Medicare Advantage Proves Seniors Will Choose Private Plans When Allowed

Imagine a government program whose designers spent decades insisting that private companies could not possibly serve older Americans well. Now imagine that, given the option, a very large number of older Americans quietly signed up with those companies anyway. You would expect the designers to ask what the customers saw. Instead the usual response is to ask what is wrong with the customers.

That is the odd place Medicare Advantage occupies in the health care debate. It is the part of Medicare where private plans compete for beneficiaries, and its steady growth is, in my judgment, the best piece of evidence in American health policy that choice and competition work inside a government program. It is also flawed, and the flaws deserve a fair hearing. Let me make the argument in order.

Terms first

Traditional Medicare is the original program: the government pays providers directly, on a fee-for-service basis, for each covered service under Part A (hospital) and Part B (medical). Beneficiaries can use nearly any provider that accepts Medicare.

Medicare Advantage, also called Part C, is the alternative. A private insurer contracts with Medicare, and Medicare pays that insurer a fixed monthly amount per enrollee. This is called capitation: payment per head, not per service. The insurer then bears the risk and the opportunity. If it can deliver the required benefits for less than it is paid, it keeps part of the difference or passes it back as extra benefits. If it cannot, it eats the loss.

Premium support is a reform idea built on the same principle. The government would pay a fixed contribution toward a plan the beneficiary chooses, and plans, including a traditional government-run option, would compete on price and quality.

My thesis has three parts. One: seniors choose private plans when they are allowed, and that choice is a revealed preference worth taking seriously. Two: the structure of Medicare Advantage, bidding against a benchmark, uses competition to discipline cost in a way fee-for-service does not. Three: the program's real defects are fixable without ending the choice, and the choice points toward premium support as the broader model.

A short history of a long fight

The idea that private plans could serve Medicare patients is older than most people suppose.

In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act, known as TEFRA. It let Medicare contract with health maintenance organizations on a risk basis, paying them a capitated rate set at 95 percent of what Medicare estimated it would have spent on comparable beneficiaries in the traditional program, a measure called the adjusted average per capita cost. Those risk contracts began operating in the mid-1980s. A program that pays 95 cents to deliver the same coverage as a dollar program should save money on paper. In practice the estimates were imperfect, and the experience taught lawmakers that setting the payment rate administratively is hard.

In 1997 the Balanced Budget Act created Medicare+Choice, which broadened the menu of private options beyond HMOs to include preferred provider organizations, provider-sponsored organizations and private fee-for-service plans, and it created a way for beneficiaries to enroll through an annual coordinated election period. The payment formula was tied to a blend of local and national rates, with floors. The problem soon became clear. Plans pulled out of markets where the payment did not cover the cost, leaving beneficiaries to move back to traditional coverage. Medicare+Choice showed that a payment rate set by formula will be too low in one county and too high in the next, and that a plan facing the first kind will leave.

In 2003 the Medicare Prescription Drug, Improvement, and Modernization Act renamed the program Medicare Advantage and rebuilt its payment around a bidding system. That is the design we have today, with later amendments. Each plan submits a bid, its estimate of what it would cost to provide the Part A and Part B benefits to an average enrollee. CMS compares that bid to a benchmark, a county-level amount based on traditional Medicare spending in the area. If a plan bids below the benchmark, the plan receives its bid plus a rebate, a share of the difference that the law requires it to give back to enrollees in the form of extra benefits or lower premiums. If it bids above the benchmark, enrollees pay the difference as a premium. The Affordable Care Act later changed how benchmarks are set, tying them to local fee-for-service spending with adjustments by quartile, and added bonus payments linked to quality star ratings.

Here is the arithmetic of that mechanism, as a hypothetical. Suppose the benchmark in a county is $1,000 per enrollee per month and a plan bids $900. The plan is paid its $900 bid plus a rebate based on the $100 gap. The law sets the rebate at a percentage of the savings that depends on the plan's quality rating, and the plan must use it to give enrollees more than traditional Medicare covers. The plan, in effect, competes for members by turning savings into benefits. The beneficiary who walks into the plan's office sees dental coverage, vision coverage, or a lower premium. That is not magic. It is a bidding system that forces a plan to show its price.

