The Great Big Medicare Rip-Off
When President Lyndon B. Johnson signed the bill establishing Medicare in 1965, he explained that it was part of Franklin D. Roosevelt’s legacy of government support for those who need it most, the elderly and the poor. At the time, there were essentially no options for older, nonworking Americans to get health coverage. Johnson signed the Medicare bill in Independence, Missouri, alongside another former president, Harry Truman, who had long advocated for universal health coverage and whose 1945 national health-care plan helped prepare the way for Medicare.
If they were alive today, these presidents would be shocked to learn that nearly half of all seniors will enroll in private, not public, Medicare plans next year. And these private plans in many ways have strayed from Medicare’s core mission of caring for the elderly while using taxpayer funds responsibly.
Since its creation in the 1990s, the Medicare Advantage program has allowed seniors to get coverage through private insurance companies that receive monthly, per-person payments from the government to offer services comparable to traditional Medicare’s. Early proponents of Medicare Advantage, who came from across the political spectrum, saw it as a way to provide retirees with more choices and flexibility to retain existing patient-physician relationships. The program also was meant to save taxpayers money. But it never has. Instead, Medicare Advantage has become rife with waste, abuse, and potential fraud, with private insurers taking advantage of loopholes to overcharge the government.
Recent government reports document how Medicare Advantage plans rake in billions of extra dollars from the federal government by describing their patients as sicker than they really are and by classifying certain conditions and treatments as more serious than they are. As a result of these and other egregious practices, Medicare Advantage costs the government about 3 percent more per person than traditional Medicare—more than $9 billion in aggregate in 2022—and that’s after the Affordable Care Act substantially reduced the level of overpayment to insurers.
By cracking down on this and other kinds of waste, the government could save Medicare anywhere from $20 billion to $35 billion a year. That’s enough to fully fund vision and hearing benefits for all seniors enrolled in traditional Medicare ($12 billion a year) and have money left over to extend the life of Medicare’s hospital insurance trust fund, which is headed for insolvency in 2028. Or it would more than cover free community college ($9 billion a year) or 12 weeks of universal paid family leave ($15 billion a year, not including medical leave) for all Americans. Democrats and Republicans might disagree on how to spend the savings, but reforming Medicare Advantage should have bipartisan appeal—for conservatives who decry government waste and for liberals who decry dishonest business practices.
Medicare Advantage has important patient benefits. Compared with seniors enrolled in traditional Medicare, those in MA health plans are more likely to have a consistent primary-care physician and to receive preventive services such as flu vaccines, colon-cancer screenings, blood-pressure screenings, and cholesterol management. MA patients also have lower rates of hospital readmission and preventable hospitalizations. And MA patients generally face fewer hassles in obtaining prescription drugs and getting information about drug costs. Because the government pays MA plans a flat fee to provide all care, those plans have an incentive to reduce unnecessary and inefficient care and promote preventive services and care management.
But these advantages are not worth the federal government overpaying MA plans. In some ways, this waste is intentional. For years, the government purposely has overpaid Medicare Advantage to induce insurers to spread the program nationwide, including to rural and other less lucrative areas. The strategy has succeeded. Today, Medicare Advantage is available to 99 percent of seniors in almost every corner of the country. By 2030, it is expected to insure some 60 percent of American seniors. Of course, this growth will correspond to a major increase in Medicare Advantage spending as a proportion of Medicare’s budget, and further compound the waste.
Medicare Advantage also has a serious design flaw that prevents the government from saving money. To determine how much to pay an insurer through Medicare Advantage, the federal government establishes a “benchmark” premium in every participating county based on the average spending per senior for traditional Medicare in that county. Medicare Advantage insurers then bid against the benchmark. If an insurer’s proposed premium is less than the Medicare benchmark, the insurer gets a rebate from the government—money that can be used to lower premiums and co-pays, or to offer benefits not available in traditional Medicare, such as hearing, vision, and dental services. This rebate arrangement prevents the government from reaping the savings from MA plans’ lower costs and premiums. MA plans then can attract additional seniors with hearing, vision, and dental benefits, which in turn increases private insurers’ revenue and profits. This bidding arrangement also prevents price competition among the MA plans, which would add to government savings.
