“The basic benefits package of Medicare — replete with deductibles and coinsurance — long ago began falling short of the promise of financial protection as articulated by President Lyndon Johnson in 1965. In 2019, out-of-pocket spending in traditional Medicare averaged $7,053 among all seniors and $12,315 in the top decile, which was equal to 25% of seniors’ mean after-tax income and to 69% of retirees’ mean Social Security income. [..]
Over time, Medicare Advantage has evolved into a conduit for financing coverage expansion that is arguably overdue. Enrollees enjoy substantially lower premiums for supplemental and prescription drug coverage than they would encounter in traditional Medicare — savings that are especially valuable for lower-income households. These gains are in part due to the large payment subsidies directed to Medicare Advantage plans, including supplementary quality bonuses, benchmarks set above traditional Medicare spending, and unintended rewards for diagnosis coding and risk selection.
Whether this backdoor approach has been more efficient than a direct expansion of coverage in traditional Medicare is unclear. On the one hand, Medicare Advantage is designed to defray the cost of more generous coverage by encouraging plans to limit overuse of health care services. Indeed, plans have achieved efficiencies by means of utilization management. On the other hand, plans pass only a portion of the extra payments along to enrollees as extra coverage, restrictions on access may go too far, and reliance on a manipulable risk-adjustment system to finance additional coverage perpetuates distortionary incentives and encumbers much-needed reform of risk adjustment. Regardless, the elimination of subsidies as “overpayments” would erode de facto progress in expanding coverage, however circuitously achieved, and would also pose dire political consequences for the responsible party.
Thus, at this juncture, the core challenge awaiting Congress is how to manage the costs and benefits of a Medicare program that is now more generous. [..] At the center of this restructuring is the fated choice between accommodating Medicare Advantage as a dominant stand-alone program and fortifying traditional Medicare along with its role in the regulation of Medicare Advantage. That deliberation may be among the most consequential for the Medicare program since its enactment. There will be calls to strengthen traditional Medicare that are motivated by concerns about putting Medicare in the hands of private interests and forsaking its responsibilities as an entitlement program. Characterized as such, ending the favored treatment of Medicare Advantage would be a move toward reasserting the role of traditional Medicare as steward and guarantor. However, there is a less contentious and potentially stronger argument to reinvest in traditional Medicare that recognizes an often-overlooked but essential role that it plays, one that may be vital to the success of the Medicare Advantage program, too, and should be at the center of any discussion about the future of Medicare — the role of traditional Medicare as competitor.
Although not a strategic market actor, traditional Medicare sets the bar for coverage, access, and per-beneficiary Medicare spending. Medicare Advantage must offer something better to attract enrollees. Medicare Advantage was intended to compete with the traditional program by financing enhancements with efficiencies, with Medicare sharing in the savings. Specifically, plans bid against a payment benchmark that is based on local, risk-adjusted spending per beneficiary in traditional Medicare. The further below the benchmark that plans bid, the more they can exceed the basic coverage offered by traditional Medicare; specifically, 50 to 70% of the difference between the bid and the benchmark is applied to extra coverage, with the remaining 30 to 50% returned to Medicare. This system was meant to encourage plans to reduce Medicare spending below levels in traditional Medicare as a means to attract enrollees with more coverage at lower premiums. However, the combination of antiquated coverage in traditional Medicare and large subsidies to Medicare Advantage have put the traditional program at a severe competitive disadvantage, allowing Medicare Advantage to easily outmatch the generosity of the traditional program without having to approach, let alone beat, its costs to Medicare. Although the share of beneficiaries in traditional Medicare remains above 40%, the rate of switching into Medicare Advantage has increased dramatically, which suggests movement into Medicare Advantage that is unremitting but lagged because of well-documented inertia in beneficiaries’ decision making.
[..] Despite historically generous payments that should encourage entry and competition, most Medicare Advantage markets remain highly concentrated. In 2021, two thirds of enrollees resided in highly concentrated counties, as defined then by federal antitrust agencies. With traditional Medicare setting a low bar for coverage, Medicare Advantage plans in such markets need not pass along as much surplus (from subsidies or efficiencies) in the form of better premiums or benefits to attract enrollees as they would need to pass along in more-competitive markets. In principle, insurers facing less competition within Medicare Advantage also risk losing fewer enrollees when aggressively restricting utilization or networks if the traditional program remains less appealing in other key dimensions.
