Medicare Advantage Costs Taxpayers 22% More per Enrollee Amounting to $83 Billion More

Medicare Advantage (Part C) is a privatized alternative to traditional Medicare, now covering over half of Medicare beneficiaries. Despite its intent to reduce government health care spending through competitive efficiencies among private insurers, Medicare Advantage currently costs taxpayers approximately 22% more per enrollee, equating to an $83 billion annual excess expenditure. This overpayment arises primarily from payment system structures that overestimate enrollee health risk and inflate plan benchmarks.

Medicare Advantage plans receive payments adjusted for the perceived illness severity of enrollees, leading to risk-adjusted payments that surpass the actual costs traditional Medicare would incur. This overestimation is due in part to coding intensity, where Medicare Advantage plans systematically record more diagnoses per enrollee, increasing apparent sickness and thus payments. Additionally, benchmark adjustments intended to expand plan availability and improve quality incentives have inadvertently raised payment levels above traditional Medicare costs.

Although these additional funds partly finance enhanced benefits such as reduced cost-sharing, lower premiums, and supplemental services like dental and vision care, only about 50 to 60 cents of each taxpayer dollar is returned to beneficiaries. These benefits come with trade-offs, including prior authorization requirements and restricted provider networks, which may limit patient access to care.

The payment system also contributes to limited competition and complexity in plan choice, with the average beneficiary faced with over 40 plan options, creating significant challenges for informed decision-making. Advertising and aggressive marketing by Medicare Advantage plans further entrench enrollment, often making it difficult for beneficiaries to switch back to traditional Medicare.

Proposed reforms include tightening risk adjustment procedures through enhanced audits, reconsidering or eliminating quality bonus payments, and refining benchmark calculations to better reflect true costs. There is ongoing debate around expanding traditional Medicare benefits, such as adding dental, hearing, and vision coverage, potentially through means-tested approaches to manage costs.

Reducing overpayments may lead to more moderated plan benefits, but the overall goal is to align Medicare Advantage payments with actual care costs to ensure long-term sustainability of the Medicare program. Policymakers also consider standardizing key plan benefit elements to simplify beneficiary choice without unduly limiting options.

Given Medicare Advantage's fast growth and substantial fiscal impact, broad reforms in payment systems and benefit structures are critical to balancing insurer incentives, beneficiary needs, and taxpayer interests.