The New Politics of Medicare
The federal government originally paid directly for all Medicare services, leading medical providers to battle constantly for advantageous payment arrangements. Yet, over recent years, beneficiaries have increasingly opted to receive benefits administered by private insurers. This has depoliticized procurement, yielding better healthcare benefits and lower costs for enrollees. Now that a majority of beneficiaries are opting for privately managed plans for the first time, Medicare may gain from increased insulation from attempts by healthcare lobbyists to inflate its costs.
The Congressional Budget Office projects that the rising cost of Medicare, and the debt interest payments resulting from it, is the primary driver of the federal government’s long-term fiscal deficit. Spending on Medicare exceeded that on national defense for the first time in 2020; and CBO estimates that current Medicare commitments will cost $1.9 trillion in 2032 – twice the level of spending on defense.
The cost of Medicare has been a problem since the program was launched. To secure the participation of hospitals and physicians, the federal government initially reimbursed them for whatever broadly-defined expenses they incurred delivering care to eligible beneficiaries – an arrangement which led to a rapid increase in the cost of services delivered. Over the past few decades, Congress has repeatedly acted to rein in Medicare fees, but the volume of services delivered has continued to grow unchecked, without regard to their cost or effectiveness.
Medicare Advantage was established to address this problem. Under MA, the federal government pays private insurers up-front to deliver comprehensive healthcare benefits to eligible beneficiaries. Insurers can save money by reviewing the necessity of medical services, steering patients to networks of cost-effective providers, and helping patients manage chronic medical conditions to avoid expensive hospitalizations. Insurers can use the savings generated to attract enrollees by reducing premiums, cutting out-of-pocket costs, and providing additional benefits.
In 2007, 19% of Medicare beneficiaries enrolled in Medicare Advantage; this year, 51% opted for MA plans. As a result, a majority of beneficiaries receive Medicare through private insurers for the first time – a shift which could transform the politics of the program.
The traditional publicly managed Medicare benefit is already outdated. It leaves beneficiaries exposed to catastrophic out-of-pocket costs, fails to provide care coordination services, and doesn’t cover dental care. Even for affluent seniors who are able to pay thousands of dollars in additional premiums to purchase supplemental insurance, the publicly administered Medicare benefit has always needed a constant stream of fresh legislation to stay functional.
Every year, Congress has routinely adjusted fees and provided additional funds to ensure that hospitals, physicians, and other medical providers are eager to serve those enrolled in it. Providers typically play up the risk that they will stop treating Medicare patients, as a negotiating tactic to drive up their fees. The case for such adjustments becomes more credible during inflationary times, when the cost of practicing medicine increases.
Yet, Medicare Advantage plans can set their own provider payment arrangements and can make up for shortfalls out of their own funds. These are already more than adequate: in 2023, MA plans were paid 22% more by the federal government than it cost them to deliver the standard Medicare benefit package. The more beneficiaries are enrolled in Medicare Advantage, the more Congress can drag its heels in meeting the demands of lobbyists for medical providers with hikes in fees – restraint which also slows the growth of payments to MA plans.
This dynamic can also help address the biggest driver of rising Medicare costs – the constant addition of new procedures and therapies to the program’s list of covered services. Currently, Medicare pays for every new medical service developed, regardless of its cost and effectiveness. Yet, since MA plans can pay for new procedures out of their own resources, they can provide funding for service expansions in the interim, without imposing an additional burden on the federal budget.
To keep Medicare affordable, Congress should therefore rely on Medicare Advantage plans to purchase healthcare services for the bulk of beneficiaries; increasing traditional direct payments to medical providers under the basic Medicare benefit only where strictly necessary.
Chris Pope is a senior fellow at the Manhattan Institute.
