Medicare Advantage, Deciphered

Another open enrollment season for Medicare plans has gone by, making this a good time to ask how Medicare Advantage (MA) actually works. This privatized alternative to traditional (“original”), government Medicare tempts elders with an advertising blitz during the 2-month window when it is possible to switch plans. As with many products or services however, the glossy exterior that is depicted in these ads is doesn’t necessarily portray what enrollees will actually experience.  How coverage is engineered by various MA plans is one matter, beyond the scope of this post. First, it’s worthwhile to consider why and how this parallel system exists. It is a topic that ought to interest enrollees and taxpayers alike.

About 40% of Medicare beneficiaries use one of more than 3,500 MA plans, which are run by private insurers and can offer additional benefits beyond traditional Medicare.  It is an holistic alternative to the piecemeal design of traditional, government-run Medicare, with its Parts A, B & D. The most visible drawback is that it relies on narrow networks, and thus constrains access to specialists. MA limits choice. In contrast, providers are essentially required to accept traditional Medicare, which opens up more treatment options. Beneficiaries in traditional Medicare can also exercise choices by purchasing supplemental coverage.

These surface characteristics bely what is actually going on with MA.  

1. Fails to contain costs: MA is less effective than traditional Medicare at controlling spending. It’s a valid question who exactly MA saves money for. It isn’t taxpayers. And it doesn’t appear to help curb healthcare costs. In “Higher and Faster Growing Spending Per MA Enrollee…”, the Kaiser Family Foundation reports that, on average, costs were $321 higher per person (compared to traditional Medicare) in 2019. Privatized Medicare has always cost more than traditional Medicare. It doesn’t promote competition either, as if that were its aim. A Commonwealth Fund study report using the HHI (Herfindahl-Hirschman Index) to measure this has effectively deflated the argument that privatized Mcare (MA) produces greater competition.   

2. Privatization: Fundamentally, MA is best understood as an incursion on public healthcare, and as a means to derive profits for private entities. If it isn’t lowering costs, this is the latent objective. Traditional Medicare was conceived in the 1960’s. This privatized alternative emerged during the 1990’s, through its predecessor, Medicare Choice. Its benefits accrue to the advantage of private interests running the program.

3. Lack of transparency: Head-to-head comparisons are made difficult because MA plans function like a black box (or boxes). What is covered, and how it is paid for isn’t clear. This proprietary knowledge is guarded. The context is similar to how pharmacies, hospitals and other providers are loathe to reveal the actual negotiated payments for their services. There is little data comparing value or expenses between plans. While this should concern customers, for the outfits that run MA plans, it helps companies skirt regulatory oversight.

4. Gaming for profit: Over the years, health plans have refined proprietary techniques to extract as much profit from their MA products as possible. Their incentives are aligned with that aim rather than health promotion or controlling healthcare costs. One of the best-publicized techniques is using risk scores to drive MA reimbursement. Don Berwick, the former head of the Centers for Medicare and Medicaid Services, calls these “risk-coding games”. Upcoding is the best example. By designating ‘sicker’ patients it is possible to make more money. Algorithmic decision rules strategically choose the most highly-reimbursed billing codes, supplemented by interviews, assessments, etc. for this purpose. 

5. Bloat: The Center for Medicare and Medicaid Services is overpaid with respect to MA. The situation is not unlike a defense appropriations bill. Private interests rely on government contracts for revenue and jobs. The influence of these stakeholders has produced a situation where this parallel, privatized system is permitted to continue functioning, even though it costs taxpayers more than the original government-operated method. As Berwick words it, “Medicare Advantage harbors an arbitrage game in which CMS consistently overpays MA plans with no demonstrable clinical benefit to patients”. Essentially, taxpayers and beneficiaries are supporting the companies that operate MA plans.

6. Subsidized marketing: Hiding in plain sight is the fact that MA incurs marketing expenses that traditional, government-run Medicare does not. There are penalties for falling lower than an 85% Medical Loss Ratio (MLR), requirement which assures at least that percentage of their dollars is spent on patient care. In contrast, the administrative costs for traditional Medicare are much lower, typically in the low-single digits. For example, in 2018, they were reported to be 1% . This is common knowledge, yet rarely generates high levels of public interest. A big part of MA revenue is siphoned off for administrative and marketing expenses.

7. Union resistance to public healthcare: Labor unions are another influence in the wings, serving to sustain MA and privatized alternatives. The simple logic is that unions fought hard for their members to enjoy generous healthcare benefits. Privatized health plans weren’t necessarily viewed as a concession. With defined benefit pensions becoming dinosaurs, MA enabled large corporations a cheaper way to preserve health coverage in retirement. Now however, it is labor unions that are sometimes propping up privatized healthcare.  It should be borne in mind that hospitals are major employers, and can be expected to mobilize against any reduction in their revenues. 

8. Pernicious mutations: The net result is that there is no practical way to migrate away from MA at this moment. Instead, new forms of privatized Medicare are poised to displace traditional Medicare. Currently, there’s pressure to expand Direct Contracting Entities (DCEs), which are essentially privatizing traditional Medicare by involuntarily assigning beneficiaries to narrow network panels. Like moths gathering around light, venture capitalists are drawn to MA and related services as means to extract profits, using private equity or other methods. The voluntary aspect of choosing traditional Medicare may go away, especially as pressure increases to insure the most lucrative populations of elders.

With MA cloaked in so many ulterior profit schemes, what are the countervailing forces that act on behalf of beneficiaries? Physicians for a National Health Program and National Nurses United are leading provider organizations. Healthcare-NOW! is nationally organized to promote single payer healthcare, and there are many state and local organizations. The Center for Medicare Advocacy advocates on behalf of Medicare consumers. There are also however industry front-groups, such as Better Medicare Alliance, which are funded by trade associations.

Fundamentally, the landscape is bereft of easy solutions. The concept of Medicare for All has questionable value when the existing system has been disfigured this much by private interests. Preserving traditional Medicare has merit, if only on the basis of being more cost-efficient. A single payer system may evolve over time, but it will be tough to accomplish unless provider reimbursement bubbles can be deflated. As a Federal program, it is difficult to innovate on a state-level. Meanwhile, MA is likely to grow further, aided by marketing campaigns and limited public curiosity about how it functions. 

-published January 5, 2022