By Matthew Cunningham-Cook and Lucy Dean Stockton
The Lever, October 4, 2023
The federal government is losing as much as $140 billion per year by subsidizing private Medicare Advantage plans, according to a bombshell new report. In the groundbreaking investigation, health care researchers identified the four major ways that private insurers systematically exploit the taxpayer-funded national health insurance program while denying care to the nation’s most vulnerable patients.
The researchers additionally found that seniors could save over $1,800 in annual fees taken from their Social Security checks if the government redirected what it spends subsidizing Medicare Advantage plans to instead reduce premium costs. Under the current arrangement, “traditional” Medicare pays about $12,000 a year to private Medicare Advantage insurers for every patient whose care they “manage.”
Medicare Advantage insurers — which include UnitedHealth Group, Humana, Cigna, and Blue Cross Blue Shield — are profiting at the expense of ordinary seniors, 40 percent of whom are completely dependent on their Social Security benefits, which average about $1,600 per month after Medicare premiums are taken out.
“Insurers are quietly plundering the Medicare trust fund for their own profits and compromising the health of senior citizens and [people with] disabilities,” said Ed Weisbart, a family medicine physician who is the secretary of Physicians for a National Healthcare Program (PNHP), a single-payer advocacy group that produced the report.
Medicare, the public health insurance for seniors and people with disabilities, is one of the most popular and effective social programs in the country. The program is funded by taxpayer money and keeps costs low by setting fixed prices with health care providers.
Medicare Advantage lets private insurance plans step in as a middle man. When the program was established in its current form in 2003, its proponents argued it would help save the government money on Medicare spending. However, research from the Medicare Payment Advisory Commission (MedPAC), an independent agency that advises Congress on Medicare, shows that the program has not yielded savings in the two decades since it was established.
Medicare Advantage plans receive a flat payment for the care they provide, strongly incentivizing the insurers sponsoring the plans to ration care — leading to high rates of wrongful claim denials, worse health outcomes, and costly administrative headaches for providers.
These private plans have been under fire for the rate at which they deny patient care. As The Lever reported, these claims have a devastating cost to health outcomes but frequently save insurance companies money as patients forgo treatments they cannot afford.
Since then, claim denials have only increased. A report from the KFF (formerly known as the Kaiser Family Foundation), a major foundation that studies health policy issues, found that two million prior authorization requests were denied by Medicare Advantage in 2021 — significantly higher than the rates for traditional Medicare.
Since 2007, the share of beneficiaries enrolled in Medicare Advantage plans has tripled, far outpacing the growth of traditional Medicare enrollment.
Many people leave traditional Medicare for private plans, and once they do, an administrative barrier makes it difficult to return. That’s because while Medicare covers 80 percent of patients’ health care costs, the last 20 percent are usually covered by the individual or a supplementary plan called Medigap. But in most states, when someone leaves Medicare Advantage, often due to illness necessitating broader coverage networks, Medigap insurers can deny future coverage — effectively making their return to traditional Medicare impossible.
As of this year, Medicare has reached a turning point: Medicare Advantage now manages care for over half of all eligible beneficiaries.
As patients are joining these for-profit plans, providers are leaving. Scripps Health, a major health care provider in San Diego, announced in late September that it would decline most Medicare Advantage plans moving forward, because of their practices.
Scripps CEO Chris Van Gorder told MedPage Today, “We are a patient care organization and not a patient denial organization and, in many ways, the model of managed care has always been about denying or delaying care — at least economically.”
Van Gorder explained that the private plans’ routine denials forced Scripps’ medical groups to operate at a $75 million annual loss, adding: “That is why denials, [prior] authorizations, and administrative processes have become a very big issue for physicians and hospitals.”
Scripps is one of many health care groups around the country dropping Medicare Advantage plans. In the last month, medical groups in Ohio, Virginia, Oregon, Missouri, Oklahoma, and South Dakota have all terminated or partially terminated their contracts with Medicare Advantage plans, citing delayed reimbursements and administrative conflicts.
In August, Humana, which controls 18 percent of the Medicare Advantage market, posted a 38 percent increase in its profit from the same quarter in 2022, earning $957 million in one quarter alone. UnitedHealth — the largest Medicare Advantage insurer, controlling 29 percent of the market — posted $8.1 billion in profits, up $1 billion, or 14 percent, from the same period the prior year. The enormous profits are driven by the substantial subsidies that Medicare Advantage offers the insurers.
Taking Advantage
The report from PNHP is among the first to fully categorize the predatory costs that the private insurance plans impose on Medicare. It spells out four key ways that Medicare Advantage games the Medicare system for profit.
