It is hard to imagine today's America without Medicare. The program has, of course, become indispensable for tens of millions of seniors. But it has also become a crucial pillar of the broader U.S. health care system, both as a source of revenue, pushing $1 trillion annually, and as a driver of efforts to limit health care costs. ¶ Yet the program is coming to a crossroads. In 2023, for the first time, more seniors (31 million in total) were enrolled in Medicare Advantage, the part of the program that relies on private, managed-care companies to provide across-the- board coverage, than its public, fee-for-service older sibling. Even a decade ago, this outcome would have seemed implausible. But given this unabated growth and immense popularity with enrollees, it seems time to figure out what we’ve gotten ourselves into.

Views on whether Medicare Advantage has been a success vary widely, depending on whom you ask – and whether they have a dog in the fight. Indeed, health care analysts cannot even agree on what success means.

Is the primary goal of MA to expand the number of service providers and choice of services available to enrollees? (It has done that.) Is it to increase the average quality of services provided? (It probably has.) To reduce the total cost of the Medicare system? (It has not.) Or is it to create a benchmark against which to measure the efficiency of traditional Medicare? (Not clear.)

For better or worse, I think we have reached a point where the current trend toward privately run, managed-care Medicare would be hard to reverse even if policymakers agreed on the desirability of going back to fee-for-service.

Moreover, accepting that MA is the future may open the door to more focused efforts to broaden insurance coverage and deliver services at lower cost. Ultimately, there is even potential to use MA’s private managed-care approach as the model for truly universal coverage that brings the United States in line with its peers among affluent industrial democracies.

Medicare: A Brief History

The adoption of a government-run system for covering the cost of health care for seniors back in 1965 was seen as a giant step forward for a country long held back by the myths of rugged individualism and the inevitable superiority of free market outcomes. And that it was. But it is worth remembering that Medicare’s triumph came at the expense of grander plans for universal health insurance that had been brewing off and on since the turn of the 20th century.

Indeed, generations of reformers have had much more ambitious goals. The briefly formidable Socialist Party of Eugene Debs made the development of European-style safety net programs the centerpiece of his presidential platforms in the early 1900s. But even the less ideologically focused Progressive Party, the third party that Teddy Roosevelt conjured in his failed bid to regain the White House in 1912, called for “the protection of home life against the hazards of sickness, irregular employment and old age through the adoption of a system of social insurance.”

But that proved to be a high-water mark for social democracy in America. Fierce opposition from businesses and from the American Medical Association, as well as popular distaste with all things Prussian (Europe’s welfare-state innovator) after World War I, brought an end to efforts to bring the U.S. health care system in line with its European counterparts.

The flame was rekindled, though, during the Great Depression. The left flank of FDR’s New Deal brain trust tried to bulldoze the White House into endorsing comprehensive health insurance as a complement to unemployment insurance, government jobs, cash welfare and old-age/disability pensions. But, fearful of angering Southern Democrats, business leaders and physicians, FDR tossed the health care baby from the welfare-state bus.

Well, not quite decisively. The New Deal planted some health care-related seeds that would see the light of day in the decades to come. But their impact was modest. And the prospects for major change only got serious when President Harry Truman chose to make health insurance a centerpiece of his successful campaign to defeat the heavily favored Thomas Dewey in 1948.

At times Truman seemed close to ringing the legislative bell, but he never did win the proverbial cigar. Indeed, in the end, all he managed to salvage was the Hill-Burton Act, which provided subsidized loans to expand medical facilities across the country.

Demoralized in defeat, progressives regrouped to find a way to make government-funded health care politically palatable. Their pared-down priority was to provide comprehensive hospital insurance for a group that was both in dire need of help and generally considered to be “deserving”: the elderly.

To be sure, it did not hurt that although the emerging private health insurance industry had gotten a big boost during World War II (first from businesses eager to offer workers fringe benefits as an end-run around wage and price controls, then from Washington’s decision not to tax employer-provided insurance), it had no interest in covering retirees. After all, they were inherently bad risks whose patronage could only be profitable if premiums were set sky-high.

Nonetheless, progress remained slow even after John F. Kennedy endorsed insurance coverage for the aged during his presidential campaign and kept pushing for it once in office. Arguably, though, success required the assassination of a president and the subsequent outpouring of goodwill for his successor to move the ball forward. Note, too, that it took, Lyndon B. Johnson, one of the nation’s most skillful legislators, to push it over the line.

