Medicare Advantage's Growth Shifts Coverage Landscape for Retirees

The Medicare system in the U.S. has experienced significant changes since the mid-2000s, with Medicare Advantage (MA), the private alternative to traditional Medicare, now accommodating over half of Medicare beneficiaries, up from 8 million in 2007 to 33 million in 2024. Employers, including state governments, have played a pivotal role in this shift by tying health benefits in retirement plans almost exclusively to Medicare Advantage, reducing choices for retirees and potentially increasing their out-of-pocket costs if they prefer traditional Medicare plus Medigap plans, which supplement original Medicare by covering co-pays and deductibles.

Medicare Advantage plans are attractive due to lower premiums, reduced co-pays, and additional benefits not covered under traditional Medicare, such as dental, hearing, and vision coverage. However, Medicare Advantage plans are generally more expensive for taxpayers, who pay Medicare Advantage insurers more per enrollee than for traditional Medicare. These plans also manage costs by limiting provider networks and prior authorization requirements, which may restrict patients' access to care.

Enrollment in Medicare Advantage is growing primarily through beneficiaries switching from traditional Medicare. In 2021, over 7% of traditional Medicare users switched to Medicare Advantage, while only 1.2% moved in the opposite direction, partly due to protection limitations for those switching back, including higher Medigap premiums in most states outside the initial Medicare enrollment period.

The increase in Medicare Advantage enrollment is most prominent among racial and ethnic minorities and low-income individuals, with geographic variation ranging from as low as 2% in Alaska to as high as 63% in states like Alabama and Connecticut. Beneficiaries opting for Medicare Advantage typically cite extra benefits and caps on out-of-pocket costs, whereas traditional Medicare enrollees prioritize provider choice.

The shift toward Medicare Advantage also reflects broader trends seen in Medicaid privatization, where most beneficiaries are enrolled in private plans with limited choice. Brokers and advertising significantly influence plan selections, raising concerns about marketing tactics that might prioritize enrollment incentives over beneficiary needs.

Employer-sponsored retirement health benefits have moved significantly toward Medicare Advantage, with 13 states excluding traditional Medicare supplement plans in state employee retiree benefits. In the private sector, the proportion of employers offering Medicare Advantage doubled from 26% in 2017 to 56% in 2024, often replacing traditional Medicare with Medicare Advantage without offering choice to retirees, which may force retirees to bear higher costs if they prefer traditional coverage.

Switching out of Medicare Advantage is complicated due to the loss of guaranteed issue and community rating protections for Medigap coverage, raising barriers for sicker or older beneficiaries returning to traditional Medicare after their initial enrollment period. Despite these challenges, some beneficiaries switch back as health needs evolve.

Medicare Advantage plans offer partially expanded benefits and lower out-of-pocket spending compared to traditional Medicare without supplemental coverage, which appeals to those facing financial insecurity. Nonetheless, the program's rapid growth has financial implications, costing taxpayers an estimated $83 billion annually due to higher payments to MA providers.

Experts suggest that reform is necessary to address payment structures, ensure access to affordable healthcare, and consider improving traditional Medicare benefits like out-of-pocket maximums and coverage for dental, vision, and hearing. Maintaining equitable access and financial sustainability in Medicare programs is crucial as the population ages and Medicare Advantage continues to dominate enrollment.