_ Medicare Advantage was supposed to be a money-saver. It’s now
become a costly, unaccountable cash cow for private insurance
companies that is swallowing traditional Medicare. _
Illustration by Jandos Rothstein / The American Prospect,
Rep. Pramila Jayapal has called it
[[link removed]] the
“biggest threat to Medicare you’ve never even heard of.” It’s
known as Direct Contracting (DC), a program concocted by the Trump
administration and not yet ended by the Biden administration to fully
DC is patterned after Medicare Advantage, the publicly financed,
privately owned, hugely profitable version of Medicare now enrolling
26 million people at an annual cost of $343 billion. Simply put, DC is
Medicare Advantage (MA) on steroids.
The growth of Medicare Advantage is a 35-year-long saga of a program
conceived as a cheaper, better Medicare transformed into a behemoth
that has not saved one cent nor produced better outcomes. Yet MA has
beaten back every attempt to make it accountable for its cost and
care. Like the Hydra, each victory adds more heft.
The politics of MA are complicated, not merely because, like the oil
and gas industry, it generates enough money for large insurance
companies to convert $150 million of profits into campaign
contributions. By design, Medicare Advantage covers the costs of
health care that are not covered at all or only partially paid by
Medicare. Its 26 million enrollees are a silent majority, potentially
available to threaten any elected official brave enough to challenge
the program. But that leaves the public with worse health coverage and
a model of privatization that could prove disastrous.
WHY MEDICARE ADVANTAGE WAS INVENTED
Medicare’s sole purpose in 1965 was to extend health coverage to the
elderly by paying their doctor and hospital bills. In a Faustian
bargain, Congress sacrificed Medicare’s regulatory role in return
for the support of the hospital-operated Blue Cross Association and
physician-owned Blue Shield plans, which set payment policies. The
only constraint, medical necessity, was defined as any treatment
ordered by a licensed doctor.
The actuary to the House Ways and Means Committee had confidently
[[link removed]] an initial
$2.2 billion price tag, increasing over 25 years to $12.4 billion in
1990. Instead, the initial price doubled by 1969 and reached $12.4
billion in 1973, just four years later.
In 1970, pediatrician Paul Ellwood, the apostle of managed care,
presented a solution to reduce health care spending that he dubbed a
“health maintenance organization” (HMO). Elwood was no fan of
Medicare, famously calling it “a crappy insurance policy
[[link removed]].” He
believed private, prepaid, integrated physician practices could be
incentivized to provide better care at less cost. At the time,
nonprofit HMOs like Kaiser and Group Health had an admirable record
[[link removed]] of
lower cost and better outcomes than traditional fee-for-service health
Then-President Nixon shared Ellwood’s enthusiasm, but with a
different agenda. Here’s a transcript
[[link removed](1971)_that_led_to_the_HMO_act_of_1973] of
a taped conversation between Nixon and John Ehrlichman, his chief
Ehrlichman: “Edgar Kaiser is running his Permanente deal for profit
… the reason he can do it … I had Edgar Kaiser come in … talk to
me about this and I went into it in some depth. All the incentives are
toward less medical care, because …”
President Nixon: [Unclear.]
Ehrlichman: “… the less care they give them, the more money they
President Nixon: “Fine.”
Nixon was later presented with a plan, which became the HMO Act of
1973, to reduce federal spending in a manner that promised to be
undetectable to participants. The alternatives to HMOs as a
cost-containment strategy were politically unpalatable—either
reducing benefits or reimposing price controls. The HMO program
promised no blowback from beneficiaries or providers, at a time when
the administration was struggling to gain leverage over inflation.
HMOs fell out of favor
[[link removed]] due to narrow
provider networks and instances of denied care. But it led to a
subtler alternative: Medicare Advantage.
