Medicare Watchdog Warns of $12B in Excess Payments

What You Need to Know

A watchdog says a mechanism for paying plans with sicker members more is broken.

Medicare Advantage is leading the U.S. government to spend billions more on seniors’ medical care than it should and needs a significant makeover, a nonpartisan watchdog said in a report to lawmakers.

The program collected $12 billion in “excess payments” in 2020 over what the U.S. would have paid to cover people who used the private plans under standard Medicare, according to a report by the Medicare Payment Advisory Commission, or MedPAC, released Tuesday.

Medicare has offered some private-sector version since the 1980s, and the current program, called Medicare Advantage, is nearly two decades old.

It allows insurers to sell plans that provide Medicare benefits along with add-ons like dental or vision coverage. That can eliminate the need for consumers to purchase supplemental insurance that picks up costs not covered by Medicare itself.

However, MedPAC said swelling costs could threaten the sustainability of Medicare and a major overhaul of the popular program is urgently needed. The program paid Medicare Advantage plans $350 billion last year, MedPAC said.

Enrollment in Medicare Advantage plans has doubled over the past decade to cover nearly half of Medicare’s 64 million beneficiaries, fetching billions for large insurers including UnitedHealth Group Inc., Humana Inc. and CVS Health Corp.’s Aetna unit that have bet heavily on the business.

It has also given rise to an ecosystem of smaller companies eager to cash in, such as tech-focused insurers like Clover Health Investments Corp. and Alignment Healthcare Inc., and clinics that cater to seniors on the plans, including Oak Street Health Inc. and Cano Health Inc.

Many of those companies have seen their shares suffer recently due in part to concerns that it will be more difficult to make profits from the business than investors had once expected.

Appropriate Pressure

MedPAC, established in the 1990s to advise lawmakers on Medicare policy, has long warned about excess Medicare Advantage payments. Private plans are on pace to cover half of all Medicare beneficiaries next year, according to the latest report, and MedPAC said they should be pushed to pare costs.

Medicare Advantage plans “need to face appropriate financial pressure” in line with providers in the traditional fee-for-service Medicare program, the group said.

Industry Backlash

Trade groups such as America’s Health Insurance Plans and the Better Medicare Alliance have disputed MedPAC’s criticism in the past. They say that the program provides better care than traditional Medicare.

Insurers say Medicare Advantage can eliminate the need to buy additional coverage to paper over gaps in the traditional program, and provide other important benefits like meal delivery or transportation. The plans can also cap out-of-pocket costs, which can be unlimited in Medicare without extra coverage.

Payments to Medicare Advantage plans for extra benefits have increased by 53% since 2019, MedPAC said, “yet we have no data about their use nor information about their value.”

The commission acknowledged that Medicare Advantage plans can deliver lower-cost care. Yet the savings don’t accrue to taxpayers or others in the program, the commission wrote.

“These efficiencies are shared exclusively by the companies sponsoring MA plans and MA enrollees, in the form of extra benefits,” the report said.