What seniors actually get

Traditional Medicare, as designed, has real gaps. It has deductibles and cost sharing, and it has no annual cap on out-of-pocket spending for Parts A and B. Many beneficiaries buy a Medigap supplemental policy to cover the holes, or get retiree coverage.

Medicare Advantage plans, by contrast, must cover everything that Parts A and B cover and must set a yearly limit on in-network out-of-pocket costs. Many offer extras that traditional Medicare does not: routine dental, vision, hearing aids, gym memberships and, in some plans, a fixed allowance for over-the-counter items. Plans also commonly include prescription drug coverage in the same package, which means one card and one premium instead of the separate pieces that traditional Medicare enrollees assemble.

Why do I call that a revealed preference? Because no one is compelled. A beneficiary who prefers traditional Medicare can stay in it. The program's own enrollment tables, which CMS publishes, show the share of beneficiaries in private plans rising over many years. I will not quote the latest percentage, because that is exactly the kind of figure that goes stale; look at the CMS enrollment files and the Kaiser Family Foundation's annual tracking and see the trend yourself. The shape of the line is the point. People who were offered a choice made it, and kept making it.

The usual response from critics is that beneficiaries are being tricked by advertising. That response has an old and honorable pedigree in American politics: the voters are choosing wrong, therefore the choice must be removed. I do not buy it. If it were true that private plans were a bad deal for seniors, then seniors, who after all have the whole of a lifetime's experience at reading fine print, would be the last group likely to be fooled for twenty years running. Treating adults over sixty-five as targets rather than customers is exactly the condescension the program's critics usually accuse the other side of.

The strongest criticism, stated fairly

I owe you the opposing case, in words its defenders would accept.

The critics say that Medicare Advantage is paid too much. The mechanism is coding. Plans are paid more for enrollees with more diagnoses, through a risk adjustment model that predicts each enrollee's expected cost from the conditions recorded in their claims. That is a sensible principle: a plan that enrolls sicker people should get more money, or it will avoid them. But it creates an incentive to record every diagnosis. The Medicare Payment Advisory Commission, MedPAC, which is Congress's own advisory body on Medicare payment, has repeatedly found that Medicare Advantage enrollees are recorded as having more diagnoses than comparable people in traditional Medicare, and that this "coding intensity" raises payments to plans. MedPAC has also reported that payments to Medicare Advantage plans, taken together, exceed what Medicare would have spent on the same people in traditional Medicare. That is a finding from a body that is not partisan.

Add the second criticism: plans use prior authorization and narrow networks to control costs, and some patients find that the care they want requires a call to an insurer. And third: the extras are attractive but their value depends on whether a person actually uses them.

I think those criticisms are serious. A conservative who defends choice should not defend overpayment. Here is the answer, in numbered points.

1. Coding intensity is a payment-design problem, not a verdict on competition. If the risk-adjustment model overpays, then correct the model. That is a different thing from saying seniors should not be allowed to choose. The remedy for a miscalibrated price is a better price. Congress and CMS have worked at it, including through a revised risk adjustment model that CMS began phasing in for 2024, and they can do more.
2. The comparison that matters is not plan against plan but plan against the alternative. Traditional Medicare also pays what it pays through administered prices, with no bidding at all. Fee-for-service has its own built-in incentive: more services mean more payment. Neither system is incentive-free. Medicare Advantage at least puts a price tag on the table and makes the plan bid it.
3. Prior authorization is a real cost, and the right answer is transparency, not abolition. Requiring plans to publish their approval and denial rates and to meet response times addresses the patient's complaint without removing the choice. Traditional Medicare, for its part, has its own coverage rules and audit processes that deny claims; the difference is which party writes the rule.
4. Narrow networks are a feature that beneficiaries can see and compare before enrolling. The annual election period exists so that they can leave a plan if the network disappoints. Fee-for-service offers wide access in exchange for open-ended cost, and the beneficiary often pays for that with a supplemental premium.

I am not saying these answers close the question. I am saying they leave the main point intact: the criticisms ask for better rules, not a repeal.