HOW THE MA MONEY MACHINE CHURNS
Unlike the Defense Department’s TRICARE and the Veterans Health
Administration, Medicare is not a public health care system. It is
public financing that relies on a joint public-private insurance
arrangement. The rules are set by the Centers for Medicare & Medicaid
Services (CMS) and Congress, and the claims processed by insurance
companies under contract to the federal government. Money from the
Medicare Trust Fund, taxes, and beneficiary premiums secure services
from the private U.S. health care system.
Medicare Advantage changes one critical element: the intermediary
between the money and the services. Medicare still pays, but with MA
it turns over all parts of the insurance function, including enforcing
the rules for medical necessity and deciding how much to pay
providers, to private companies. Retirees can choose from 3,834 plans
offered by nine different companies in 2022. Four in ten Medicare
beneficiaries have joined. Humana and UnitedHealthcare own half the MA
Traditional Medicare leaves lots of holes that retirees must otherwise
fill out of their own pockets. It does not cover vision, hearing,
dental, or long-term care. Beneficiaries are responsible for monthly
premiums, deductibles, and coinsurance (known as “cost-sharing”).
And unlike commercial insurance, it has no cap on out-of-pocket
spending. The extra cost added up to $6,509 per person in 2018,
according to an AARP-commissioned study
Twenty-six million people find MA a deal they cannot refuse. They gave
up their hard-earned red, white, and blue Medicare card for one
supplied by Humana, UnitedHealth, Anthem, Aetna, Kaiser, or another
company. Like HMOs, the plans offer less freedom of choice, with
limited provider networks and prior-approval requirements in exchange
for sharply reduced and capped out-of-pocket expenses, and additional
benefits like gym memberships.
Most recent retirees do not find the restrictions new or particularly
burdensome. Anyone previously insured through an employer health plan
dealt with very similar constraints.
The MA profit-making formula is simple: get a large sum of money from
the Feds, spend less than traditional Medicare, give some of the
excess to beneficiaries, and pocket the difference. Over the last 12
years (2009–2021), Medicare paid the MA plans $140 billion more
[[link removed]] than
would have been spent if the same people stayed in Medicare. Put
another way, Medicare during these years would have saved enough
to pay for the enhanced Child Tax Credit in 2022
[[link removed]], and
MA plans follow the design of commercial insurance, with the
beneficiary choosing between either an HMO, with a closed provider
panel, or a PPO, which rewards participants who stay in its provider
network. Either way, the insurance company constructs reimbursements
and utilization checks to spend less than traditional Medicare.
MA companies have perfected the art of denying claims by requiring
preauthorization of many services, especially expensive ones. For
example, doctors treating UAW retirees for orthopedic injuries, a
frequent legacy of assembly line work, must get MA prior approval for
246 specific procedures, or else the plan does not guarantee payment.
MA plans deny 4 percent of claims for prior authorization and 8
percent for post-service payment requests. Very few people appeal.
When they do, the HHS Office of Inspector General found that denials
were reversed more than three-quarters of the time
Just to see how it would fall out, Aaron Schwartz and colleagues at
the University of Pennsylvania reprocessed 6.5 million traditional
Medicare Part B claims as if they were subject to MA prior
authorization. Approximately one million
[[link removed]] might
have been denied, accounting for 25 percent of Part B spending.
“Our study found that health care spending for enrollees in Medicare
Advantage plans is 10 to 25 percent lower than for comparable
enrollees in traditional Medicare,” said Amy Finkelstein, an MIT
economist and one of the authors of an influential 2017 paper
Insurance companies earned gross margins of $2,256 per enrollee in
more than double what they made in the group market.
Spending less would make perfect sense if MA enrollees were healthier.
They are not. “Medicare Advantage enrollees do not differ
significantly from beneficiaries in traditional Medicare,”
the Commonwealth Fund reported in October
“in terms of their age, race, income, chronic conditions,
satisfaction with care, or access to care.” Health outcomes are
similarly no better or worse
FEDERAL REGULATORS LOSE THE WAR
Over the past 30 years, laws were passed and regulations issued to
contain costs and protect MA beneficiary access to care. Managed-care
sponsors found ways around the rules.
