Posted on June 26, 2003

Private Medicare plans increase costs


The Commonwealth Fund
Policy Brief
Lessons from Medicare+Choice for Medicare Reform
By Geraldine Dallek, Brian Biles, and Lauren Hersch Nicholas

Lesson 7: Private plans are not less costly than traditional Medicare

The major goal of Medicare reform based on private plans is to use competition to control the growth in overall Medicare costs. The experience from M+C suggests that private plans do not save Medicare money and that, to the contrary, they can increase program costs.

The reasons why M+C (Medicare+Choice) private plans have not succeeded in reducing total Medicare costs include:

  • Enrollees in M+C managed care plans have historically been healthier than those who remain in fee-for-service Medicare, and risk-adjusted Medicare payment does not fully compensate for this pattern.
  • To attract M+C plans in more rural and non-metropolitan areas, Medicare has increased payments for M+C plans above the level it pays in these areas for traditional Medicare. While this has not led to increased participation by Medicare HMOs, increased rural payments translate into higher Medicare costs for PFFS (private fee-for-service) plan contracts.
  • The newer private plans - PFFS plans and demonstration PPOs (preferred provider organizations) - contract in areas where M+C payment rates are higher than traditional Medicare rates.
  • Medicare administrative costs average approximately 2 percent, while administrative costs in private plans in employer groups generally exceed 10 percent. In particular, private plans have costs associated with marketing and, in the case of for-profit plans, a return for investors.

New, less-structured PFFS and PPO plans, with broader provider networks and fewer cost containment features, may be even less able than are current M+C HMO plans to limit total costs through reductions in price, rates of hospitalization, and use of specialized services.

The lesson from M+C suggests that it is difficult for private plans to reduce total costs of care from the level of the traditional Medicare program. It is even more difficult for private plans to offer additional benefits, cover marketing and administrative costs, and make a profit while pricing their products below the costs of the Medicare fee-for-service program.


In 1997, it was predicted that 34 percent of Medicare beneficiaries would be enrolled in M+C private plans by 2005. Instead, 11 percent of the Medicare population is enrolled in M+C plans in 2003, down from 16 percent in 1998. Policy experts also projected that M+C plans would expand to all parts of the country, educated beneficiaries would begin to make informed choices based on costs and quality, and competition among plans would reduce overall costs to the Medicare program and to beneficiaries alike.

None of these predictions has occurred. Instead, the M+C program has fostered broad dissatisfaction by private plans, providers, and elderly and disabled beneficiaries. Rather than steady growth, the program has undergone a period of persistent instability and a decline in enrollment.

The history of M+C is a cautionary tale. It offers important lessons for consideration in any new program to expand the use of private plans in Medicare.

Comment: How many times have we heard this? Private Medicare plans, whether Medicare + Choice, PPOs, or private fee-for-service plans, all increase costs over the traditional Medicare program. Politicians who make claims to the contrary are simply lying. Call them on it, and demand that they explain the real reasons for supporting private plans. Failing that, fire them in the next election.