The Medicare Advantage Boondoggle Rolls On

Read the fine print before you enroll in a too-good-to-be-true plan.

Photo by Online Marketing on Unsplash

It’s open enrollment season for Medicare through December 7, which means it’s open season on the elderly or those hoping to become so. Last year, according to a study by the Kaiser Family Foundation (KFF), a nonprofit health policy organization, 643,000 Medicare ads ran on television during the nine-week enrollment season, most of them for Medicare Advantage plans. That doesn’t include the bombardments of direct mail and internet ads.

One of my college professors used to remark that the American economic system is a unique hybrid, providing socialism for the rich and capitalism for the poor. There is no better illustration of this than Medicare Advantage, a program that gives billions of government dollars to private corporations, which convert them into stingy services and impressive profits.

What a great business! For every person Medicare Advantage companies enroll, Medicare pays them the amount Medicare would have spent on medical expenses for that person. By keeping their premium rates low, companies can attract more policyholders, which means more dollars from Medicare.  (Currently, about half of Medicare-eligible adults are enrolled in Medicare Advantage plans.) Then all the companies have to do is spend less than Medicare would have, and still make a profit. How? That’s easy – by ratcheting down the reimbursements they pay to doctors and clinicians and hospitals, and by denying coverage for expensive claims that Medicare would have approved.  It’s a brilliant business model as long as the government cash keeps flowing.

Private Sector Efficiency?

The rationale behind the creation of Medicare Advantage back in the 1980s was that the private sector could provide health insurance more efficiently, and at lower cost, than the federal government. You never hear that rationale anymore, for a good reason: It has never been true of Medicare Advantage.

An analysis in 2021 found that Medicare overpaid the Medicare Advantage plans more than $106 billion from 2010 to 2019. To put it another way, Medicare paid private insurers $106 billion more than it would have spent had everyone eligible been covered by original Medicare. The outflow continues to increase annually.

And this is not because Medicare Advantage plans pay out greater amounts for medical expenses. In general, they don’t. It is because the insurers have been playing games at the government’s expense. One is called upcoding. When a new person enrolls in a Medicare Advantage plan and reports a pre-existing condition, the insurers frequently “up code” the enrollee’s current condition as more serious than it is. This triggers more Medicare revenue.

Perhaps it is not a coincidence, then, that in 2021 the average gross profit margin in the Medicare Advantage market was $1,730 per enrollee, according to KFF. That was more than double the margin for other insurance markets. It is difficult to say how profitable Medicare Advantage is, since the largest market leaders (United Healthcare, Humana, CVS/Aetna, Kaiser, and Anthem together represent two-thirds of all policies) do not separate Medicare Advantage from other corporate earnings, but it is generally understood that Medicare Advantage has been a good business for the big players.

Medicare is doing its best to claw back some of the money it has paid out through deceit. In late September, for example, Cigna Group agreed to pay $172 million to resolve allegations that it illegally submitted untruthful diagnosis codes for Medicare Advantage enrollees and failed to withdraw coding that was inaccurate.

Good for Policyholders?

How good is Medicare Advantage for its millions of policyholders? Low premiums certainly make them attractive, and an array of extra coverage not included in original Medicare makes them appealing. But critics say the plans can be risky for older adults in poor or declining health, or those who need to see specialists. Because Medicare Advantage operates as a cost-conscious, managed care system, gatekeepers often put up barriers to accessing care when it’s needed. A report several years ago from the Government Accounting Office (GAO), the auditing arm of Congress, found that 28% of the Medicare Advantage plans it surveyed had a disproportionate number of sicker patients dropping out of the plans. Patients who left cited difficulty getting access to the doctors and hospitals they preferred or other medical care.

Some big insurers, including United Healthcare, use algorithms to make decisions about when to deny services. Next year Medicare plans to restrict how Medicare Advantage plans use predictive technology tools to make coverage decisions.

To me, the Medicare Advantage business proposition is analogous to how state governments operate. Some states keep taxes low, and in return offer citizens mediocre to poor services. Some states provide high quality services and tax citizens enough to pay for them. Medicare Advantage is like the low-tax, low-service states. A bargain-basement premium lures people in when they are healthy. It is only when their health falters or fails that they fully realize the bargain they have made.

I have lived in both high-tax and low-tax states and have no doubts about which I prefer.