Assuming HMOs to be more efficient, in 1985 the government set the
payment rate at 95 percent of what would otherwise have been spent in
Medicare. The plans needed to match traditional Medicare benefits but
could make their own arrangements with hospitals, doctors, and labs,
and keep the difference.
With the freedom to choose how much they paid out and where and whom
they enrolled, the companies scammed the program by finding healthier
retirees living in counties where rates were high. No plan operating
in any U.S. county enrolled a sicker-than-average group of elderly
people, according to a comprehensive Mathematica study commissioned by
the Reagan administration. Despite this, expenditures for MA were
approximately 5.7 percent higher than they would have been for
traditional Medicare, despite getting 5 percent less from the feds.
The Clinton administration tried again to save money with HMOs. “We
think that payment rates that are 90 percent, rather than the current
95 percent, of community fee-for-service rates are appropriate,”
said Bruce Vladeck, Clinton’s head of the Health Care Financing
Administration (HCFA). He wasn’t able to go that far, but
significant cutbacks were made in 1997’s Balanced Budget Act (BBA).
The BBA established a national growth cap and, under threat of
penalty, forced the HMOs to stop cherry-picking. Since health care
costs were increasing faster than the cap, and the plans had less
ability to exploit healthier enrollees, the BBA effectively cut HMO
margins. But the howl from the private plans was so loud that Congress
subsequently loosened the buckle in 1999 and 2000. Even with the
changes, BBA managed care did not save Medicare money. Plans were
still outpacing traditional Medicare costs by 2 percent.
George W. Bush’s Medicare Modernization Act (MMA) removed the BBA
caps and increased funding, adding millions to MA payments. The price
tag for excess spending during the first decade of the 21st century
was $150 billion
“We, right now, give $15 billion every year as subsidies to private
insurers under the Medicare system. Doesn’t work any better through
the private insurers,” Sen. Barack Obama said in 2008
[[link removed]], during the
first presidential debate with Sen. John McCain. “They just skim off
$15 billion. That was a giveaway and part of the reason is because
lobbyists are able to shape how Medicare works.” Candidate Obama
pledged to make MA no more costly than traditional Medicare.
By tweaking some elements, the Affordable Care Act (ACA), according to
the Congressional Budget Office, would reset MA spending to no more
than 101 percent of traditional Medicare. The result was to be
an estimated $136 billion
[[link removed]] saved
over ten years.
Just two years later, the plans got it all back. “The insurance
industry chalked up one of its greatest political victories in recent
memory on Monday,” Politico reported
[[link removed]] on
April 3, 2013, “as the Obama administration reversed course on a
proposal to cut Medicare Advantage rates.” With a sleight of hand so
obvious that CMS’s actuary publicly repudiated the move
(“conflicts with the Office’s professional judgment”), CMS
increased MA rates by 3.3 percent, rather than cutting them by 2.3
In March 2021, MedPAC, an independent Medicare monitor that reports to
Congress, reviewed the impact of the ACA. It found that “aggregate
plan payments under the ACA were similar to [traditional Medicare]
levels for only one year before rising above.”
No one even mentions MA as a cost-containment strategy anymore. The
larger and richer the plans have become, the less leverage the feds
have to regulate the industry. While the funding still comes from the
U.S. Treasury, dispersed under the aegis of Congress, most of the
power has passed to the companies.
RISK ADJUSTMENT AND STAR BONUSES
Insurance companies have consistently found innovative ways to protect
their bottom lines. A major one involves claiming MA enrollees are
sick, even if they aren’t.
