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The JAMA Forum
June 14, 2016

The Cost of Medicare Advantage

Author Affiliations
  • 1Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs and an associate professor at Boston University’s School of Medicine and School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs or Boston University
JAMA. 2016;315(22):2387-2388. doi:10.1001/jama.2016.6790

The Medicare Advantage program, which offers private plan alternatives to traditional Medicare, is surging in popularity among Medicare beneficiaries (http://nyti.ms/1rGB0gu). More than 30% of about 55 million beneficiaries are enrolled in a Medicare Advantage plan, up from 16% a decade ago (http://kaiserf.am/1IniNZU). Yet among policy experts it remains as controversial as ever. At issue: do Medicare Advantage plans cost more or less than traditional Medicare?

Austin B. Frakt, PhD

Doug Levy

You’d think a simple accounting exercise would settle the matter, but it’s a more complex question than it appears.

What’s Being Covered? And Who Pays?

Consider the consumer’s point of view. A typical Medicare beneficiary can choose from more than a dozen plans (http://nyti.ms/1W9tNpi). Nearly all provide more generous coverage than traditional Medicare, with lower cost sharing and coverage of additional items like hearing aids and eyeglasses. Moreover, many do so without requiring any additional premium from enrollees (http://bit.ly/1roYCIZ). Therefore, to Medicare beneficiaries, Medicare Advantage is cheaper than traditional Medicare because they get more for less.

Now consider the plans’ point of view. Each plan discloses how much it would cost to cover exactly the same benefits as traditional Medicare for a Medicare beneficiary of average health. These estimates are used to establish how much plans are paid by the Medicare program and how much plans must charge in premiums. (One major benefit is not held constant in this exercise: most Medicare Advantage plans offer coverage only for a restricted network of physicians and hospitals. Traditional Medicare imposes no such restrictions.)

The commission that advises Congress on Medicare payment policy analyzes these plan cost estimates, plan premiums, and Medicare’s payments to plans (http://1.usa.gov/23pITpc).

In 2015, just as in previous years, it estimated that Medicare Advantage costs were less than the costs of traditional Medicare coverage. On average, in 2015 a Medicare Advantage plan provides Medicare services 6% more cheaply than traditional Medicare, though this figure varies across types of plans and markets. Here again, one could make the case that Medicare Advantage is cheaper than traditional Medicare, at least for provision of the same set of benefits.

But what about taxpayers? Here the story has a couple of twists.

Somebody is paying for the additional benefits Medicare Advantage plans provide. Even though Medicare Advantage plans may provide the Medicare benefit more cheaply than traditional Medicare, by law the Medicare program pays the plans much more. Through a complex formula that includes quality incentives and other factors, in 2015, an average Medicare Advantage plan was paid 8.5% more than its costs and 2% more than traditional Medicare. This figure has been much higher in the past; in 2009 plan payments were 14% higher than traditional Medicare’s cost (http://1.usa.gov/1NWGzEp).

“Up Coding” and Health Care Utilization

But Medicare Advantage plans likely cost taxpayers even more than government figures suggest. Several recent investigations(http://n.pr/1IYRvbu) and studies show that plans find ways to make their enrollees appear sicker than they would be if enrolled in traditional Medicare, a phenomenon known as “up coding.” Because Medicare pays plans higher rates for sicker enrollees, up coding increases government payments to plans.

A government audit found such up coding to be very common (http://n.pr/1SN2IoT). Last year, an investigation by the Center for Public Integrity found that it accounted for nearly $70 billion in additional payments to Medicare Advantage plans from 2008 through 2013 (http://bit.ly/1l4hmTg). Analysis by Michael Geruso, PhD, a health economist at the University of Texas, and Timothy Layton, PhD, a postdoctoral research fellow at the Harvard Medical School, quantified the cost of Medicare Advantage up coding (http://bit.ly/1WJ1Kva).

It increases it by 6.4%, although an adjustment by Medicare reduces the effect to just more than 1% (http://bit.ly/1SN3n9W).

But there’s one more twist in the story: Several studies(http://bit.ly/1Nk2xRF), including, most recently, one by Katherine Baicker, PhD, and Jacob Robbins, (http://bit.ly/23pLa3P), have found that additional enrollment in Medicare Advantage plans reduce health care utilization not just for those additional enrollees but also for the remaining traditional Medicare enrollees. In other words, the influence of managed care on practice patterns spills over into the traditional program (http://bit.ly/1QSijh6). And this could save taxpayers money, offsetting the additional cost of Medicare Advantage. To date, nobody has estimated the full effect of Medicare Advantage spillovers, so it is not clear if taxpayers come out ahead or not.

So which costs more, Medicare Advantage or traditional Medicare? Enrollees and plans both benefit from lower costs. Whether taxpayers do is not yet settled.

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Article Information

Corresponding Author: Austin B. Frakt, PhD (frakt@bu.edu).

Published online: May 4, 2016, at http://newsatjama.jama.com/category/the-jama-forum/.

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