The Medicare Advantage Paradox: How private insurers cost taxpayers billions

Recent studies and reports from the Medicare Payment Advisory Commission (MedPAC) reveal that MA overpayments have significantly burdened taxpayers.

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Medicare Advantage (MA) has recently reached a milestone with enrollment surpassing 30 million. The health insurance industry’s trade group claims MA is beneficial for both members and taxpayers. However, recent studies and reports from the Medicare Payment Advisory Commission (MedPAC) reveal that MA overpayments have significantly burdened taxpayers.

MedPAC estimated that MA over payments added $82 billion to taxpayer costs in 2023 and $612 billion between 2007 and 2024. These over payments are driven by two main strategies: Diagnosis up-coding and avoiding enrollees who require costly care.

MA plans are paid based on a risk-adjustment formula incorporating diagnoses reported by insurers. This allows insurers to inflate the number and severity of diagnoses to boost revenues. Up-coding has resulted in a net over payment of 13 percent last year, despite a 5.9 percent automatic deflator applied by CMS to account for this practice.

Before risk adjustment, MA plans cherry-picked healthier enrollees and managed to drop those needing expensive care. Despite refinements in risk adjustments, MA plans continue to enroll beneficiaries who are less costly for their risk scores, shifting from any healthy older adults to those who are inexpensive for their risk scores.

MA insurers tailor networks to exclude clinicians and centers needed by high-cost patients, encouraging them to avoid MA. Expensive drugs are placed in high co-payment tiers to repel potentially unprofitable enrollees. Prior authorization requirements constrain the use of expensive care and hassle patients needing it most.

MA plans incur significant overhead costs for advertisements, network management, benefit design, executive salaries, utilization review, and shareholder profits. These costs drive their overhead up to 14%, compared to 2% for traditional Medicare. Most of the over payments go towards administrative costs and profits rather than improving patient care.

MA’s managed-care techniques reduce both high-value and low-value services, potentially harming vulnerable patients. MA enrollees requiring complex surgeries are less likely to be treated at specialized centers, experiencing longer delays and higher mortality rates.

Despite efforts to control MA gaming and over payments, past reforms have largely failed. The study suggests abolishing MA and redeploying the $88 billion saved from over payments to upgrade benefits for all Medicare beneficiaries.

Dr. Adam Gaffney, assistant professor of medicine at Harvard Medical School, emphasized that “Medicare Advantage is a bad deal for taxpayers. Money that could be used to eliminate all co-payments or shore up Medicare’s Trust Fund is instead lining insurers’ pockets.”

Wendell Potter, a former insurance executive turned critic of Medicare Advantage, advocates for its elimination, noting the program’s high administrative costs and the excessive payments insurers receive. He acknowledges that while eliminating MA may be challenging due to political influence, reforming MA to address over payments and prior authorization abuses is crucial.

A new academic analysis published in JAMA Internal Medicine details the enormous sums that privatized Medicare Advantage plans have cost U.S. taxpayers in recent years and calls for the abolition of the program, which has been massively profitable for the insurance giants that dominate it. Citing the nonpartisan Medicare Payment Advisory Commission, the paper notes that Medicare Advantage (MA) plans have overcharged the federal government to the tune of $612 billion since 2007—and $82 billion last year alone.

MA plans—now used by more than half of the eligible Medicare population—utilize a range of tactics to reap larger payments from the federal government, which provides insurers a lump sum for each Medicare Advantage patient. The size of the payment depends on the enrollee’s health, which MA plans are notorious for portraying as worse than it is in order to receive heftier government payments.

“Paradoxically, despite those over payments, MA plans spend 9 percent less on medical services than [fee-for-service] Medicare spends for comparable enrollees,” reads the new study. “If MA plans pay for less care, where do the over payments go? Some pay for supplementary benefits, although plans do not disclose how much they spend on them, and MA enrollees do not get significantly more dental care or incur lower out-of-pocket dental costs than those in FFS Medicare. Instead, overhead and profit eats up the lion’s share.”

The study’s authors estimate that MA plans’ overhead from 2007 to 2024 was $592 billion, which is “equivalent to 97% of taxpayers’ $612 billion over payments to them during that period.”

Dr. Adam Gaffney, an assistant professor of medicine at Harvard Medical School and the lead author of the new study, said in a statement that “Medicare Advantage is a bad deal for taxpayers. Money that could be used to eliminate all co-payments or shore up Medicare’s Trust Fund is instead lining insurers’ pockets.”

Gaffney and study co-authors Drs. Stephanie Woolhandler and David Himmelstein—co-founders of Physicians for a National Health Program (PHNP)—argue based on their examination of Medicare Advantage’s decades-long history that “the time has come to declare MA a failed experiment and abolish it.”

The study’s authors observe that the elimination of Medicare Advantage would allow the federal government to use the roughly $88 billion in estimated MA over payments for the coming year to instead “upgrade benefits for all Medicare beneficiaries.” Traditional Medicare typically does not cover dental, vision, or hearing services, which often leads people to choose MA plans.

Wendell Potter, president of the Center for Health and Democracy, emphasized the urgency of addressing these issues. “Not only has it never saved taxpayers a dime since it was created during the George W. Bush administration, but it has cost us $592 billion over the last 17 years because of the high administrative costs inherent in the program and the way insurers have rigged the system to get paid excessively every year.”

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Alexandra Jacobo is a dedicated progressive writer, activist, and mother with a deep-rooted passion for social justice and political engagement. Her journey into political activism began in 2011 at Zuccotti Park, where she supported the Occupy movement by distributing blankets to occupiers, marking the start of her earnest commitment to progressive causes. Driven by a desire to educate and inspire, Alexandra focuses her writing on a range of progressive issues, aiming to foster positive change both domestically and internationally. Her work is characterized by a strong commitment to community empowerment and a belief in the power of informed public action. As a mother, Alexandra brings a unique and personal perspective to her activism, understanding the importance of shaping a better world for future generations. Her writing not only highlights the challenges we face but also champions the potential for collective action to create a more equitable and sustainable world.

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