NBER Working Paper No. 23090: Healthcare Spending and Utilization in Public and Private Medicare

By Vilsa Curto, Liran Einav, Amy Finkelstein, Jonathan D. Levin, and Jay Bhattacharya
National Bureau of Economic Research, January 2017


We compare healthcare spending in public and private Medicare using newly available claims data from Medicare Advantage (MA) insurers. MA insurer revenues are 30 percent higher than their healthcare spending. Healthcare spending is 25 percent lower for MA enrollees than for enrollees in traditional Medicare (TM) in the same county with the same risk score. Spending differences between MA and TM are similar across sub-populations of enrollees and sub-categories of care, with similar reductions for “high value” and “low value” care. Spending differences primarily reflect differences in healthcare utilization; spending per encounter and hospital payments per admission are very similar in MA and TM. Geographic variation in MA spending is about 20 percent higher than in TM, but geographic variation in hospital prices is about 20 percent lower. We present evidence consistent with MA plans encouraging substitution to less expensive care, such as primary rather than specialist care, and outpatient rather than inpatient surgery, and with employing various types of utilization management. Some of the overall spending differences between MA and TM may be driven by selection on unobservables, and we report a range of estimates of this selection effect using mortality outcomes to proxy for selection.

From the Conclusion

We have compared healthcare spending and utilization in public and private Medicare. This setting provides a rare opportunity for a “side by side” comparison of public and private health insurance systems operating on a similar scale, for the same population, in the same markets, and with the same providers. Novel data from the Health Care Cost Institute on the healthcare claims of MA enrollees allow us a rare look inside the “black box” of healthcare utilization and spending in MA.

We find that MA insurer revenues are 30 percent higher than their healthcare spending. Healthcare spending for enrollees in MA is 25% lower than for enrollees in TM in the same county and risk score.

The lower spending by MA enrollees is entirely due to lower healthcare utilization. Prices appear similar in MA and TM. Where we can most directly measure this – the price of an admission for a given DRG at a given hospital – we estimate that average prices in MA are 1.1% higher than in TM. Reductions in utilization appear similar both for types of care where there is concern about “over use” (e.g. imaging and diagnostic tests) and where there is concern about “under use” (e.g. preventive care).

We provide suggestive evidence for some of the potential channels by which MA may reduce healthcare utilization for enrollees. We find that utilization is lower in MA but that, conditional on an encounter, spending per encounter is similar or slightly higher in MA. This suggests that MA manages to restrict utilization on the margin to sicker individuals. Relatedly, individuals discharged from the hospital are much more likely to be sent home – and less likely to be sent to post-acute care facility – if they are enrolled in MA rather than in TM. We also find evidence consistent with substitution to less expensive types of care in MA: differences in specialist visits are much larger than differences in primary care visits, and while inpatient surgery rates are lower in MA, outpatient surgery rates are higher.

Finally, in light of the widespread interest in geographic variation in healthcare spending in TM, and recent work on geographic variation in commercial (under 65) private insurance, we explore similar comparisons in MA. Although geographic variation in spending in TM is often viewed as a reflection of the inefficiencies in a public health insurance system, we find similar – in fact slightly larger – geographic variation in spending in MA compared to TM. And while recent work has emphasized the much greater geographic pricing variation in private commercial insurance than in TM, we find similar – in fact slightly smaller – geographic variation in pricing in MA compared to TM.

One natural question these findings raise is their implications for MA insurers and consumers. For insurers, our estimates from MA data indicate that their revenue exceeds their healthcare expenditures by $177 (about 30%) per enrollee-month. An important area for further work is to examine how this may be dissipated through other costs, such as the administrative costs of providing the insurance and the marketing costs of attracting enrollees. A related and important question is whether and how competitive pressures affect the MA market.

Implications for consumers are more elusive, since the elements of their objective function are not as straightforward to define or measure. A simple revealed preference argument would suggest that consumers who choose MA are better off in it. Other inferences are harder to make. Quality of the healthcare experience is difficult to assess; our measures of preventive care point to reductions there that are similar in magnitude to those for other forms of care. We calculated that the mean actuarial benefit to consumers (i.e. rebate to consumers as measured in the bid data) was $51 per enrollee-month, but, of course, the rebate may be valued differently from its actuarial value, and MA plans have other attributes that will affect consumer surplus, such as limited networks. The implications of privately provided Medicare for both consumers and producers is an important area for further work.


Although services provided by the traditional Medicare (TM) program and the Medicare Advantage (MA) plans are priced about the same, the health care expenditures of MA plans are about 30 percent lower than their revenues. The difference is lower utilization by patients of MA plans.

Although some would like to claim that the lower utilization is due to greater efficiency of the managed care organizations as opposed to the government plan, the data is highly suggestive that MA plans do what we already knew they do – they enroll healthier, less expensive patients who do not require as much care.

What are the private MA plans doing with the 30 percent of revenues that are not spent on health care? The authors suggest that further study might be warranted of their administrative costs and marketing costs of attracting (healthy) enrollees (not to mention high executive compensation and shareholder return), but we already know that is where the excess payments are going. The payments are excessive because they care for healthier patients than those in the traditional program, while gaming risk adjustment to receive higher capitation fees as if their enrollees were sicker than they actually are.

We need an improved Medicare to cover all of us, and one of the first improvements should be to get rid of the private Medicare Advantage plans that are wasting so much of our taxpayer dollars.