Medicare Overpayments to Private Plans, 1985-2012: Shifting Seniors to Private Plans has Already Cost Medicare $282.6 Billion

By Ida Hellander, David U. Himmelstein, Steffie Woolhandler
International Journal of Health Services, Volume 43, Number 2 / 2013, Posted online May 10, 2013


Previous research has documented Medicare overpayments to the private Medicare Advantage (MA) plans that compete with traditional fee-for-service Medicare. This research has assessed individual categories of overpayment for, at most, a few years. However, no study has calculated the total overpayments to private plans since the program’s inception. Prior to 2004, selective enrollment of healthier seniors was the major source of excess payments. We estimate this has added US$41 billion to Medicare’s costs since 1985. Medicare adopted a risk-adjustment scheme in 2004, but this has not curbed private plans’ ability to game the payment system. This has added US$122.5 billion to Medicare’s costs since 2004. Congress mandated increased payment to private plans in the 2003 Medicare Modernization Act, which was mitigated, to a degree, by the subsequent Affordable Care Act. In total, we find that Medicare has overpaid private insurers by US$282.6 billion since 1985. Risk adjustment does not work in for-profit MA plans, which have a financial incentive, the data, and the ingenuity to game whatever system Medicare devises.

How Does Medicare Overpay Private Plans?

1. The selective enrollment of healthier beneficiaries before 2004, or what we will call “old cherry-picking.” Under the payment formula in effect until 2004, Medicare paid private plans a premium that was risk-adjusted only for a few demographic factors, such as age, gender, disability, whether an enrollee resided in a nursing home, and Medicaid eligibility (a proxy for poverty). Hence a healthy 70-year-old man would bring the same premium as his sicker, 70-year-old neighbor. Private plans used marketing, benefit design, enrollment office location, and other techniques to recruit the healthy and discourage sicker seniors from enrolling.

2. Gaming of Medicare’s more complex risk-adjustment scheme, known as Hierarchical Condition Categories (HCCs). Since 2004, private plans have been selectively enrolling beneficiaries with very mild cases
of the medical conditions included in the HCC risk-adjustment formula; such patients have, on average, substantially lower costs than the risk-adjusted premium payment that Medicare pays the private plan on their behalf. We refer to this as “new cherry-picking.”

3. Congressionally-mandated overpayments included in the 2003 Medicare Prescription Drug, Improvement, and Modernization Act (MMA), including duplicate payments for indirect medical education. The provisions that generated this overpayment were tacked onto the MMA after heavy lobbying by the private insurance industry.

4. Bonus payments from the $8.35 billion CMS Medicare Advantage Quality Bonus Payment Demonstration, an expansion of the $3 billion in quality bonuses contained in the ACA. This demonstration will award bonuses to plans covering more than 90 percent of MA beneficiaries and offset more than one-third of the cuts to MA overpayments mandated by the ACA between 2012 and 2014. According to the General Accountability Office (GAO), the demonstration is so poorly designed that it will generate almost no useful findings to improve quality.

5. Duplicate payments for private plan members who receive all or part of their care at Veterans Health Administration (VA) facilities. Medicare pays the private plan a full premium payment, no matter how much of the patient’s care is delivered (and paid for) by the VA. In an extreme case, a senior might receive all care at the VA, making the premium given to the private plan pure profit. In 2009, 8.3 percent of all MA enrollees were enrolled in the VA.


Advocates of market-based Medicare reforms suggest that competition among private plans will induce greater efficiency and result in cost savings. Our findings indicate that the opposite is true. Private plans have drained more than $280 billion from Medicare since 1985, most of it in the last eight years. Increasing private enrollment through voucher-type Medicare reform (as suggested by Republicans) or through quality bonuses and financial incentives to plans to enroll dual-eligible beneficiaries (as enacted by President Barack Obama’s administration) will almost certainly raise Medicare’s costs, not lower them.

Funds wasted on overpayments to private MA plans could instead have been used to improve benefits for seniors, extend the life of the Medicare Trust Fund by more than a decade, or reduce the federal deficit. Private insurers have enriched themselves at the expense of the taxpayers.

It is time to end Medicare’s long and costly experiment with privatization. The U.S. needs to adopt a single-payer national health insurance program with proven, effective methods for controlling costs.… (you may have to cut and paste this link)

Now we know that the private Medicare plans have been overpaid $282 billion in taxpayer funds. The Obama administration has continued to add to the overpayments by expanding eligibility for extra quality award payments to which the plans were not entitled, and by using a bookkeeping gimmick for suspended SGR adjustments. Congress and the administration, in using our taxpayer funds to reward this unprincipled industry, should pay a political price for their misdeeds.