Medicare Advantage (MA), a system of competing private plans, is America’s best bet for reforming all of Medicare, but it isn’t perfect. Last month, the Medicare Payment Advisory Commission (MedPAC—one of the panels that advises Congress—had an intense internal debate that demonstrates how susceptible MA is to bureaucratic efforts to undermine the market-driven dynamics that have made it so popular and successful.

The Commission discussed a status report on the program. It showed that over 99 percent of Medicare enrollees have access to a private health plan, enjoy an average choice of 41 plans, including plans that offer $0 premiums. As outlined in a Heritage Foundation report, MA’s phenomenal enrollment growth in recent years has been fueled by richer and more varied benefit offerings, its guarantee of financial protection against the financial devastation of catastrophic illness, and its lower beneficiary costs. As Commissioner Amol Navathe, professor in the School of Medicine at the University of Pennsylvania, remarked, “We have a lot of beneficiaries voting with their feet, moving into Medicare Advantage for a variety of reasons, and I think that reflects the value that the program is offering them.”

Unfortunately, the report also revealed that enrollment selection and higher coding for health risks (in the risk adjustment system) have jacked up MA spending above traditional Medicare by 23 percent. The paradox is that Medicare’s private plans, as MedPAC itself reports, can provide traditional Medicare benefits well below the cost of traditional Medicare itself. Because of this large disparity, some Commissioners called for independent evaluations from a broader range of analysts. 

This issue is not new. While largely successful, MA, as Heritage analysts and others have noted, has two specific weaknesses: an unnecessarily complex health plan payment process and a flawed risk adjustment system. The former undercuts price competition. The latter inaccurately accounts for beneficiary health risks, encourages health insurer “gaming” of the system, and thus leads to higher government payments to health plans. And current law prevents insurers from providing seniors cash rebates for choosing less expensive plans. This means that insurers who offer plans that cost less than the government payment for those plans can funnel the difference into rebates that take the form of richer supplemental benefits, for example, rather than providing seniors rebates in the form of direct cash savings or enabling them to deposit the additional funds in a tax-free health savings account.

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Unsurprisingly, several commissioners are embracing a regulatory rather than a competitive strategy to resolve MA’s problems. More specifically, they are advancing a proposal to further standardize Medicare Advantage benefits. Today, MA plans must offer traditional Medicare’s standard hospital, outpatients and prescription drug coverage, but health plans can also offer additional benefits, including vision and hearing, and different combinations of benefits, as well as a variety of supplemental and preventive care benefits.

While proponents claim additional government benefit standardization for private plans would improve competition, it would, in fact, have the opposite effect: making MA more like the traditional, single-payer Medicare—the Left’s out-of-date model for government-run, national health insurance. As Walton Francis, an independent economist and a nationally recognized expert on consumer-driven insurance markets, has observed, “Any standardized package (or even a set of standardized packages) created under any method necessarily suffers the obvious defects of all ‘one-size-fits-al’ schemes.” This includes, among other things, intense politicization of benefit offerings, frenzied lobbying by provider groups desperate to get Congress to cover their service or procedure, and, of course, greater costs for the American taxpayer.

Commissioner Brian Miller, MD, professor at Johns Hopkins School of Medicine, neatly summarized the MA benefit standardization proposal: “I think that standardization is poison disguised as candy.”

Dr. Miller is not alone. Mr. Kenny Kan, a health insurance actuary and a former member of the Maryland Health Care Commission, observed that government standardization of MA’s additional benefits would result in “massive” market disruption. Specifically, he said, that almost all MA enrollees would have to change their plans, more than nine out of ten would likely have to switch their coverage, and roughly seven out of 10 would face higher premiums, more cost-sharing, and fewer supplemental benefits.  

Kan admits that Commissioners supporting government standardization of private plan benefits may be well intentioned, but he warns that such standardization could have negative consequences, such as tightened drug formularies or smaller provider networks. Moreover, additional government benefit standardization could increase insurance market consolidation: the domination of a smaller number of big insurers serving Medicare patients in given geographic areas. Already, Commission staff report that while local market concentration has decreased—a welcome development—nationwide market concentration has increased.

Good policy would reverse consolidation both locally and nationally. But government benefit standardization will do the opposite. As Commissioner Kan put it:

Overly restrictive benefit standardization leads to a race to the bottom on price and discourages innovation. In addition, this would actually increase the admin burden for the industry, especially for small plans which lack scale. As a result, more local nonprofit small plans could drop out as they are saddled with higher administrative burden and an inability to differentiate themselves. When this happens, the big plans win.

It is also worth noting that government standardization of health benefits not only invites intense politicization of benefit offerings (and possibly pricing), but the very complexity of the task must greatly expand bureaucratic power and reach. Today, insurers have to make judgments on the size and scope of their benefit offerings, provider networks, and physician and hospital payment, balancing these decisions with their premium prices and cost-sharing, as well as the required level of catastrophic protection. In his book Putting Medicare Consumers in Charge: Lessons from the FEHBP (AEI Press,2009), economist Walton Francis warned:

What Solomonic figure knows the answer to whether all plans should adopt (say) the average HMO benefit package as opposed to (say) the average PPO package? Does the same figure have some divine information as to whether acupuncture and chiropractic should be covered at all, and if, so for how many visits and at what rate? What could possibly go wrong? 

Policy, not the market, is the problem. Whatever the true level of excess costs, Congress can directly resolve MA’s current issues through sound payment and risk adjustment reforms. In chapter 9 of Modernizing Medicare: Harnessing the Power of Consumer Choice and Market Competition (Johns Hopkins University Press, 2023), which I co-edited alongside Marie Fishpaw, Heritage Foundation analyst Edmund Haislmaier prescribes how such reforms can reduce costs and stop any insurer “gaming”. Other carefully crafted reforms could strengthen the MA program by enhancing free market forces of choice and competition responsible for its dramatic growth and popularity.

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The Medicare landscape is changing rapidly. Traditional Medicare, a defined-benefit, fee-for-service, “single payer” health program is steadily losing popularity among beneficiaries, while Medicare Advantage (MA), the defined-contribution system of competing health plans, has been expanding exponentially. Based on government data, between January 1, 2020 and January 1, 2024, MA enrollment increased from 24.3 million to 33.5 million, or 37.5 percent. In short, counter to the Left’s early expectations that Medicare would be a first step to national health insurance, most Medicare patients today get their care and coverage through private health plans.

MedPAC has made many positive recommendations to improve Medicare in the past, but past performance, as the saying goes, is no guarantor of future success. While House and Senate members must maintain a close watch over the regulatory decisions of the Centers for Medicare and Medicaid Services (CMS), the powerful Medicare bureaucracy that runs the program, they should also be aware of proposals bubbling up within the Medicare Payment Advisory Commission (MedPAC). Today’s arcane policy debates on financing and delivery details can set the big agenda for tomorrow’s policy changes that affect all Americans, especially seniors.