Doctors and hospitals in MA networks are frequently offered extra
payments simply to record every ailment, whether treating it or not (a
practice known as “risk coding”). In an 8,000-word article
[[link removed]] in
respected health policy journal _Health Affairs_, Drs. Don Berwick
and Richard Gilfillan detail how upcoding affords almost unlimited
opportunities to manipulate the system to make money. They present the
hypothetical case of Ms. Jones, a 72-year-old MA enrollee being
treated for type 2 diabetes and congestive heart failure. With a risk
adjustment score of 1.029, the annual payment for her is $9,000. Her
physicians are paid extra to code all her ailments. Now her scorecard
adds morbid obesity, major depression, COPD, and a pressure ulcer on
her right heel. With no additional medical care or cost, the MA
company is now paid $32,000, because Ms. Jones’s risk score totals
As a result of this upcoding, Medicare gave MA plans $9 billion more
[[link removed]] in
2019 than it would have if the same beneficiaries had enrolled in
Another way MA reaps more funds is through star bonus payments. CMS
began publishing evaluations of MA plans in 2009 to assist
beneficiaries in plan selection. Numerical values were assigned to
variables measuring care processes, outcome, patient experience, and
access. The numbers are summarized on a scale of five stars.
In the original star publication, 1 in 7 plans scored four or 4.5
stars, and none were awarded five. For the 2022 plan year, 7 out of 10
received four-plus stars and 16 percent of plans were given fives. Is
there improved quality, or teaching to the test?
MA companies began paying more attention to the star variables after
the ACA anointed the system as a quality control mechanism and
authorized bonuses based on stars. Critically, bonus payments are not
budget-neutral. The more plans that qualify, the more the feds spend.
MedPAC estimates that bonus payouts added about $6 billion
[[link removed]] to
the 2019 MA bill.
Do bonus payments result in better care? The answer is no. Under the
headline “The Medicare Advantage Quality Bonus Program Has Not
Improved Plan Quality,” University of Michigan researchers compared
[[link removed]] four
million MA claims to the same number of commercial insurance claims.
“[T]hese results suggest that the quality bonus program did not
produce the intended improvement in overall quality performance of MA
THE NEW PROFIT-TAKING
“A lot of the new capital is moving into setting up new Medicare
Advantage plans because they’re growing rapidly, and the future is
bright,” Peter Orszag, CEO of Financial Advisory at investment firm
Lazard and former Obama OMB administrator, told Business Insider
The possibility for payouts like the one for Ms. Jones has lured hedge
funds and venture capitalists to invest in data mining companies and
care aggregators, which are developing new ways to maximize MA’s
profitable deals. Berwick and Gilfillan found
[[link removed]] investors
spent $50 billion to buy into MA-focused firms in a recent 18 months.
Direct contracting would privatize the remainder of traditional
Medicare. Drawing on the MA experience, Direct Contracting Entities
(DCEs) would serve as intermediaries between traditional Medicare
beneficiaries and their medical-care providers. The DCE would receive
an MA-like monthly payment for a specific population. It would make
deals with networks of providers, “manage” beneficiary care and
costs, and pay the bills, while keeping the difference. Medicare’s
only role would be as banker.
In December 2021, CMS reiterated its invitation to “organizations
that currently operate in Medicare Advantage” to become DCEs,
targeting the very MA insurers and investor-controlled provider firms
that are driving MA overpayments. One such firm, Oak Street, a
for-profit organizer of MA providers, labeled MA as its “core
market” and direct contracting as its “opportunity” in a
November 2021 corporate presentation.
While the Biden administration put a halt to the most extreme form of
direct contracting, it has moved ahead with two others. Fifty-three
bidders have been designated in the first class of DCEs. They include
28 investor-controlled plans including Oak Street, six insurers, and
19 health care provider–owned companies. The investor and insurer
DCEs will be operating in 38 states and have access to 84 percent of
Many on Wall Street are licking their chops. Clover, a 50,000-member,
San Francisco–based MA plan, expects to harvest a direct-contracting
bonanza large enough to justify its $1.2 billion IPO. HHS senior
official Liz Fowler (an architect of the Affordable Care Act) projects
the transition of all traditional Medicare to DC to be complete by
According to the Biden administration, Direct Contracting will
facilitate “the next evolution of risk-sharing arrangements to
produce value and high-quality health care.” Berwick and Gilfillan
believe that “the Direct Contracting model seems to have ignored the
lessons learned from the experience of MA.”