Favorable selection and deselection:
Researchers found that Medicare Advantage plans actively seek out healthier patients, targeting their marketing towards a healthier demographic in a process called “favorable selection” and “favorable deselection.”
While traditional Medicare accepts anyone who is eligible, private plans aggressively market to a healthier population — and when high-need patients find that their Medicare Advantage plans won’t cover their health care costs, they often try to return to traditional Medicare.
This means that low-needs patients turn to Medicare Advantage, taking Medicare funding with them, while high-needs patients further strain the traditional Medicare system with elevated care costs.
The flat rates that the government pays to Medicare Advantage insurers is based on the costs of traditional Medicare participants, but traditional Medicare participants tend to be sicker. Research shows that patients tend to switch to traditional Medicare as they get sicker due to Medicare Advantage plans’ narrow provider networks and restrictions on care.
The PNHP report cites a 2019 study from KFF, finding that similarly situated seniors who switched to Medicare Advantage plans received $1,253 in less care in a given year than those who had stayed in traditional Medicare.
MedPAC found in June that favorable selection for a healthier Medicare Advantage population resulted in 11 percent lower costs for Medicare Advantage plans, even as insurers get paid on the basis of the traditional, higher-need Medicare population. The report estimates that these overpayments cost Medicare $44-56 billion annually.
Upcoding:
Even though beneficiaries enrolled in Medicare Advantage plans tend to be healthier, the private plans systematically make their patients appear sicker to juice more profits out of Medicare.
As part of a complex formula, Medicare Advantage insurers receive “risk adjustment” payments when their patients have more severe conditions, strongly incentivizing the private plans to create records that indicate having sicker patients, a practice known as “upcoding.”
As The Lever covered in May, this fraudulent practice leads to $20 billion in additional spending per year — and generates more profits for insurers. The PNHP report cites a 2021 study showing that risk adjustment payments are 20 percent higher in Medicare Advantage than traditional Medicare.
Quality benchmarks and county bonuses:
Currently, Medicare provides bonuses to Medicare Advantage plans based on the locations they cover, supposedly to ensure equal geographic access to coverage. But as MedPAC noted in its 2023 report, these payments “are not necessary for maintaining affordable supplemental coverage” and “fail to capture savings for the Medicare program.”
These payments are combined with bonuses that Medicare Advantage insurers receive for being higher “quality.” Over half of all plans currently receive over four stars out of five, making them eligible for “quality” payments — and the rating system is plagued with limited information, making it a poor performance measure.
A June 2023 report from the Urban Institute found that “after weighting, about two-thirds of a contract’s star rating is determined by beneficiary experience and administrative effectiveness,” and that “measures of beneficiary experience do not permit meaningful distinctions across [Medicare Advantage] contracts.” The report added, “Administrative effectiveness measures do not target important deficiencies regulators have identified within [Medicare Advantage] organizations.”
The PNHP report estimates that quality benchmarks and county bonuses may amount to $24-28 billion in annual overspending.
Induced utilization:
In traditional Medicare plans, only 80 percent of health care costs are covered — and 86 percent of traditional Medicare beneficiaries have some type of supplemental coverage, whether from a Medigap plan, an employer-sponsored health plan for retirees, or another form of supplementary coverage to cover the last 20 percent.
Medicare Advantage participants do not need supplementary coverage.This is an essential feature of the marketing of Medicare Advantage plans: Seniors accept the costs of narrow networks and managed care in exchange for not needing to pay the cost of supplementary coverage.
But Medicare makes spending assumptions for Medicare Advantage on the basis of significantly more comprehensive coverage than what the plans actually offer. That means that Medicare Advantage plans are paid using assumptions that they provide more care than they actually do.
The report estimates that these costs amount to $36 billion per year.
Experts say that the $140 billion these predatory practices are costing the government could instead go to reducing costs for seniors.
“Medicare Advantage overpayments could be rediverted into paying everybody’s [traditional Medicare] premiums, the money they’re paying every month out of Social Security,” said Weisbart, from PNHP. “It’s going directly into the profit lines of the Medicare Advantage companies without any additional health value.”
He added, “If seniors understood that the $165 coming out of their monthly Social Security checks was going essentially dollar for dollar into profiteering of Medicare Advantage, they would and should be angry about that. We think that we pay premiums to fund Medicare. The only reason we have to do that is because we’re letting Medicare Advantage take that money from us.”
Analysts from Moody’s Investor Service, a bond credit rating agency, suggested in March that they could expect slower growth in the overall insurance industry compared to 2022, but that they “expect continued growth in Medicare Advantage.”
