Medicare Advantage should be making news. It’s not because the Medicare trust fund continues to run on fumes, which it does. Nor is it because Medicare was taken “off the table” in recent debates about cutting the federal budget, which it was. Rather, it should be getting a lot of attention for new data about its size, cost and striking profitability.
First, Medicare Advantage enrollment is crossing a meaningful threshold
This year, for the first time ever, Medicare Advantage will likely supersede traditional Medicare in total enrollment. That is big news. Medicare is often perceived as a government plan (i.e., think Medicare-for-All). But since 1997, it has given enrollees an option to choose a private plan to deliver Medicare benefits. Enrollees have increasingly picked those plans. This year, more people will be enrolled in the private coverage option than the government plan, giving those who value privatized Medicare a big win. 
This doesn’t mean there is necessarily a strong public preference for private coverage. The enrollment growth probably has more to do with the aggressive marketing by private insurers that traditional Medicare cannot match. This includes widely-criticized, misleading advertisements from 2021 featuring Joe Namath, William Shatner and others. Such marketing resulted in nearly 40,000 complaints filed with the Centers for Medicare and Medicaid Services (CMS) in 2021 (a 7-fold leap from 2017).
Second, CMS announced it would collect overpayments to Medicare Advantage
Federal financial audits of Medicare Advantage have revealed considerable overcharging of Medicare. CMS found overcharges totaling about $650 million during a two-year period. And an earlier analysis found overpayments of about $12 billion per year over a ten-year period. This occurs because of how Medicare pays Medicare Advantage plans. Plans assign each patient a risk score based upon their health conditions, with a larger number or complexity of conditions triggering higher payment. Thus, plans have an incentive to up-code patient conditions.
CMS has delayed action to reclaim those overpayments. In last week, however, CMS finally announced it would begin the process of recouping those costs. It detailed the process by which the overpayments would be calculated, and how future payments will be made based on risk scores. Ultimately, CMS aims to recover just $4.5 billion over the next decade. And it has still decided to raise payment rates by 1% to Medicare Advantage plans for 2024, which raises concern that little is actually being done to stop the gross overpayments.
Third, new data suggests Medicare Advantage is strikingly profitable
Third, a recent report by Kaiser Family Foundation suggests that Medicare Advantage plans are making private insurers more money per enrollee than any other type of plan. In 2021, Medicare Advantage plans had gross margins of $1,730 per enrollee. That is far higher than their gross margins in Medicaid managed care ($768), the individual market ($745), or the employer-based market ($689). That is a stark difference in likely profitability. And according to the new data, it has been this way for years.
Sure, gross margins aren’t a direct measure of profit. The margins include money that can be used for administrative costs, tax liabilities and a few other things. But they are an approximate measure of relative profitability across plan types. And Medicare Advantage appears to be raking it in.
These profits, combined with the growth in the number of older adults, likely explain why private insurers offered nearly 4,000 Medicare Advantage plans in 2022 (a new record by far).
We’re not making it easy on ourselves
When it comes to the sustainability of Medicare, we are not making it easy on ourselves. The enrollment shift to Medicare Advantage plans, coupled with their gaming of the system and dramatic profits, only makes the challenge of creating an enduring Medicare program that much harder. Perhaps if there were clear health benefits of choosing Medicare Advantage, we could justify it. But newer evidence is mounting that there is no such effect.
Gregory Stevens