All else being equal, a more generous traditional Medicare should apply more pressure on plans to generate efficiencies without adversely compromising access and to share the resulting savings with enrollees in ways that differentiate Medicare Advantage plans from the traditional program. In this way, strengthening the value of traditional Medicare to beneficiaries could strengthen the performance of Medicare Advantage, allowing Medicare to extract more for beneficiaries and taxpayers by contracting with private plans.
In markets with more insurer competition in Medicare Advantage, the influence of traditional Medicare is conceptually less clear. Medicare Advantage plans pass along more of their payment to enrollees in less-concentrated markets, which suggests gains from a stronger traditional Medicare in more-concentrated markets but perhaps a lesser need for traditional Medicare elsewhere. [..]
The competitiveness of traditional Medicare may also play a role in keeping provider prices in Medicare Advantage far below commercial rates. When Medicare Advantage plans must keep costs below traditional Medicare spending in order to outmatch the benefits of the traditional program, plans can credibly reject provider demands for prices much above traditional Medicare rates. Generous payments to Medicare Advantage plans well in excess of spending in traditional Medicare could undermine this position and allow providers to negotiate higher prices (assuming that they can turn away out-of-network enrollees), thereby diverting surplus away from enrollees to providers.
The alternative to making traditional Medicare more competitive is to rely more exclusively on insurer competition within Medicare Advantage and on direct regulation to make Medicare Advantage perform well as a dominant stand-alone program. Although instilling more competition within Medicare Advantage may be a worthy policy goal, policymakers and antitrust authorities in the United States have struggled to make health care markets more competitive.
As for regulating Medicare Advantage without a traditional program, the challenges are not insurmountable. To control costs and ensure levels of generosity above what traditional Medicare currently offers, benchmarks could be set differently, administered prices could be imported from traditional Medicare to Medicare Advantage, premiums could be capped, and benefits could be standardized. Stricter measures could be devised to discourage overly restrictive practices.
However, attempts to replicate the effects of a competitive public option with explicit regulatory controls present risks. For example, if benchmarks are decoupled from traditional Medicare spending and are instead based on plan bids, they could increase in markets that have little competition, which would act to increase Medicare spending. Various aspects of access, such as network adequacy and the appropriateness of prior authorization practices, are hard to define and monitor. Consider, for example, the complexity of curbing the misuse of artificial intelligence in coverage denials. Regulations could go too far, undermining the ability of plans to limit low-value care. Conversely, measures such as the medical loss ratio (i.e., the share of plan revenue devoted to care) may fail to ensure that enough is spent on patients. A competitive traditional program allows Medicare to discipline plan behavior indirectly, demanding healthy innovation from private plans without necessitating as tight control — in other words, regulation by means of sponsoring a competitor rather than by rulemaking.
As policymakers weigh the options without complete information available regarding the trade-offs, the vital importance of competition to the success of Medicare Advantage and evidence of regulatory deficiencies when this program operates alongside a weak traditional Medicare should caution against continued neglect of the public Medicare competitor. What would restoring the competitiveness of traditional Medicare entail?
[..] the approach must couple an increase in the generosity of traditional Medicare coverage (which increases Medicare Advantage payment) with an offsetting decrease in Medicare Advantage subsidies, which could be fine-tuned to achieve a desirably moderate net reduction in plan payments. The first piece would involve making the traditional program generous enough to offer decent coverage with an out-of-pocket maximum and reasonable cost-sharing at an affordable premium, obviating beneficiaries’ need for Medigap to insure against catastrophic losses. The package should not be too generous, given that it must leave room for Medicare Advantage plans to differentiate themselves from traditional Medicare to attract beneficiaries who are willing to accept some restrictions in exchange for lower premiums or additional benefits. The second, counterbalancing piece would reduce payment subsidies to Medicare Advantage plans; ideally, the reductions would include implementation of a less-manipulable risk-adjustment system that minimizes rewards for coding intensity.
