We all know about Medicare, the federal government health insurance program for Americans who are over the age of 65 and/or disabled. We know that as we have begun to live longer, the Medicare population has ballooned and the costs of the program are, by most estimates, “unsustainable.” We also know that Medicare, despite being a government program, is beloved by America’s seniors. If it was an unpopular program, Congress would have cut it long ago, saved billions of dollars, and we wouldn’t be talking about debt ceilings. But, the fact is that the Medicare program is extremely popular, making any proposed changes to it–even changes deemed necessary to preserve the program–a political liability. That is why both Republicans and Democrats have blamed each other for wanting to cut the program. They know that if they can pass the blame effectively, it would be the kiss of death for their opponent.
But, while we know all of this, what far fewer of us know about is a special offshoot of the federal Medicare program–a privately administered model known as Medicare Advantage. In 1997, the passage of the Balanced Budget Act created what were known as Medicare+Choice plans. By 2003, when the Medicare Prescription Drug, Improvement, and Modernization Act was passed, Medicare+Choice was re-branded as Medicare Advantage. These Medicare Advantage plans work differently than traditional fee-for-service Medicare. Let me explain.
Under traditional Medicare, at the time they become eligible, individuals receive hospital coverage (Part A), which they have paid into during their working life (or that of their spouse), and they may pay a relatively low monthly premium to receive physician coverage (Part B). While these beneficiaries have to pay certain deductibles and co-insurance, the Medicare program generally covers all necessary health care services.
By contrast, Medicare Advantage works on a more capitated model. That is, the federal government pays private insurers who offer a Medicare Advantage plan a fixed dollar amount per member per month. Beneficiaries still have to pay their monthly Part B premium to Medicare, but they typically do not pay additional premiums, and they usually pay a copayment at the time of a health care visit, rather than a deductible and coinsurance. To top it all off, Medicare Advantage plans have to provide coverage that is as good as traditional Medicare, but they can also offer additional benefits, and most plans do offer things like vision and hearing benefits, and even gym memberships.
On the surface, these Medicare Advantage plans certainly seem advantageous. After all, who doesn’t prefer lower out-of-pocket costs and more benefits? This likely explains the growth in Medicare Advantage enrollment from 5.4 million beneficiaries in 2005 to 11.1 million in 2010. But there’s a catch. You read it, but maybe you glossed over it. Let me draw your attention to it again: “the federal government pays private insurers who offer a Medicare Advantage plan a fixed dollar amount per member per month.”
If you’re running a business and trying to make a profit, and your model is based on receiving a fixed monthly payment for individual, paying a significant portion of the costs of their care, and pocketing the difference, what are your incentives? If you answered, “To pay as little for their care as possible,” you’re on the right track. But they can’t do this by denying benefits to those of their enrollees who use the most care. What they can do, is work diligently to target only healthy people to enroll in their Medicare Advantage plan. The strategy is simple: By selecting healthy individuals who will use less health care, they keep their costs down, and generate larger profit margins. Meanwhile, traditional Medicare gets left caring for the sickest subset of the elderly and disabled population.
Recent research, which Jordan Rau of Kaiser Health News summarizes nicely, confirms that this is precisely what is happening. The bottom line is this: Medicare Advantage works to your advantage when you are healthy, but if you happen to get sick, the private insurance market will turn its back on you, and traditional Medicare will be there to greet you with open arms–provided we can keep it solvent. So, the next time you hear Republicans saying they want to privatize Medicare, it might sound like an attractive option right now, but think long and hard about what it would mean if you actually got sick and needed insurance on which you could depend.
Note: In the interest of time, much of the substantive content of how Medicare Advantage plans work is adapted from that bastion of web-based knowledge Wikipedia. Here’s the link if you want even more details than the basics I included here.