
The overall result: Today Medicare is spending 6% more for an Advantage member than it would have if that person had been in original Medicare, according to MedPac, the nonpartisan legislative agency that advises lawmakers on Medicare financing. Some analysts estimate the difference is even greater.
MedPac, in a March report to Congress, blamed it on a flawed payment system, saying the policies “undermine the goal of plans competing to improve quality and reduce healthcare costs.”
Under Biden, the Centers for Medicare & Medicaid Services announced plans earlier this year that it would start auditing Advantage plans to recover overpayments, but experts doubt they’ll recoup much.
Health insurers don’t seem particularly worried. Andrew Witty, head of UnitedHealth Group, the No. 1 provider of Medicare Advantage health plans with 7.5 million enrollees, said in April that he expects that business “to grow strongly for years to come.” Humana, the second largest Advantage insurer, recently announced it was withdrawing from the commercial employer group market to focus on Medicare.
Wall Street analysts who follow for-profit healthcare finances say that for every dollar of Medicare Advantage payment, insurers on average spend about 85 cents for medical expenses and another 10% for operational overhead such as salaries, leaving about 5% for net profit. While that is slightly less than the commercial health insurance market, what makes Medicare Advantage so desirable for insurers is that it brings in a lot more dollars per enrollee, reflecting their age and greater medical utilization.
According to KFF’s analysis, the amount of Medicare Advantage premium, or payments from Medicare, left after accounting for medical claims was $1,730 per enrollee in 2021 — more than double the gross margin for someone in a group employer or individual plan.
Moreover, with still millions more baby boomers aging into Medicare, that population is growing at multiples of the under-65 commercial market. No surprise then that more than 180 insurers and organizations are currently offering Advantage plans, said Gretchen Jacobson, the Medicare expert at the Commonwealth Fund, a private foundation promoting better healthcare.
Medicare specialists and health economists tend to be wary of Medicare Advantage, partly because so many seniors have jumped into these plans without knowing all the limitations and caveats. Enrollment has surged along with a bombardment of television ads, some confusing and misleading, which Medicare officials are now starting to go after.
Consumer advocates also warn that HMOs in their heyday in the 1980s and ’90s often cut costs by making it difficult for patients to access specialists and denying medically necessary care.
Last year, government investigators said that their study found that 13% of denials by Medicare Advantage health plans would have been approved under original Medicare. In recent months, UnitedHealthcare and Cigna, two of the largest Medicare Advantage health plans, announced they would reduce their prior authorizations for certain procedures.
Still there’s been no widespread consumer backlash with Medicare Advantage as HMOs saw in earlier decades. And surveys have shown that Advantage plans overall enjoy a high level of member satisfaction, comparable to original Medicare.
A big reason is the added coverage for vision and dental care, both of which have become very expensive and both of which involve medical problems that loom even larger among seniors .
Also, more and more doctors have given up individual private practice and joined large medical groups that include hospitals and other facilities. So while original Medicare beneficiaries have greater choice — in theory they can go to any doctor or hospital — Advantage plans in some areas give members access to the highest-rated providers in their networks.
George Halvorson, the retired chief executive of Kaiser Permanente, says he recently had a surgical procedure on his skull, a craniotomy, at the renowned Mayo Clinic. Because he was a member of the Minnesota Blue Cross Medicare Advantage plan, he said, all of it was covered. Traditional Medicare beneficiaries are responsible for 20% of the charges, although those who can afford it buy supplemental insurance (Medigap) to cover the gap.
Halvorson argued that Medicare Advantage’s popularity comes down largely to good results. He said, for example, that Medicare Advantage has sharply reduced the number of expensive amputations by preventing foot ulcers. More generally, studies have shown a higher percentage of people in Medicare Advantage use preventative healthcare services than those in original Medicare.
Still, after a review of more than 60 studies on the subject, KFF analysts said they found “few big differences” between Medicare Advantage and traditional Medicare on a variety of measures.
There’s some evidence that hospital readmissions may be lower with Medicare Advantage, but research also shows people in traditional Medicare tend to have better access to top-rated hospitals for services like cancer treatment and to the highest quality skilled nursing facilities.
Regardless, practically everyone sees Medicare Advantage enrollment growing.
“There’s no stopping it,” said Bonnie Burns, a longtime Medicare specialist at California Health Advocates, a nonprofit counseling and advocacy group.
“There’s a revolution going on,” she said. “And I don’t think it’s clear where all this is going to wind up.”