To Truly Understand Medicare Advantage Spending, Look at the Bigger Picture

By Mary Beth Donahue, President and CEO, Better Medicare Alliance, and Susan Dentzer, President and CEO, America’s Physician Groups 

More than 35 million adults age 65 and older and people with disabilities now choose Medicare Advantage to get their comprehensive healthcare. The physician groups that take care of them invest in multiple ways to keep these patients healthier — identifying their risks of illness before they fall sick, managing their chronic conditions before they reach a crisis, and building care teams that make sure patients get the care they need and help them navigate their way through a complex and fragmented health care system.  

How to measure the value of this comprehensive coverage and care provided to patients, and the costs of it all to the federal government and taxpayers, are critically important issues.  And the policies that the government undertakes in response to any cost estimates will have consequences for everyone, including the patients who rely on the program and the providers caring for them. 

The Medicare Payment Advisory Commission (MedPAC) estimates that the federal government spends more per beneficiary in Medicare Advantage than it would for comparable beneficiaries in the traditional, fee-for-service Medicare program. That estimate is widely cited and has been used to make the argument that Medicare Advantage is “overpaid,” and that federal payments to fund the program should be cut accordingly.  

But a new white paper by the Better Medicare Alliance finds that the MedPAC estimate understates the value of Medicare Advantage because it omits the bigger picture. For starters, it doesn’t quantify in any meaningful sense all the benefits that Medicare Advantage provides for enrollees.  It also doesn’t count the savings that enrollment in Medicare Advantage can generate by avoiding even more expensive care for enrollees down the line.  And it is based on conclusions about differences between people who elect Medicare Advantage and those who stay in traditional Medicare that may not be valid over time. By contrast, an analysis that properly considered the elements of this bigger picture could reach very different conclusions about the value of Medicare Advantage and whether the government is spending too much on it.  

Here is one key example of how the MedPAC estimate neglects this bigger picture and the shortcomings that result in its analysis.  

MedPAC’s estimate of the cost difference between traditional Medicare and Medicare Advantage takes into account just two parts of Medicare – Part A, which pays hospital bills, and Part B, which primarily pays physicians and other clinicians for taking care of patients.  It then computes what the government spends to provide these benefits under Medicare Advantage and traditional Medicare.  But MedPAC’s analysis omits Part D of Medicare, which pays for outpatient drugs. Many Medicare Advantage plans automatically incorporate Part D coverage into the total benefits package provided to enrollees. By contrast, enrollees in traditional Medicare have to purchase standalone Part D plan coverage separately.  Either way, by law, the government pays 75% of the cost of this drug coverage.  

Because Medicare Advantage plans are typically large and have better bargaining power with pharmaceutical companies than the standalone Part D plans do, the premiums that they charge MA enrollees for drug coverage are substantially lower than premiums for standalone Part D plans.  This benefit to Medicare Advantage enrollees isn’t captured in any MedPAC estimate of the value of the program, however.  And there are no published estimates of how much total government outlays for per-beneficiary Part D spending differ between those enrolled in traditional Medicare versus Medicare Advantage, and MedPAC doesn’t supply any, either.  

To top it off, because many Medicare Advantage plans enroll many low-income or disabled patients who are eligible for both Medicare and Medicaid, the complex financial arrangements between the two programs mean that many costs that would normally be borne by Medicaid are paid for by Medicare Advantage plans instead.  But these Medicaid savings aren’t captured in MedPAC’s estimate, which, as a result, doesn’t reflect a big-picture perspective of Medicare Advantage’s net impact on total federal spending.  

The Better Medicare Alliance paper cites several other major examples of the ways in which MedPAC’s estimate lacks a comprehensive perspective on the value of Medicare Advantage, particularly to enrollees. A simple one is that Medicare Advantage plans are required to cap beneficiaries’ annual out-of-pocket costs, which most plans now cap at an average of $5,421 for in-network services.  Traditional Medicare has no such out-of-pocket annual spending cap; to curb their out-of-pocket costs, enrollees in the traditional program must buy separate supplemental Medicare (so-called Medigap) coverage, the average cost of which – depending on the plan selected and the beneficiary’s location – can be another $1,200 to $3,600 annually.  MedPAC does not estimate what providing comparable protection directly through traditional Medicare would cost, but one analysis suggests that doing so would increase spending in the traditional program by 3.5% per year, or about $36 billion in 2026 alone.  

Why is it important to examine this bigger picture in making realistic comparisons between traditional Medicare and Medicare Advantage?  Simple but erroneous comparisons of the cost differential between the two have led to multiple proposals to slash government spending on Medicare Advantage, allegedly to bring it more in line with what the government spends on traditional Medicare.  But doing so could harm beneficiaries, the physician groups caring for them, and government finances in the long run.  

Research supported by America’s Physician Groups compared outcomes for Medicare Advantage and traditional Medicare patients when they were cared for by the same 17 physician groups. Medicare Advantage patients whose physicians operated under two-sided risk arrangements with Medicare Advantage plans had better outcomes on 16 of 20 measures, including substantially fewer hospitalizations, emergency department visits and 30-day readmissions. The most likely reason is that Medicare Advantage payments allow physician groups to develop the sophisticated care infrastructure to keep patients relatively healthy and out of hospitals – the largest source of health care spending – and thus to save money over time.  

Chopping money out of Medicare Advantage could strip physician groups operating in these models of the resources needed to care well for patients and maintain their health.  As more patients ended up sicker and in hospitals, not only would they suffer, but government Medicare spending would also rise over time.  Actions that seemed penny-wise – curbing Medicare Advantage spending – would end up being pound-foolish, to the tune of billions if not trillions of dollars.  And it would all have been because a narrow view of Medicare spending had missed the bigger picture all along.