Medicare Advantage was meant to save taxpayers money—but plans' revenue far exceeds their costs, research suggests

Although Medicare Advantage (MA) was created as a way to reduce federal spending, the federal government generally pays MA insurers more than the plans actually pay for patient care.

According to New York Times' "The Upshot," MA was created as a way to offer U.S. residents private alternatives to Medicare, in hopes that doing so could reduce federal Medicare spending. About 19 million U.S. residents are enrolled in MA plans, representing about one-third of the total number of U.S. residents who are eligible for Medicare, according to Kaiser Family Foundation data.

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MA beneficiaries typically report high satisfaction with the plans, and research has shown that MA plans generally offer higher quality than traditional Medicare coverage. However, stakeholders in recent years have expressed concerns about MA's costs.

For instance, a study published earlier this year by the National Bureau of Economic Research (NBER) found that the revenue MA plans received in 2010 was 30 percent higher than the amount they paid for medical care. According to the study, MA plans likely received about $20 billion in federal payments they did not spend on medical care.

Amy Finkelstein, an economist at the Massachusetts Institute of Technology and one of the study's authors, said, "Our study found that health care spending for enrollees in [MA] plans is 10 to 25 percent lower than for comparable enrollees in traditional Medicare," adding, "Yet government payments to plans is far above their lower health care costs."

According to "The Upshot," one reason MA plans might spend less on care when compared with traditional Medicare is that MA beneficiaries use lower-cost care or fewer health care services. For example, MA beneficiaries:

  • Are more likely than traditional Medicare beneficiaries to be discharged from hospitals to their homes instead of to skilled nursing facilities;
  • Typically see specialists and receive inpatient surgeries less often than traditional Medicare beneficiaries; and
  • Typically use hospital care less often than traditional Medicare beneficiaries.

One study conducted by Bruce Landon, a Harvard Medical School physician, also found that MA beneficiaries used between 20 and 30 percent less emergency department and outpatient surgical care and received fewer knee and hip replacements than traditional Medicare beneficiaries. Landon said, "This is exactly what [MA] plans were designed to do. They manage the utilization of services while also assuring that enrollees receive recommended care, all at lower cost to patients."

MA plans also tend to enroll healthier individuals when compared with traditional Medicare beneficiaries, which can lead to lower health care costs, "The Upshot" reports.

Despite those lower costs, the federal government pays MA plans more than what they spend on care because of payment formulas and bonus programs Congress put in place as a way to help bolster the private market, according to "The Upshot." In addition, the federal government pays MA plans for administrative and marketing costs, and while the Affordable Care Act sought to curb those payments, MA insurers still receive more in government payments than they spend, "The Upshot" reports.

AHIP weighs in

However, America's Health Insurance Plans (AHIP) has argued that federal payments to MA plans no longer outpace payments for traditional Medicare coverage. According to AHIP, the NBER study was based on data from 2010, when MA payments were greater than those for traditional Medicare. However, AHIP said a recent report from the Medicare Payment Advisory Commission found that MA payments for 2017 were mostly in line with payments for traditional Medicare coverage.

Further, AHIP's Mark Hamelburg said while MA plans typically do spend less on medical care than traditional Medicare, lower spending is "the goal of the program." He added that much of the savings derived from lower spending are given back to MA beneficiaries through new benefits, Axios' "Vitals" reports (Frakt, "The Upshot," New York Times, 8/7; Nather, "Vitals," Axios, 8/9).

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