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Does Medicare Advantage Spell Doom For Traditional Fee-For-Service?



This year is turning out to be something of a watershed for Medicare Advantage health plan enrollment, so it’s worth asking if the program could one day become more popular than traditional Medicare’s fee-for-service model.

It was 10 years ago that Medicare Advantage plans, administered by private health insurers, reached rock bottom. In 2004, only 5.3 million people – 13 percent of all Medicare recipients -- were enrolled in the health insurance program.

Fast forward to today: Enrollment in individual and group markets has grown steadily, individual enrollment has far surpassed group enrollment, with an estimated 15.7 million people – or 30 percent of all Medicare recipients -- enrolled in Medicare Advantage, according to U.S. government data.

Of those 15.7 million, only 3 million are enrolled through group plans, but one-third of enrollment growth in 2014 has come from group enrollment.

Since the enactment of the Affordable Care Act (ACA), enrollment in Medicare Advantage plans has jumped by 4.6 million people or 41 percent, U.S. government figures show. Medicare Advantage enrollment has increased in nearly every state.

Even with the ACA’s reductions to insurance carriers to trim Medicare Advantage payments by $156 billion over 10 years, and despite concerns that payment rate changes incorporated in the ACA would lead to lower enrollment, Medicare Advantage continues to grow.

“Enrollment trends suggest that Medicare Advantage remains an attractive option for a growing number of beneficiaries,” Medicare experts Marsha Gold, Gretchen Jacobson, Tricia Neuman and Anthony Damico wrote in a brief published by the Henry J. Kaiser Family Foundation.

More than 54 million Americans are enrolled in Medicare. As millions of baby boomers reach 65, the age at which they are eligible to enroll, Medicare rolls are expected to swell.

Medicare Advantage is already huge. In 2013, enrollees chose from about 3,600 plan options delivered largely by health maintenance organizations and preferred provider organizations. Enrollees paid plans $146 billion last year, according to the Medicare Payment Advisory Commission.

Medicare Advantage, which has been in existence for 30 years, used to lag the traditional fee-for-service Medicare model because it was more expensive and delivered uneven quality of service compared to traditional Medicare.

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Individual critics, to be sure, lambaste Medicare Advantage as corporate welfare for health insurers, rail against carriers who drop provider networks without warning, and deride the difficult approval process for certain procedures.

Nevertheless, the differences between Medicare Advantage and traditional fee-for-service Medicare have narrowed, recent research by Harvard University health economists Joseph P. Newhouse and Thomas G. McGuire has found.

Newhouse and McGuire said Medicare Advantage plans may cost 6 percent more on average, but now they also offer higher quality that traditional Medicare.

The narrowing of the gap is no accident.

The Medicare Payment Advisory Commission supports private plans and alternative health care delivery systems. Because plans are paid on a per-enrollee basis instead of on a fee-for-service basis, private plans have more incentives to innovate and implement care management techniques.

In its June report to Congress, the commission said recent legislation had helped narrow the inequities between Medicare Advantage and traditional Medicare.

“As a result, over the past few years, plan bids have come down in relation to FFS [fee-for-service] spending while enrollment in MA [Medicare Advantage] continues to grow,” the commission’s report said.

Enshrined in the ACA are bonus programs to reward quality within Medicare Advantage programs. Medicare Advantage plans “may be responding to the legislation by paying closer attention to quality measures,” the commission said.

Medicare Advantage plans’ pressure on costs is undeniable, Harvard researchers Katherine Baicker, Michael Chernew and Jacob Robbins stated in a paper published last year by the National Bureau of Economic Research.

Higher Medicare Advantage enrollment led to fewer hospital visits not only by Medicare Advantage patients but for traditional Medicare patients as well due to the influence of Medicare Advantage on doctor’s practices, the researchers found.

Based on patient databases in Florida, New York, California, Arizona and Massachusetts, the researchers found that boosting Medicare Advantage payments by $100 a month to private health plans would generate a “spillover effect” and raise the share of beneficiaries enrolled in Medicare Advantage from traditional Medicare plans by about 400,000 people in those five states.

Medicare Advantage spending would rise by almost $5 billion for those states, but overall costs in hospital care would drop an estimated 2 percent or $600 million for traditional Medicare beneficiaries due to higher Medicare Advantage enrollment, the researchers found.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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