Medicare Advantage has historically cost 7 to 12 percent more than traditional Medicare, according to the Medicare Payment Advisory Commission. But to conclude that this cost difference proves that private health plans have no place in Medicare misreads the Medicare Advantage experience in an important way: It ignores the decisive role that government has played in driving up the program’s costs. Medicare Advantage is only partly about reducing costs. It is also designed to increase choice for beneficiaries. And the incentives that government gives private health plans to expand choice end up undercutting efforts to save money.
Under Medicare Advantage, private plans deliver Medicare services directly to patients. Insurance companies bid to provide Medicare beneficiaries with a different package of services than traditional Medicare, but their coverage must be at least as generous. The government then reimburses the insurers to cover about 13 million enrollees, or about 27 percent of the Medicare population.
Both insurers and consumers are making choices. Beneficiaries opt out of traditional Medicare if they think a private plan offers them a better deal, and insurers enter the Medicare Advantage market if they believe it will be profitable. The crucial point is that both consumers and insurers need an incentive to take part in the market. That costs money — and it is the government that has chosen to pay the price to give beneficiaries more choices. The result is that insurers compete by covering more services rather than by reducing premiums and improving efficiency to remain profitable at lower premiums.
Read the full report here.
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