Thus progressives finally had cause to celebrate, as Medicare was born in 1965 along with its smaller means-tested cousin, Medicaid, that was aimed at individuals living in poverty. It included, of course, the hospital insurance component (Part A) that advocates had long been pushing. No less impressive, there was the voluntary, premium-based physician coverage component (Part B).

Despite then-actor Ronald Reagan’s dire warnings about the certain demise of American freedoms, it was signed into law. In 1966, 19 million seniors enrolled – a number that has grown to almost 60 million today. And success has been especially sweet because the equal treatment given to Black recipients was a break from America’s despicable past of discrimination in federal programs.

That said, there was a downside to covering the most “deserving” group first. It sapped the energy from the campaign for universal health insurance, and proponents would have to wait another half century for Obamacare to squeak through a bitterly divided Congress. Even today, more than 25 million Americans are without coverage.

Enter Medicare Advantage

But the half a loaf called Medicare proved tasty, indeed. It has transformed the lives of the elderly, not only closing the gap on access to medical care but sharply reducing the numbers who lack the financial resources to remain above the poverty line. And over the years, Medicare has seen a number of transformations that have reshaped the experience for seniors.

One of the most substantial has been the growing role that private insurance carriers have played, managing health care for Medicare beneficiaries in what we today call Medicare Advantage. The essence of these arrangements is straightforward: offer Medicare beneficiaries a deal in which they give up their right to pick their own service providers in return for the convenience, broader access to care and alleged efficiency of privately managed care.

To be clear, there has never been a true firewall between the public and private in the Medicare program. Indeed, Medicare has always relied on private providers from physicians to hospitals to physical therapy in the traditional fee-for-service program. More-over, private insurers have been involved from the beginning, serving as intermediaries for handling Medicare’s giant billing operations. Consider, too, that managed-care providers, while until recently a small minority of Medicare stakeholders, have been on a privileged track in terms of how they are paid for their services ever since Medicare opened for business.

That doesn’t explain, though, how and why Medicare Advantage has been transformed into Medicare’s marketing darling. This has required a number of broad institutional developments – most visibly the federal government’s commitment to incentivize the expansion of managed care as a means of taming medical inflation through greater competition. Experts also point to the changes made under a 2003 law that increased payments to managed-care intermediaries and created incentives for seniors to one-stop-shop for both health and prescription drug insurance. And many note that the Affordable Care Act (aka Obamacare) in 2010 included legal changes that inadvertently enhanced the attractions of using Medicare Advantage.

In the wake of these changes, both Medicare Advantage premiums and Washington’s costs of funding the MA program dropped substantially, which some attribute to increased efficiencies available to large-scale, managed-care providers. While all of the changes added regulatory complexity to the program, in the end they appear to have created a more viable program, as enrollment exploded from 1.8 million in 1990 to 9.2 million in 2010 – and to well over 30 million in 2024, with no end in sight.

Head-To-Head

Lower costs ... more satisfied customers ... what’s not to like?

In spite of the remarkable popularity of Medicare Advantage among seniors in recent years, rumblings about the need for pushback against managed care have been getting louder. So let’s compare fee-for-service Medicare with the upstart.

Traditional Medicare has served as a great equalizer because, unlike its cousin, means-tested Medicaid run by individual states, all seniors have access to the same package of benefits regardless of where they live or how much income they have. Proponents also highlight the history of traditional Medicare as an innovator when it comes to creating efficiency-driving payment incentives, and its ability to leverage its unique market powers to act as a price-setter for the rest of the American health care system.

What’s more, traditional Medicare does all this with spending on administrative expenses far below that of private insurers. And, of course, traditional Medicare offers wide (and in some locales virtually unlimited) choice of medical providers because it does not rely on exclusive provider networks. Last but not least, Medicare has played a crucial role in pushing racial equality in the delivery of health care.

Yet, even the most ardent defenders of traditional Medicare acknowledge that the system has inherent flaws. Economists have long pointed to the inefficiencies of markets with monopsonist buyers – Uncle Sam is a monopsonist as the sole payer – as well as the government’s limited incentives to seek improvements and innovations. Most tangibly from beneficiaries’ perspective, there are limits on the services provided by Medicare that strike most Americans as frustrating, if not downright shocking: It does not include dental care, vision care or long-term nursing home care. And while all beneficiaries have coverage for hospital services under the mandatory Part A (yet may face substantial out- of-pocket payments), physicians services under Part B are optional and do require additional premiums.

Jimmie Walker of Good Times fame.

