It’s really, really hard to justify running taxpayer money through private companies when it’s paying for essential services. Yet we’re doing just that with Medicare. Only a minority of seniors still have traditional Medicare, where the government pays bills directly. A majority have Medicare Advantage plans, in which the money flows through private insurers. That is, Medicare has been largely privatized.
Why do people choose Medicare Advantage? Typically because the plans offer benefits not provided by traditional Medicare, such as vision or dental care, without charging extra premiums. But how are they able to do that? Is it the superior efficiency of the private sector?
As far as anyone can tell, no. Instead, private insurers game the system.
On one side, seniors attracted by the extra benefits of a Medicare Advantage plan may not be fully aware that they’re also agreeing to extra restrictions, such as limited provider networks and requirements for prior authorization — not to mention the insurance industry’s growing propensity to hold down costs by delaying or denying coverage whenever possible, a practice highlighted by the killing of United Healthcare’s CEO.
Indeed, despite the extra benefits MA typically provides, satisfaction with coverage isn’t significantly higher than under traditional Medicare.
Which is a bit odd, because Medicare Advantage costs taxpayers much more than traditional Medicare.
How so? There’s a long history here, which goes back to Ronald Reagan, who allowed insurance companies to offer managed care plans to Medicare recipients. The idea was to save money through the purported efficiency of the private sector. What actually happened was that insurers engaged in “cream skimming”: they signed up seniors in good health, leaving less healthy Americans with traditional Medicare. The result was that insurers received more taxpayer money than they paid out for health care.
The program we now call Medicare Advantage was created in 1997, and made an effort to crack down on this practice, “risk adjusting” patients based on their medical history so as to pay less for those with low expected health care costs. This curbed some of the worst abuses, but it turns out that there are still ways for insurers to game the system.
For one thing, the risk adjustment is coarse enough that insurers still engage in some cream skimming, doing their best to recruit customers likely to have lower medical bills than the government formula predicts.
More important, insurers have worked the other end, pressuring doctors and nurses to provide diagnoses that make their clients look sicker than they really are. This means that Medicare pays them more under the risk adjustment formula, even though their costs aren’t higher. Ten years ago the federal government developed a plan to crack down on this practice — but backed off under industry pressure. The Biden administration finally made a small dent in overpayments for 2025.
We’re talking large sums here. The Medicare Payment Advisory Commission, which, um, advises the government on Medicare payments, estimates that last year Medicare Advantage cost taxpayers $83 billion (!) more than those enrolled would have cost under traditional Medicare.
But the bigger question should be, what are we even doing here? Medicare is supposed to provide older Americans with the health care they need. Yet instead of focusing solely on how best to achieve that goal, we have an arms race between insurance companies trying to game to system to charge more and deliver less and government officials trying to rein them in.
So what purpose do these private insurers serve? Why are they even part of the picture?