Our two Medicare choices: Medicare and Advantage

By William Johnston

Introduction

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. Written by Gretchen Jacobson, Ph.D., and David Blumenthal, MD, MPP, the paper is titled "The Predominance of Medicare Advantage."

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 in 2024.

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 healthcare 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.

The full text of the article, including footnotes, can be found at NEJM.org, and then search for "The Predominance of Medicare Advantage." I have edited the article for clarity and brevity and offered my observations. Also included is supplemental material to further explain essential points and subheadings.

Background

Traditional Medicare

The traditional plan pays medical providers a fee-for-service, with no limit to the total amount spent annually.

Payments from the Centers for Medicare and Medicaid Services (CMMS) to Medicare Advantage companies are called rebates and are projected to increase significantly in the coming years.

Medicare Advantage

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 Medicare Advantage insurers.

All Medicare 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.

Did you know?

1. The original purpose of including private insurance companies in Medicare was to allow the Medicare program to benefit from the reputed efficiencies of the private insurance market and enable patients to receive care from the few HMOs that existed at the creation of Medicare.

2. Later, Congress made it easier for Medicare beneficiaries to enroll in Medicare Advantage plans to introduce more robust private-sector competition into a publicly run program.

3. Medicare Advantage plans offer both HMO and PPO options. In most cases, HMO Plans limit medical care to only medical providers from within the plan network. Medicare PPO beneficiaries are free to visit the medical care provider of their choice. Unlike an HMO plan, a PPO plan may cover some of the care you receive outside the plan network, but you will likely pay higher out-of-pocket costs for care you receive outside the network.

4. Although over 180 insurers provide Medicare Advantage plans, the three largest, UnitedHealth Group, Humana, and CVS, accounted for 56% of Advantage enrollments in 2022. All three are for-profits seeking to increase and grow profits.

5. Controversy rages over whether private plans engage systematically in "upcoding," the recording of diagnoses not expected to require treatment that may be exaggerated or even fabricated. An entire industry has arisen to help Medicare Advantage plans maximize their ratings.

6. Federal spending for private Medicare Advantage exceeds spending on public Medicare. In 2023, total payments to Advantage plans were expected to average $12,453 per person, which is 6% higher than what it would cost to cover similar persons in traditional Medicare.

7. There are obstacles to disenrolling from Advantage. Beneficiaries who switch from Medicare Advantage plans to traditional Medicare may find insurers offering Medigap plans charging higher premiums for preexisting conditions or refusing to cover them. Similarly, those with retiree health coverage must use plans arranged by their former employers or unions, which are increasingly choosing Advantage.

How do the results compare between the two Systems?

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:

• Exclusion of highly reputed providers of cancer care

• Being more likely to have observation stays rather than admissions to the hospital.

• Use less home health care and shorter post-acute stays

• More likely to go to home health agencies & nursing homes with lower quality ratings.

• Both providers and patients complain about delays in payments.

• Recent evidence suggests beneficiaries in Advantage plans who use post-acute services have less favorable outcomes than those in traditional Medicare.

• Higher rates of dis-enrollment from plans among racial and ethnic minorities and high-need beneficiaries have also raised questions about the quality of Medicare Advantage plans.

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.

A recent report of losses by one of the primary Medicare Advantage Providers adds another dimension to the issue.

• Humana recently announced a steep loss for the 4Q and signaled its financial woes will extend into at least next year. The company suggested the issues extend through the entire Medicare Advantage industry. Shares of Humana fell 12%, and shares of rivals CVS Health, UnitedHealth Group, and Centene were also down.

• The loss of $591 million, compared with a loss of $71 million a year ago, is worse than Wall Street expected. The company also downgraded its projected 2025 results. Humana said its unprecedented unprofitability reflected more significant dynamics across the Medicare business, and the industry woes will likely persist for years.

• Humana suggested the industry was facing a fundamental reset. Humana had already been under pressure from its investors.

Future View

• Federal authorities and plan stakeholders face an increasing challenge to continually craft an Advantage program that is affordable, high in quality, free of abuse and meets the needs of beneficiaries. The for-profits significant reported financial losses must be addressed to regain a sustainable Advantage program.

• For now, the fundamental features that make Medicare Advantage plans attractive to beneficiaries & investors remain in place, making it likely the program will continue to grow if the financial pressures are solvable.

• New Federal policies to improve risk management, correct coding, limit payments for poor quality, and remove distortions in the Medicare Advantage marketplace would better test the value of plans for beneficiaries and taxpayers.

• For example, policies allowing people to get Medigap if they switch to public Medicare would easily enable beneficiaries to follow their preferences. Regulating broker commissions could improve advice to beneficiaries about whether private plans are best for them. Accurate and accessible provider directories would help reduce bait-and-switch tactics.

• As Advantage continues to grow, federal authorities and plan stakeholders face a continuing challenge to craft a private program that is affordable, high in quality, and free of abuse and meets the needs of beneficiaries.