Medicare Advantage II -- History and Costs

    Congress created the current Medicare Advantage program as part of the Medicare Modernization Act of 2003, the same statute that also created the Medicare drug program (Part D.)  Medicare Advantage is also referred to as Part C.  Medicare has included service by private providers since 1972, when Congress allowed health maintenance organizations (HMOs) to provide coverage for Medicare beneficiaries.  In 1997, Congress and the Clinton Administration created the Medicare Plus Choice program, in a desire to expand the availability of health plan options.  This program was not successful.  The new statute enable Congress to impose caps on HMO revenue and authorized Medicare to adopt new regulations on private plans.  This resulted in 900 pages of regulations.  As a result, the number of private health plans in Medicare dropped by more than half -- from 346 and 1998 to 151 by 2003.  Therefore, many areas of the country had no access to private health plans.

   The 2003 legislation reversed much of this policy.  It reversed the price caps and approved additional funding to encourage private plans to return to Medicare.  The result has been an enormous increase in private plans, so that in 2009, 24% of all Medicare recipients were participants in Medicare Advantage programs.  Medicare Advantage plans provide substantially greater benefits than Medicare at approximately the same price to the consumer.  Its pricing structure enables them to provide additional services, or to reduce costs that are charged under Medicare, such as for the Part D program.

    (Much of the above history is drawn from The Success of Medicare Advantage Plans: What Seniors Should Know, by Robert E. Moffitt, published by the Heritage Foundation on June 13, 2008.  The very recent Report to Congress: Medicare Payment Policy, issued by the Medicare Payment Advisory Commission (MEDPAC) in March 2010 is also very useful.  See particular, pp. 261 et sec.)

     Since no great achievement goes unpunished in Washington, the Medicare Advantage program has drawn criticism from Democrats, primarily that its cost is more than the cost of the regular Medicare program.  Thus, theMEDPAC report states:

By some measures, the Medicare Advantage (MA)
program appears to be successful, but excessive payment
rates preclude the program from achieving desired
efficiencies. MA enrollment continues to increase, MA
plans are widely available to beneficiaries, and plans
provide enhanced benefits for their members. However,
taxpayers and beneficiaries in traditional FFS Medicare
subsidize these benefits, often at a high cost.

Medicare Advantage costs are, in fact about 12% higher than normal Medicare costs.  But the above statement contains numerous errors.  First of all, this is not a straight apples-to-apples comparison.  Medicare Advantage provides substantial additional benefits, which, presumably, increase its costs.  Nor does the cost comparison say anything about efficiency, since we are not comparing the same services.  Based on my experience, Medicare Advantage seems much more efficient, since it does not inundate consumers with a blizzard of paperwork.  Moreover, there is no basis for claims of cross subsidization.  Congress adopted a particular policy of supplemental payments to Medicare Advantage plans in order to encourage their development.  There is no evidence that it deprived traditional Medicare patients of services they would otherwise have received.  Indeed, in 2009, 23% of beneficiaries were enrolled in Medicare and its plans, and the payments for Medicare Advantage amounted to 23% of total Medicare spending (in 2008, according to a paper on the Medicare Advantage payment system, issued byMEDPAC in October 2009).

    The Medicare pricing structure is as follows:

1.  Medicare establishes a benchmark figure for each county, representing the average cost of fee-for-service payments per person.  This benchmark is a bidding target.

2.  Plans then bid to offer Medicare  (Parts A and B) coverage to Medicare beneficiaries.  The data is presented as the price to cover an average or standard beneficiary, and includes administrative costs and profit.  

3.  If the bid is below the benchmark, the plan receives a base rate equal to its bid.  Importantly it also receives an additional payment from Medicare in the form of a rebate, which equals 75% of the difference between its bid and the benchmark.  The plan then must return the rebate to its enrollees in the form of supplemental benefits or lower premiums.

4.  If the bid is above the benchmark, the plan receives a base rate equal to the benchmark, and the enrollees have to pay an additional premium and equals the difference between the bid and the benchmark.

The overwhelming majority of bids are below the benchmark.  In 2006, 95% of Medicare Advantage plans bid below the benchmark level (Heritage paper, above, page 6).

    Medicare Advantage plans have, obviously, been a great success, providing superior services at less then or the same cost as traditional Medicare.  It has achieved results intended by Congress in 2003.  But, a Democratic Congress wants to reduce these benefits, and use the "savings", not to fix Medicare finances, but to develop a new program for younger people -- the Obama health plan.  The Democrats present this in terms of cutting waste, but as explained above, there is nothing wasteful in Medicare Advantage -- the additional cost covers additional services, which are greatly beneficial to Medicare consumers.