Kuttner on TAP: Can Medicare Advantage Be Contained?

Medicare Advantage is a lucrative private insurance product masquerading as part of Medicare. It’s actually an HMO for seniors, offered by every major insurance company, using the trusted Medicare brand and relying on Medicare payments.

Medicare Advantage programs attract customers by covering some things not covered by traditional Medicare, such as vision care and hearing. They compensate for the added cost—and more—by “managing” (and denying) nominally covered services much more aggressively than public Medicare; by targeting their marketing on relatively healthy (and less costly) seniors; and by overcharging the government by abusing the system of risk adjustment in which government pays extra for more serious conditions.

Because of the extra coverage, Medicare Advantage plans are popular and they are rapidly crowding out public Medicare. By the end of this year, more than half of all people enrolled in Medicare will be in Medicare Advantage.

On Monday, the Biden administration took a small but important step toward reining in these abuses. The Department of Health and Human Services issued a rule that will increase the auditing of these plans.

Sample audits by HHS found a pattern of these plans systematically overbilling HHS by exaggerating the patient condition reported, a strategy known as upcoding. HHS expects to collect about $4.7 billion over a decade by clawing back improper overcharges. Meanwhile, the GAO issued a report yesterday on extra services provided by Medicare Advantage programs, and urged HHS to monitor these offerings more closely.

Despite the extra coverage ostensibly provided, studies have found that Medicare Advantage plans are more profitable than most other health insurance industry products, because of the opportunities they provide to game the system. And that suggests that there is a much larger problem here that won’t be solved by a cat-and-mouse game of more aggressive audits—creeping privatization.

Medicare was enacted in 1965 as a public program, but its coverage was not comprehensive. To get full coverage, you had to purchase supplemental “Medigap” insurance—offered by private insurers.

Then Medicare Advantage was added in 1997 (initially called Medicare Plus Choice) as a privatized HMO variant. Since then, optional drug coverage was also added as a purely private program using the Medicare brand in 2003. The Affordable Care Act also piggybacks on private insurance products, with no public option; and every year there is less real competition and higher costs.

The larger lesson is that partial privatization insidiously leads to more privatization, leaving government to pay the added expense. Despite the promises of greater efficiency, it doesn’t save costs but adds costs, as more money goes to industry middlemen and government has to spend more on monitoring.

In the 1990s, when the Clinton administration (!) added the option of privatized Medicare HMOs, there were also efforts to partly privatize Social Security by allowing younger people to divert some of their anticipated benefits into private investment accounts, managed by Wall Street investment firms for a fee.

We dodged that bullet, and Social Security stayed public. And the Biden administration, to its great credit, has started reversing the past moves to privatize the VA, our one oasis of efficient socialized medicine.

But Medicare Advantage will complicate the politics of getting to universal public health insurance, which is a heavy lift all by itself. Medicare for All doesn’t work if it includes privatized Medicare Advantage. Best to keep public programs public.