David Whelan chronicles the rise (and possibly future fall) of Medicare Advantage programs in his article “Unfilled Prescription” in Forbes.
Earlier laws privatizing Medicare, starting with a pilot program in 1985, were written to give insurance companies only 95% of the money otherwise spent per Medicare member. The insurers were supposed to figure out how to make up the difference. It was a blunt way to save the Treasury money, but few companies stepped up…
The 2003 law hiked the payments to lure more insurers into the market. In some counties minimum payments to these plans reached as much as 128% of the amount Medicare traditionally spends per patient. Insurers rushed in, and costs soared. In the most remunerative counties, two times as many old people are enrolled in Medicare Advantage as the national average. As a result, taxpayers now pay an average of 12% more per private-plan beneficiary, not 5% less.
Whenever we talk about cost we also need to talk about quality. Are people who opt for Medicare Advantage plans getting higher quality care than in traditional Medicare? Are they able to see doctors in a more timely manner? Is care more coordinated? If this is the case, then the extra costs may be worth the money.
Nevertheless, an economist would guess that Medicare Advantage plans should be cheaper. Even though the private plans have higher administration and advertising costs, they likely are more efficient than the government plans. Further, one would anticipate that healthier seniors would choose the Medicare Advantage plans and sicker senior would be more likely to choose traditional Medicare. This selection problem should make Medicare Advantage cheaper.
I agree that the federal government should not pay more money for private plans than it does for traditional Medicare. It should reimburse the plans the same (or less if there is adverse selection) as it costs for the government to administer traditional Medicare and if firms want to increase the price, than seniors can pay the difference. If seniors do not want to pay the difference, they can always opt for traditional Medicare.