One of the principal lessons learned by private MA is how managing
care is so easily morphed into managing costs, and how much excess
revenue that produces. The private Medicare companies have succeeded
in getting the feds to turn over more and more to them while
obliterating the notion that HMOs would save money or improve care.
Their power to extend their reach to all $880 billion in Medicare
spending is embedded in the program itself. The more money and
beneficiaries they control, the more juice they have to control more.
TAKING MEDICARE PUBLIC, AGAIN
Last fall, 13 U.S. senators (eight Democrats and five Republicans)
sent a letter promising to “stand ready to protect MA from payments
cuts.” The letter was part of a long stream of such letters
ritualistically issued by lawmakers at the urging of the industry,
every time anyone announces consideration of MA cost control. This
latest version of the pledge was precipitated by a draft of the Build
Back Better Act that would include hearing, vision, and dental
benefits in the regular Medicare menu for the first time, threatening
one of the main selling points of MA.
The campaign against the new benefits was intense and a little weird.
AHIP, the insurance industry lobbying group, stated that adding these
services could negatively affect the benefits available to MA
recipients, because it might lead to a cut in the payments made to MA
plans. AHIP’s press release stated it would be bad for all seniors,
even though all seniors are not in MA plans. Politico quoted an
[[link removed]] describing
a recent $2.6 million ad campaign against the new Medicare benefits.
“We know members are already telling leadership: ‘We can’t take
attack ads saying we’re cutting Medicare.’ They know the public
isn’t going to distinguish between the private and public pieces of
What the senators and lobbyists understand is that MA depends on the
threat of an uprising of unhappy seniors. It’s a potent terror. Some
electeds are swayed by campaign contributions. But these would matter
very little without the potential mobilization of 64 million
beneficiaries, their concerned children, and grandchildren.
The experts have proposed sophisticated technical fixes to remedy
MA’s overpayments. It might work, as the Balanced Budget Act and the
ACA did, for a while. The Department of Justice has filed cases
against such large MA providers as Kaiser, United, and Anthem for
submitting false risk adjustment claims. The Justice Department has
even opened an inquiry into Oak Street’s practices.
But neither more regulation nor billion-dollar fines will suffice. The
history of the MA dance shows that by the time the music ends, the
private partner has swept the public one off her feet. He’s taken
control over every step.
To put a stop to MA’s distortions and its systematic theft would
require a campaign to make Medicare a more public health insurer. From
the start, it ceded significant financial authority to private
hospitals, doctors, pharmaceutical, and insurance companies. The more
beneficiaries and money handed over to MA, the greater its power to
resist. The ascendency of DC is the latest and most serious warning
sign that the private profit-maximizers are close to victory. Nothing
short of full public control can keep that from happening.
Protection of public Medicare requires that its beneficiaries be
offered a better way to get affordable health care. I feel guilty that
my enrollment in a UnitedHealthcare MA plan contributes to that
company’s money and power. Yet I am on MA because without it,
Medicare is a very risky proposition. I could be impoverished trying
to pay for my health care. MA is the only plan I can afford.
History shows that the federal government’s attempt to harness the
perceived benefits of managed care to Medicare by attempting to
separate for-profit entities from profit-maximizing behavior has
failed. Instead of throwing more money at MA to reform it, trying to
cut MA payments, or regulating, perhaps the solution is starving the
beast. With reduced cost-sharing and service expansion, people would
have less incentive to enroll in MA. The fewer beneficiaries, the less
money paid out, the less power.
A campaign to improve Medicare might be the only political avenue open
to those who want to save it.
_[BARBARA CARESS has worked for many years in nonprofit, union, and
public-agency health care and administration. She teaches health
policy at Baruch College.]_