Remember, too, that until 2003 there was no prescription drug coverage, and even today this “Part D” coverage requires payment of additional premiums. And even those who do pay the premiums still face substantial out-of-pocket costs for drugs. Of course, out-of-pocket costs can be mitigated by buying private “Medigap” insurance – but all those premiums add up. On top of this, there is no central coordinating mechanism, putting the burden on patients (or that increasingly rara avis, the family physician) to manage their care.

From a health system perspective, it is also safe to say that the quality improvement agenda of the traditional Medicare program has been unambitious. And, of course, from a broader policy perspective, the potential for political interference in what’s included as a benefit has always been lurking.

Now for the head-to-head part. On paper, Medicare Advantage starts with big structural pluses. Proponents of MA – and managed-care systems more generally – highlight its potential for savings through scale economies and more efficient care coordination, the development of high-performing provider networks, and reduction in duplicative or unnecessary care. Economists add that competition among for-profit carriers also drives innovation and helps identify opportunities for efficiency gains. This should help to hold down costs in traditional Medicare as well as MA because cost-effective changes in medicine tend to spill over.

The private enterprises running Medicare Advantage also have both the incentives and deep pockets to build cost-effective capital structures and to use their expertise to drive improvements in other segments of the national health care market. Most importantly, consumers are offered choices when it comes to picking a plan they think works best for them. Often, they choose plans that provide access to benefits not offered by traditional Medicare – vision and dental care, of course, but nutritional guidance, gym memberships, and medical transportation, even carpet-cleaning for asthma sufferers.

Medicare Advantage enrollees thus unquestionably come out ahead on a range of services, as virtually all plans offer benefits beyond the statutorily defined limits of traditional Medicare. To be sure, these benefits are by no means standardized, but the plans are marketed skillfully to maximize appeal. Importantly, the vast majority of MA organizations do not charge extra for prescription drugs, and premiums are often lower than income-adjusted traditional Medicare deductions from Social Security checks.

The limited out-of-pocket costs of Medicare Advantage coupled with the more expansive benefits act to shield enrollees (among them a disproportionate number of lower income and minority Americans), from financial instability. Some studies estimate that annual cost savings for beneficiaries average as much as $1,600.

Choice among plans, though, can be a two-edged sword. Medicare Advantage prospects certainly do have a plethora of choices – typically some 40 plans offered by an average of eight different carriers. On the flip side, though, the number of options overwhelm many seniors, who not only must decide whether to opt out of the traditional Medicare program but must comb through dozens of MA plans with intricate and complex benefit designs. As in: This one includes two of the three brand-name drugs I use, but no access to exercise facilities. ... That one offers counseling on weight loss, but no access to the hospital near my home. ...

On the contrary, Medicare Advantage beneficiaries also surrender some of their choices by agreeing to managed care. That is, MA enrollees give up the wide-open choice of service providers for a constrained choice from a provider network and must put up with more demands for prior authorization for expensive testing and treatment.

What about access and quality of care? Answers are actually pretty hard to suss out. Advocates for traditional Medicare and Medicare Advantage focus on different data sources and metrics. The Medicare Payment Advisory Commission (aka MedPAC), an independent but clearly not neutral agency that advises Congress on issues affecting Medicare, has become increasingly critical of Medicare Advantage and has questioned the validity of comparisons between traditional Medicare and its private counterpart. MedPAC has also started to question whether the quality measures of MA plans – the star ratings assigned by Medicare itself – are reliable metrics.

The academic literature has come down slightly on the side of Medicare Advantage when it comes to quality. In particular, researchers have found Medicare Advantage beneficiaries do better on preventive care, hospital admissions, emergency department visits, shorter hospital and skilled nursing facility stays and standard quality-of-care metrics. Some studies even point to reduced overall health care spending. However, studies have also concluded that MA organizations are weaker on including high-quality providers in their networks, and they struggle to provide access to convenient services in rural areas.

That said, research has found little difference on some measures we really care about: patient satisfaction, hospital readmission rates, mortality and racial and ethnic disparities. And confounding the whole exercise, researchers generally acknowledge there is no entirely satisfactory way to compare plans serving people with widely differing demographic characteristics.

This raises some broader issues for the Medicare Advantage program. One crucial point of contention is whether the program disproportionately attracts sicker patients, and if it does, how to adequately account for this difference to make true apples-to-apples comparisons. On paper, MA beneficiaries do look sicker – that is, they have more diagnoses identified by their providers in their charts – than those in the traditional program. But some of the differences can be explained but the underlying incentives inherent in Medicare’s current reimbursement scheme.