Measuring it against first principles

The Founders did not write about Medicare, naturally, but they wrote about power and choice. Alexander Hamilton, in Federalist 70, argued that energy in the executive was essential to good government. The broader tradition from the same era, running through Adam Smith and the Scottish Enlightenment, held that dispersed decisions by many people usually outperform one central judgment. A program that gives a retiree a menu is closer to that tradition than a program that hands her a single plan and a rulebook.

There is a plain moral claim underneath it. A person's health is among the most personal things a person owns, and being allowed to choose how to arrange coverage for it is a form of dignity. We usually think of Medicare as an entitlement, which makes it sound like a gift. It is better understood as a contract between the citizen and the government, and in any contract the party that can walk away has leverage. Competition gives the beneficiary the leverage that a monopoly never does. It is a point I also make about Medicare's Two Trust Funds and the 45 Percent Warning Congress Keeps Ignoring, where the underlying problem is the same: costs that no one is made to see.

Let me add the observation that every good market argument needs. Competition does not abolish costs; it exposes them. The most useful thing a bidding system does is force a number onto the table. When a plan says "we can do this for $900 and here is what we will add for the extra $100," you have learned something that fee-for-service, which pays whatever the claims add up to, never tells you. Look at how the same logic works in other parts of the economy. In a thought experiment where every price in town is set by a committee, we follow what happens when nobody has to bid.

What it suggests for premium support

If seniors will pick private plans inside Medicare, the next question is whether the whole program should work that way. That is the premium support proposal.

It has a history worth knowing. In 1999 the National Bipartisan Commission on the Future of Medicare, chaired by Senator John Breaux, a Democrat, and Representative Bill Thomas, a Republican, studied the program's finances and voted on a premium support plan modeled on the system that covers federal employees. It won a majority of the commission, ten of seventeen members, but fell short of the supermajority the commission's rules required for a formal recommendation. Years later, in 2011, Representative Paul Ryan, a Republican, and Senator Ron Wyden, a Democrat, put out a joint proposal along similar lines. That the idea has support on both sides of the aisle at some points in history is worth remembering when it is called radical.

The key design choices are these:

• The contribution. The government pays a defined amount, typically linked to the cost of competing plans in the area, for each beneficiary. A beneficiary who picks a plan that costs less keeps the savings. One who picks a plan that costs more pays the difference.
• The traditional option. In most designs the government-run plan remains and competes alongside the private ones. Nobody is forced out of traditional Medicare.
• Protections. Plans must accept all applicants and cannot charge more for existing conditions, and the contribution can be adjusted by health status and income, so that the sick and the poor are protected.

The strongest objection is that the contribution might not keep up with the growth in health costs, leaving beneficiaries with a rising share of the bill. That is a real risk, and the answer is in the design: the contribution should be tied to what plans actually bid, not an arbitrary growth rate, and a poorer beneficiary should receive more. Whether a given proposal does that is a matter of detail, and details are exactly what voters should demand.

Other health reforms of the same family, such as health savings accounts and direct primary care, also reduce the distance between a patient and the price. For the portable-money side of the argument see Eleven Questions About Health Savings Accounts, Answered for Working Families. For how four conservative plans differ from each other, see Four Conservative Health Plans Side by Side, From Tax Credits to Block Grants.

The case in brief

1. Medicare Advantage grew out of a long record: the risk contracts of the 1982 TEFRA law, Medicare+Choice in the Balanced Budget Act of 1997, and the bidding system of the 2003 Modernization Act.
2. Under that system plans bid against a county benchmark, and savings come back to enrollees as extra benefits and an out-of-pocket cap that traditional Medicare lacks.
3. The best criticism, coding intensity and overpayment as MedPAC has described it, is real, but it calls for a better payment formula and more transparent rules, not for ending the choice.
4. Seniors who stay in or move out of private plans are telling policymakers something, and premium support, which has had bipartisan sponsors, is the logical way to build on it.

What you can do: open the CMS plan-finder tool or the annual Medicare & You handbook at election time, compare the plan options in your own county, and then tell your representative which features you want protected in any reform.