The Medicare Advantage Success Story — Looking beyond the Cost Difference Jeet S. Guram, B.S., and Robert E. Moffit, Ph.D. March 29, 2012.

Ongoing concern about the federal deficit has focused increased attention on the unsustainable trajectory of Medicare spending and the need for reform. Yet many policymakers seem to be overlooking the lessons of what may be the greatest source of innovation in care delivery in Medicare: Medicare Advantage, which subsidizes private-plan alternatives to fee-for-service Medicare. Last year, one in four Medicare beneficiaries was in a Medicare Advantage plan.

The Medicare Advantage program is frequently misrepresented. Because government payments to these plans were, on average, 10% higher than those for fee-for-service Medicare last year, critics contend that administering insurance through the government is inherently cheaper than subsidizing private insurance. They argue that, therefore, increasing the role of private plans in Medicare — an idea that gained bipartisan support with the introduction of a reform proposal by Representative Paul Ryan (R-WI) and Senator Ron Wyden (D-OR)1 — would be needlessly expensive. But examination of the way the government calculates payments to Medicare Advantage plans reveals the flaws in this argument.

Medicare Advantage plans submit bids to the Centers for Medicare and Medicaid Services (CMS). These plans, which include health maintenance organizations (65% of Medicare Advantage enrollment in 2011), preferred-provider organizations (27%), private fee-for-service plans (5%), and other types of plans (3%), must cover the same services as traditional Medicare. A bid is the amount a plan predicts it will spend in the upcoming year to cover these services for the average enrollee in a particular county. Read More