Private Medicare Plans Drive Up Health Care Costs By Offering Insufficient Coverage

Two separate reports by the Centers for Medicare and Medicaid Services (CMS) and Health Affairs builds upon earlier research to conclude that private insurance plans under the Medicare Advantage program drive up Medicare spending. Ultimately, those private plans raise health care costs by encouraging seniors to cherry pick their health plans respective to their health, Kaiser Health News reports.

Private insurance plans under Medicare Advantage are often able to attract healthier Medicare beneficiaries by offering cheap — but bare-bones — health plans. When those healthier seniors encounter a medical problem that’s too extensive for their private coverage, they switch over to the more generous traditional Medicare program in order to take advantage of its more expansive benefits. That in turn, raises spending in the traditional Medicare pool:

A study released Thursday, by Gerald Riley, a researcher at the Centers for Medicare & Medicaid Services (CMS), adds to those concerns. The study looked at more than 240,000 people who dropped out of Medicare Advantage plans in 2007, and compared them with beneficiaries who remained in traditional Medicare the entire time. In the six months after leaving the private plans, the former Medicare Advantage patients used an average of $1,021 in medical services each month, while the patients in the control group cost Medicare $710 a month, the study found.

Another study in the December issue of the journal Health Affairs found that people “disenrolling were much more likely than other beneficiaries to report health declines.” Those researchers, led by J. Michael McWilliams, a Harvard Medical School professor, surmised that beneficiaries who developed serious ailments might leave the plans to get unfettered access to physicians and treatments through traditional Medicare, but neither that study nor Riley’s determined what motivated the changes. […]

McWilliams’ study, along with other analyses in the same issue of Health Affairs, found that generally, Medicare has succeeded in reducing cherry-picking by Medicare Advantage plans by changes in how the program worked, including restrictions in the time periods that people could switch from a private plan back to traditional Medicare. In 2006, Medicare tried to crack down on switches by limiting them to once a year rather than monthly.

While the Health Affairs study notes that there have been some protective measures instituted to prevent this cherry-picking, it still occurs in considerable volume. The findings underscore the reality that adverse selection remains a costly problem in private insurance markets.


While some critics might claim that reductions to Medicare Advantage payments under Obamacare could encourage seniors to continue disenrolling from private Medicare Advantage plans, that hasn’t borne out in reality. In fact, since Obamacare’s cuts to overpayments in Medicare Advantage began to be phased in, enrollment in the program is up while premiums are down.

Furthermore, increased enrollment into traditional Medicare might actually be a desirable outcome — the traditional Medicare program costs less per capita than the private Advantage program. And as these recent studies show, Advantage plans tend to fall short — and cost more — once beneficiaries get sick. As Center for Medicare Advocacy executive director Judith Stein put it, “Private Medicare Advantage plans work for people when they are relatively well, but fall short of traditional Medicare when they are sick or disabled.”