Insurers have discovered other ways to game the system to collect even more government money. MA plans get extra government payments if they enroll patients who are sicker than the average Medicare beneficiary. This “risk adjustment” payment makes sense; sicker patients generally cost more to treat than healthier ones. But this structure also creates perverse incentives for insurers to make their enrollees look sicker than they really are. As reported recently in The New York Times, some insurers sift through old medical records of Medicare Advantage patients to look for conditions that those patients’ doctors either failed to identify or chose not to treat. For instance, by coding “anxiety” as “mood disorder,” an insurer can get paid more. Experts estimate that this practice of “upcoding”—or reclassifying conditions and care with treatment codes linked to higher payments—adds $12 billion to $25 billion annually to MA’s cost.
Finally, Medicare overpays private plans through a flawed program in which the Centers for Medicare & Medicaid Services gives bonuses to plans based on the quality of care they provide. This program might sound good in theory, but in practice it allows for what some have called “medical gerrymandering.” As the Kaiser Family Foundation and others have documented, insurers lump together poor-performing plans with better-performing plans to “earn” the quality bonus payments for the entire group, masking the performance of low-quality plans and maximizing the bonus money received. Experts also have argued that many of the quality measures the government uses have little to do with improving patient outcomes.
Some progressive politicians have called for abolishing Medicare Advantage. But with half of America’s seniors enrolled in the program, abolition is impractical. Seniors who prefer Medicare Advantage should have it as an option. Importantly, from a policy perspective, traditional Medicare has serious flaws. Its fee-for-service structure inherently encourages less preventive care and the ordering of more—and more expensive—tests, surgical procedures, and other treatments. And it de-emphasizes managing patients’ care, resulting in fragmented services from multiple physicians, which is particularly challenging for patients with serious chronic conditions. Fortunately, it is possible to lower Medicare Advantage’s costs in a way that also would help keep Medicare as a whole solvent for future generations.
To do this, first the Justice Department should investigate and criminally prosecute insurance executives and physicians who engage in systematic upcoding. In recent years, eight of the 10 leading MA plans have been audited or faced lawsuits for overcharging. (Some lawsuits have been settled, but others are ongoing, with the insurance companies disputing the allegations.) Unfortunately, such civil prosecutions for return of money don’t often deter bad behavior; instead, they merely get factored into the cost of doing business. But putting a few insurance and hospital executives behind bars could make a difference.
Second, CMS needs to change its risk-adjustment method. The formula Medicare uses was originally devised in 2004. As is well known among health-policy experts, it is not terribly accurate and has built-in racial and geographic biases. Machine-learning techniques could be used to calculate risk scores more accurately. In addition, the system could incorporate more data that cannot be easily manipulated, such as what services patients actually receive, the drugs they take, and where they live. With more accurate assessments, payments would come down, and insurers might decide that the extra money they otherwise could get isn’t worth the effort, risk of prosecution, or adverse publicity. (Full disclosure: I am engaged in a research project that has received philanthropic funding to explore the use of machine learning to improve the risk-adjustment system.)
A third solution to overpayment would be to jettison the benchmark system the government uses to determine MA payments. For many years, policy experts have argued for straightforward competitive bidding—that is, letting insurers simply bid what premiums they will charge, the way they do for employer-based health-care plans. Such competitive bidding would lower premiums and government payments while reducing insurers’ profits. Recent estimates suggest that using competitive bidding to set MA payments could save $230 billion over 10 years.
The problems with overpayment in Medicare Advantage by now are well known, and the solutions are straightforward. Pursuing those solutions would ground Medicare in its initial purpose, as outlined by LBJ: providing seniors with high-quality, accessible care. Ultimately, with the right reforms, seniors and taxpayers will save, Medicare’s finances will improve, and any fraudsters and thieves will lose.