Medicare Advantage as a precursor of premium support

Variations In County-Level Costs Between Traditional Medicare And Medicare Advantage Have Implications For Premium Support

By Brian Biles, Giselle Casillas and Stuart Guterman
Health Affairs, January 2015


Concern about the future growth of Medicare spending has led some in Congress and elsewhere to promote converting Medicare to a “premium support” system. Under premium support, Medicare would provide a “defined contribution” to each Medicare beneficiary to purchase either a Medicare Advantage (MA)–type private health plan or the traditional Medicare public plan. To better understand the implications of such a shift, we compared the average costs per beneficiary of providing Medicare benefits at the county level for traditional Medicare and four types of MA plans. We found that the relative costs of Medicare Advantage and traditional Medicare varied greatly by MA plan type and by geographic location. The costs of health maintenance organization–type plans averaged 7 percent less than those of traditional Medicare, but the costs of the more loosely structured preferred provider organization and private fee-for-service plans averaged 12–18 percent more than those of traditional Medicare. In some counties MA plan costs averaged 28 percent less than costs in traditional Medicare, while in other counties MA plan costs averaged 26 percent more than traditional Medicare costs. Enactment of a Medicare premium-support proposal could trigger cost increases for beneficiaries participating in Medicare Advantage as well as those in traditional Medicare.

From the Discussion

This analysis of the relationship between the costs to provide Medicare benefits by MA private plans and by traditional Medicare in the same county found that these costs varied widely by the type of MA plan and the level of costs in traditional Medicare at the county level.

Most notably, Medicare Advantage HMO plans had lower costs than traditional Medicare in areas in the nation where the average costs per beneficiary in traditional Medicare were relatively high compared to the national average. In contrast, the three less tightly organized MA plan types had higher costs than traditional Medicare in almost all areas of the nation, and their costs were much higher where the average costs in traditional Medicare were lower than the national average.

Although both traditional Medicare and MA plans are changing, these findings have broad implications for future Medicare policy, especially for proposals to transform Medicare into a premium support-based program.

Nationwide, MA plans in rural areas have costs that average 115 percent of local costs in traditional Medicare. In some metropolitan areas, MA plan costs to provide Medicare benefits are also higher than in traditional Medicare. In cities such as Rochester, New York; Sacramento, California; and Seattle, Washington, Medicare Advantage HMO plan costs are higher than costs in traditional Medicare by 18 percent or more. In these areas, with low costs in traditional Medicare, a premium-support program would not lead to an increase in the monthly Medicare premium to traditional Medicare beneficiaries. It would, however, reduce payments to MA plans, which would then need to raise their monthly premiums to Medicare members and reduce any supplemental benefits that they now provide.

Policy Implications

This analysis suggests that reform of Medicare based on the premium-support model will inevitably result in major changes in costs for health insurance coverage and health care services for elderly and disabled beneficiaries in substantial portions of the nation. The analysis finds that only the more tightly organized Medicare Advantage HMO–type plans have costs that are lower as a national average than traditional Medicare costs in the same area. Medicare Advantage HMO–model private plans, although very successful in some high-cost urban regions, have proved expensive and difficult to develop and expand in other areas with lower costs in traditional Medicare. After thirty years of federal and private support, the most tightly organized Medicare Advantage HMOs have achieved significant cost savings relative to local costs in traditional Medicare in only a limited number of urban counties.

The lesson is that these less structured MA plans, which mostly mimic the fee-for-service payment system for which traditional Medicare is criticized, have costs that are substantially higher than those of traditional Medicare in the same area and would not contribute to lower Medicare costs.

Finally, the analysis finds that the traditional Medicare program is not as universally inefficient and expensive relative to private plans as is often suggested. The findings described here indicate that MA plans have average costs that are higher than costs in traditional Medicare in five of the ten US county cohorts with the lowest traditional Medicare costs. In the three county cohorts with the lowest traditional Medicare costs, even HMO plans have costs that exceed those of traditional Medicare, by more than 10 percentage points.


By Don McCanne, M.D.

The contention that private Medicare Advantage (MA) plans competing with the traditional Medicare program are able to lower costs has been proven repeatedly to be a fiction. Yet there continues to be a push to convert Medicare into a premium support system in which patients would use vouchers to purchase private plans under the false promise of lower costs through market competition.

Although tightly organized HMO-type Medicare Advantage plans may have lower costs in areas where the costs of the traditional Medicare program were higher, more loosely structured PPO and private fee-for-service Medicare Advantage plans averaged 12 to 18 percent more than the costs of the traditional Medicare program.

Understanding the distinction between tightly organized HMOs and loosely organized PPOs and private FFS plans is important to be able to make sense of the economic impact of these models. PPO and FFS Medicare Advantage plans are business models of private insurance designed to be marketed as insurance products that partially cover losses due to health care. These models are associated with very high administrative costs, a fact acknowledged in the Affordable Care Act since similar plans are permitted to consume 15 to 20 percent of the premiums for their own administrative costs and profits. These administrative costs are far higher than those of the traditional Medicare program, as mentioned above.

Tightly organized HMOS, such as Kaiser Permanente, are designed as patient service models providing prepaid health care. These models have been shown to be effective in improving efficiency and sometimes reducing health care costs. What distinguishes them from the loosely organized models is that these HMOs are integrated health care delivery systems whereas the loosely organized models are simply intermediary insurance plans that contract with mostly non-integrated private providers.

Why is this important? Integrated systems such as Kaiser that are a part of the delivery system would be covered under a single payer national health program - an improved Medicare for all. The loosely organized models are simply private insurers that are not part of the health care delivery system. Under single payer they would be replaced by an improved Medicare. Thus we would be keeping efficient prepaid delivery systems while dumping the wasteful and intrusive private insurer intermediaries.

How would premium support change this? The advocates would provide generous vouchers for these wasteful intermediaries while failing to provide adequate cost adjustments for the traditional Medicare program. We know that they would do this because they already are doing it. Although the Affordable Care Act called for the reduction of the Medicare Advantage overpayments, a conspiracy between the insurance industry and the administration has resulted in various accounting innovations that have preserved these overpayments, though in a disguised form. So they would eventually displace traditional Medicare with a thriving market of private plans, but, as patients would eventually discover, plans with unaffordable cost sharing and limited choice of narrow networks.

This study is yet one more that demonstrates the irrationality of using wasteful private insurance plans in a public program. Yet it also shows that those who prefer to obtain care through an integrated delivery model, such as Kaiser Permanente, could continue to do so under single payer since it is a prepaid health delivery system rather than a private, superfluous, intermediary insurer. But, by all means, be prepared to protest vociferously when you hear talk of premium support.