Medicare Advantage carriers have potent incentives to ensure that service providers document every diagnosis, applying the service codes that deliver the richest reimbursement from Uncle Sam. It should thus not be surprising that the MA companies have heavily invested in profit-maximizing diagnosis coding in a host of ways – for example, leveraging AI to game the system, establishing direct financial incentives for physicians and applying chart reviews extensively, directly employing the physicians in charge of documentation.

Proponents of Medicare Advantage spin this as a plus, arguing that traditional Medicare fails to collect all relevant diagnostic information. And there is some truth to it. Providers in traditional Medicare are only incentivized to collect enough information to get reimbursed for the care they provide and not one code more.

The cynical interpretation is that Medicare Advantage’s dedication to documentation is excessive, sometimes devolving into outright cheating. The federal government openly acknowledged some of these concerns when it developed a methodology to downward-adjust differences in coding “intensity” in 2005. Nonetheless, critics maintain that politics has prevented a full accounting of the discrepancies.

Joe Namath of New York Jets fame goes for the win.

Medicare Advantage may cut the costs of delivering services and pass along some of the savings to enrollees in the form of higher quality and a broader array of services. But by most assessments, the taxpayers have not shared in the bounty: MA hasn’t saved the government a penny. Indeed, there is solid evidence that Medicare Advantage costs the federal government more than traditional Medicare – at times, as much as 17 percent more. And no doubt, regulatory failures as well as carrier code-gaming and sometimes flat-out fraud are to blame.

But there are at least hints that federal administrators are getting ahead of this oversight problem. Repeated adjustments to regulation have started to narrow the ability of MA to slice more than its appropriate share from the Medicare pie. Yet even today, the Medicare Advantage market remains the most profitable market for health insurance carriers. All in all, most experts would likely agree that payments to MA owners are on the high side.

Quo Vadis, Medicare Advantage?

At the end of the day, I think it’s safe to say that Medicare Advantage has at least in part delivered on its promises in the form of somewhat better basic care and substantially broader packages of services. And given the realities of health care politics in hyper-partisan America, MA may well be the only way to deliver more inclusive care – in particular, dental and vision benefits – to seniors. Those political realities are increasingly binding in light of both Washington’s budget woes and the reality that MA is a marketing steamroller. Moreover, low rates of plan-switching, along with consumer surveys suggest that MA is working pretty well for most enrollees.

In a sense, though, Medicare Advantage’s success in expanding the basket of benefits raises an awkward question. Should society (i.e., taxpayers) continue to fund the additional benefits provided by MA that Congress has always denied to enrollees in traditional Medicare? This question is growing ever more relevant as the portion of the federal budget going to the elderly continues to grow, and the responsibility for guarding against the vagaries of life has been shifted more and more from society to households.

There is also a much broader question here. How much discretion to make social policy are we willing to devolve to private actors – in this case insurers?

With transfers from government to private health insurers projected to exceed $7 trillion over the next decade, it’s plain that policy-making in Medicare (and health care more generally) is severely constrained by the interests of the vast health-industrial complex. These entities can not only prevent change in policy, they may be able to push policy fur- ther in directions they prefer. But the companies profiting from Medicare Advantage have no incentive to seek the social good, especially when it clashes with the interests of their stockholders.

That said, there’s no denying the toothpaste is out of the tube; Medicare Advantage is here to stay. Indeed, the most likely end-game is the unabated growth of MA followed by the withering away of traditional Medicare. I think the prudent path forward, then, is to try to mitigate the negative consequences of an MA-dominated delivery system rather than clinging to a traditional program that seems to be fading away.

Medicare Advantage 2.0

Even if we concede that Medicare Advantage is the future, it doesn’t follow that Washington should cede its role as policymaker in a representative democracy. For one thing, there’s the earlier question of how the claims of seniors on government resources should be weighed against those of the working-age population that will foot most of the bill. But there are also big questions about implementation.

For example, growth in Medicare Advantage will likely widen differences in the quality of Medicare received by individuals, as enrollees will be ever more dependent on the private carriers choosing to do business in the places they live. Can we afford to let the market set the bar for quality and access, or should government help seniors make choices?

Then there is the issue of whether Medicare Advantage should serve as the model for universal coverage if Obamacare evolves into Medicare for All. Should the government encourage the integration of publicly funded health care with privately funded insurance coverage? Are the potential benefits of expanding managed care in terms of efficiency worth the price in terms of the risks of devolving so much responsibility to profit-driven organizations?

Medicare Advantage isn’t going away. The biggest question is whether this peculiar combination of public funding and private managed care is the model of choice for universal care down the road.