Medicare Dis-Advantage: Overpayments and Inequity

MA plans coax expensively ill members to disenroll by, for instance, putting medications they need (e.g., cancer chemotherapies) into the highest drug benefit tier, which loads out-of-pocket costs onto the sickest patients. Similarly, unlike traditional Medicare, MA plans limit enrollees to narrow networks of doctors and hospitals, thwarting enrollees’ access to specialized providers like psychiatrists and cancer hospitals. For patients with complex illnesses, these managed-care restrictions can be a major barrier to care. Consequently, sicker and disabled seniors (such as those with dementia, or needing nursing home or rehabilitation care) disproportionately depart MA for traditional Medicare—further enriching the MA pool with healthier seniors, reducing insurers’ per-patient outlays for care and increasing their profits. The upshot is a windfall for insurers: MedPAC estimates that insurers will garner overpayments of $35 billion this year thanks to “favorable selection” alone.

Such overpayments have persisted—indeed, increased—despite reforms specifically designed to rein in this misbehavior. Since 2004, government payments to MA plans insurers have been based on the average sickness levels (i.e., risk scores) of their beneficiaries, which the government calculates from diagnosis codes that the plan submits. Insurers quickly learned how to play that game. They began padding enrollees’ medical records with (often irrelevant) diagnoses to make them look sicker on paper—so-called “upcoding.” Regulators, in an effort to get ahead of insurers, slapped a discount on payments to MA plans to account for their upcoding. But insurers again outmaneuvered the regulators, coding ever more avidly, using innovative techniques like dispatching nurses to enrollees’ homes—not to treat enrollees but merely to put more diagnostic codes on paper, including some based on highly suspect in-home tests. Upcoding has allowed insurance firms to extract enormous overpayments—an estimated $50 billion in 2024 alone—on top of the aforementioned “favorable selection” bonanza.

Two of us (with Ida Hellander) previously estimated total taxpayer overpayments to Medicare Advantage plans at $282.6 billion from 1985 to 2013. Since then, overpayments have ballooned—totaling more than $400 billion over the past decade, according to MedPAC’s estimates. But even as overpayments deplete Medicare’s finances, Medicare Advantage poses another, even graver threat to the program: undermining its core commitment to equal access and equitable care.

Ironically, even as Medicare Advantage plans soak the taxpayers, their enrollees receive much less care than they would if covered by traditional Medicare. Insurers’ narrow provider networks and onerous prior authorization requirements restrict care through inconvenience and outright payment denials. And (unbeknownst to most patients) insurers often use bonuses or penalties to incentivize physicians—especially the tens of thousands that they now directly employ—to deny care. Reams of research has found that beneficiaries with Medicare Advantage (relative to those in traditional Medicare) receive less medical care, e.g., fewer home care visits from aides, speech therapists, physical therapists, or nurses. Among cancer patients requiring complex surgeries, Medicare Advantage beneficiaries are less likely to get surgery at high-volume cancer hospitals where quality is highest, and suffer longer delays in treatment and higher death rates. In effect, Medicare Advantage has introduced fresh inequities into Medicare. Increasingly, it is no longer one national program providing a single tier of access to nearly all providers: today, Medicare resembles our broader fragmented, multitiered and unjust insurance system.

Why, then, would beneficiaries enroll? Some are bamboozled by insurers’ slick and ubiquitous marketing. During Medicare’s seven-week open enrollment period in 2022, TV viewers were inundated by 643,852 English-language ads and more than 40,000 in Spanish. Plans also deploy some of their overpayments to offer some extra benefits—e.g., free eyeglasses or partial dental coverage—that are attractive to many seniors. And most importantly, insurers can reduce seniors’ monthly premiums for drug coverage—sometimes to zero—as well as their copayments for routine care like office visits.

Unsurprisingly, these perks are most attractive to beneficiaries with little cash to spare. Consequently, low-income and non-white seniors disproportionately “choose” Medicare Advantage—especially “zero-premium” plans and restrictive, HMO-style coverage. In other words, increasingly, Medicare beneficiaries are being sorted; even among Medicare Advantage plans, a socioeconomic gradient has emerged, with more restrictive plans enrolling poorer beneficiaries. And this sorting has medical consequences: One study found, for instance, that enrollees in stingier plans suffer higher death rates than those in less restrictive ones.

The harms resulting from Medicare Advantage plans’ privatization of Medicare are hence even more serious than is commonly realized. They don’t just extract tens of billions in overpayments from the federal treasury annually (though they do), or deny potentially life-saving care to the sickest enrollees (though they do that as well), and waste billions on the administrative bureaucracy needed to deny care (they do that, too). The very underlying “choice” that Medicare Advantage is said to offer undermines Medicare’s Great Society promise of equal and universal care for seniors.

Medicare Advantage enrollment continues to rise: if that trend continues, insurers will come to entirely dominate the program. But traditional Medicare’s serious shortcomings, including inadequate benefits and high cost-sharing, should not be whitewashed. Fortunately, as it turns out, the two problems have a single solution: end Medicare Advantage and use the tens of billions in savings to expand benefits for all beneficiaries.

Or better yet, pass a nonprofit Medicare for All reform that would address these problems, and amend current Medicare payment policies that have tolerated, and even encouraged, healthcare profiteering and the corporate takeover of care. Such reform could deploy the even larger savings on administrative bureaucracy (about 17 percent of health spending, equivalent to $832 billion in potential savings this year) to improve coverage for everyone. What we must not do, however, is stand by and watch insurers privatize Medicare to the point where we can no longer recognize it.