Medicare Advantage Overpayments Fund Non-Medical Perks, Costing Taxpayers $1.2 Trillion

Medicare Advantage was designed as a cost-effective alternative to traditional Medicare, offering private insurers a fixed payment to manage seniors' health coverage. However, payment structures have evolved to include substantial supplemental benefits that extend beyond traditional medical services, funding non-medical perks such as golf fees, ski passes, and pet supplies. This expansion is largely enabled by the Bipartisan Budget Act of 2018, which allowed plans to offer benefits that reasonably improve or maintain the health of chronically ill enrollees, broadening the scope of covered supplemental benefits.

These supplemental benefits have become widespread, with nearly half of Medicare Advantage plans in 2024 offering flex cards averaging $966 to enrollees, and some plans reimbursing expenses from social clubs to beauty services. Medicare Advantage plans have responded by intensively documenting enrollee diagnoses to maximize payments, some of which relate to conditions with unclear medical cost impacts. This has introduced discrepancies, as the Centers for Medicare and Medicaid Services overpays for beneficiaries with low costs and underpays for those with high costs.

Payments to Medicare Advantage plans have increased significantly, rising from 112% to 120% of what traditional Medicare would spend, leading to overpayments rising from $18 billion to $77 billion annually. The Committee for a Responsible Federal Budget projects these overpayments will reach $1.2 trillion over the next decade. These funds have boosted insurers' profits and expanded supplemental benefits rather than strictly controlling costs as originally intended.

The Medicare Payment Advisory Commission highlights these structural payment issues, noting the challenges in categorizing medical needs accurately. Plans tend to preferentially attract healthier, more active enrollees with supplemental benefits that may not reduce high-cost medical events but appeal to patient lifestyles, such as paying for golf equipment or ski passes.

Policy discussions have emerged about reducing these overpayments to alleviate budget pressures. New Medicare leadership and some lawmakers from both parties have proposed reforming payment structures, seeing savings from Medicare Advantage as a potential source for deficit reduction or funding other social programs. The debate centers on balancing the program's financial sustainability while managing beneficiaries' supplementary benefits and the overall tax burden on working Americans.