Reducing the need for Medigap would remove the so-called Medigap trap, in which Medicare Advantage enrollees who are dissatisfied with the program find that switching to traditional Medicare is unaffordable because Medigap premiums are typically adjusted on the basis of beneficiaries’ health risks after their initial enrollment period in Medicare. This trap has ambiguous effects on the relative attractiveness of the traditional program, dampening the appeal of Medicare Advantage to prospective first-time enrollees but also making traditional Medicare prohibitively costly for many persons once they enroll in Medicare Advantage. The latter effect eases pressure on plans to compete with traditional Medicare on dimensions of quality that become apparent to enrollees only after they gain experience in a plan. Allowing beneficiaries to move more freely between the Medicare Advantage and traditional programs may shift more enrollees out of Medicare Advantage when they receive a diagnosis of severe illness. Such shifts and their fiscal implications warrant consideration and would depend on risk adjustment and how plans change their bids and offerings. However, removing this unpopular source of friction would also better enable beneficiaries to make choices that match their evolving preferences.
How much would this way forward cost? Increasing the generosity of traditional Medicare would clearly increase federal spending in the near term, but this increase is likely to be moderated by several factors that could also make the longer-term budgetary implications favorable relative to the status quo. First, on its present course, Medicare spending is already set to increase steadily as beneficiaries increasingly choose Medicare Advantage. Costs will increase either way — whether as the result of a more generous traditional program or as a result of a growing Medicare Advantage. To the extent that a more generous traditional Medicare accelerates the inevitable, the added costs will diminish with time.
Second, the increased spending in the traditional program would be offset by the modest net reduction in payment to Medicare Advantage plans (resulting from the cuts to subsidies) and by savings from insurers lowering their bids to offer more generous plans as a counter to the stiffer competition from traditional Medicare. Initially, these offsets would be partial, but eventually, they could decrease spending Medicare-wide, depending on how high enrollment in Medicare Advantage would reach under the status quo (currently, a peak is nowhere in sight). Among the moderating cuts, elimination of subsidies for higher coding intensity in Medicare Advantage would not only counteract the increased Medicare Advantage payment levels that would be caused by the increased generosity and spending in traditional Medicare; it could also slow payment growth in Medicare Advantage because risk scores are expected to rise faster in Medicare Advantage than in the traditional program, continuing a decade-long trend. In this way, the coupling of otherwise problematically large cuts to Medicare Advantage with an enhanced traditional Medicare would facilitate long-term control over Medicare Advantage payment by largely preserving it in the short term.
Third, an enhanced traditional Medicare package could be offered as an option (alongside Medicare Advantage plans) that prohibits concurrent Medigap coverage, thereby shifting some beneficiaries out of Medigap plans with minimal-to-no cost-sharing and reducing health care utilization somewhat. Fourth, traditional Medicare would not need to be as generous to compete for higher-income beneficiaries who are willing to pay more for unrestricted access; accordingly, premiums could be graded according to income.
Finally, enhancements to coverage in the traditional program would not be necessary for dually eligible beneficiaries, who receive supplemental insurance from Medicaid. The path forward for these dually eligible beneficiaries is complicated, but it need not increase Medicare spending. Therefore, strengthening traditional Medicare as a competitor while reanchoring Medicare Advantage payment to spending in the traditional program may not cost as much as one might think and could improve the long-run fiscal outlook of Medicare by curbing runaway spending in Medicare Advantage and by limiting overuse in the traditional program.
Relying on a public option to help lead Medicare into the future is not without trade-offs. A revitalized traditional Medicare must strike a balance between ensuring an option that is favored by enough beneficiaries and leaving room for private plans to do better for other beneficiaries. Moreover, a more generous traditional program may mean a less expansive Medicare Advantage and hence fewer beneficiaries who would be exposed to incentives that encourage efficiency. [..]
Governing Medicare Advantage without a viable traditional Medicare is not straightforward, and the potential merits of a strong public competitor should not be underestimated. These potential merits include a higher-performing Medicare Advantage, a simpler regulatory approach that more flexibly supports innovation, a modernized guarantee of financial protection for seniors, and a fairer market that supports better-informed choices.
Medicare reform will not be easy, but at this point, it cannot be sidestepped. As Medicare Advantage grows, debate must begin. In grappling with the future of Medicare, policymakers would be well served by setting aside polemical characterizations of traditional Medicare and Medicare Advantage and by finding common ground in what these two programs were intended to do together for seniors — compete for them.”
Full editorial, JM McWilliams, New England Journal of Medicine, 2024.8.21