How Medicare Advantage Took Over Senior Health Care

While the term Medicare Advantage is only about 20 years old, private Medicare plans have existed in some form for decades.

When President Lyndon B. Johnson launched the Original Medicare program in 1965, it offered older Americans a way to receive health care through the federal government. Part A covered inpatient and hospital care and Part B covered areas like doctor’s visits, treatments and services.

From the beginning, there was some form of private plan offerings — though not nearly to the level seen today. The Commonwealth Fund reports that just 65 total HMOs contracted with Medicare in 1979.

According to the National Library of Medicine, the precursor to the modern Medicare Advantage program began when the Tax Equity and Financial Responsibility Act (TEFRA) of 1982 allowed Medicare to contract with private, risk-based plans. In 1985, lawmakers finalized the program’s rules and beneficiaries began to enroll in the private plans.

The program grew quickly in popularity and enrollment in these risk-based plans jumped from 2.8% of beneficiaries in 1986 to 14% by 1997.

Today, beneficiaries also know Medicare Advantage plans as Part C, in contrast with Parts A and B offered by Original Medicare.

The term Part C traces its roots back to the Balanced Budget Act (BBA) of 1997 and the adoption of the Medicare+Choice program. According to the National Library of Medicine, the BBA was born when congressional members in the 1990s believed remodeling the Medicare program might help reduce the deficit.

Renamed Medicare Part C, private plan options expanded beyond HMOs to include other formats including PPOs. Despite Congress’s hope that competition would grow between private plans and the market would expand, it shrank.

This new model created a market less beneficial to those in private plans and enrollment numbers fell. As payment rates decreased, the number of plans available decreased as well. The Commonwealth Fund found that enrollment fell from 18% of all beneficiaries in 1999 to just 13% in 2004.

Medicare ultimately lost money on beneficiaries enrolled in private plans from 1997 to 2003, a direct contradiction to the hope that the new model would save the government money.

The modern Medicare Advantage program took its name and current form from the Medicare Modernization Act of 2003.

The Act created a more favorable format for private plans, increasing payments and establishing a new bidding process.

The Medicare Modernization Act laid the groundwork for the Medicare Advantage market as it exists today. With private plans receiving higher payments and plenty of motivation to pursue growth, the stage was set for a march to market dominance.

Today, as the number of diverse plans continues to grow, enrollment in Medicare Advantage has skyrocketed. KFF reports that enrollment in private plans represented just 19% of all beneficiaries in 2007. It took less than a decade for private plans to grow to a 33% market share from there, and now private plans are likely to claim most of the market within a year.

This growth happened faster than originally projected. According to KFF, the U.S. Centers for Medicare & Medicaid Services (CMS) Office of the Actuary projected about 15 million beneficiaries would enroll in private plans by 2020. Actual enrollment that year eclipsed 22 million beneficiaries.

“It’s been a pretty steady upward climb over a couple of decades now,” Jack Hoadley, Ph.D., a former commissioner on the Medicare Payment Advisory Commission and research professor emeritus in the Health Policy Institute of Georgetown University’s McCourt School of Public Policy, told RetireGuide. “[Ten years ago] I might have speculated that it would start to level off a bit or that you’d reach a limit of how many people were willing to join a Medicare Advantage plan.”

We can attribute the dramatic growth of Medicare Advantage to several factors.

Medicare Advantage’s pitch to beneficiaries is simple: Private plans offer expanded benefits like vision, dental and hearing coverage. And they often do so with $0 in additional premiums, making them a more affordable option than Original Medicare with Medigap.

“A lot of it has to do with the premiums and the price of Medicare Advantage plans from the outset. Most Medicare Advantage plans now have a $0 premium,” Meyers said. “When people are choosing what sort of plans to enroll in, particularly people who maybe have more financial need, it might be a really appealing choice to see that, ‘Oh, you don’t have to pay as much for these plans.’”

With cost as a major deciding factor for millions of beneficiaries, the option of securing a plan with little to no additional premium can be very appealing. Beneficiaries who stay with Original Medicare often must also purchase a Medigap plan and Part D plan. And those additional costs add up quickly.

“It’s almost always the case that purchasing a Medicare Advantage option is going to be less expensive than a Medicare supplement option,” Hoadley said. “For many of the Medicare Advantage plans, there’s no additional premium. In fact, in some cases, they actually give some rebates to the Part B premium. And Medigap policies typically are at least $125 a month.”

Expanded benefits also play a major role. Medicare Advantage plans often include drug coverage, as well as some form of vision, dental and hearing coverage. Original Medicare doesn’t cover any of these areas.

Marketing efforts by the insurance companies selling Medicare Advantage plans also factor into the program’s significant growth.

It is not uncommon for television broadcasts to be inundated with ads for various Medicare Advantage services during enrollment periods.

“As soon as the big major carriers like UnitedHealthcare, Humana and Aetna started becoming profitable on it in the early-to-mid 2000s, they’ve just been pushing it more and more,” Joe Arroyo, an independent insurance agent and author of “Mastering Medicare: Enroll with Confidence,” told RetireGuide. “And now you can’t avoid it. It’s on TV 24/7. It’s the number one thing I get asked, honestly. ‘What’s this Medicare Advantage thing I keep seeing on TV?’”

This constant marketing helps ensure that millions of beneficiaries know Medicare Advantage is an option. That awareness helps spur enrollment.

“It is kind of a feedback loop,” Arroyo said. “As people have become more interested in it, then more and more advertising and more and more people are aware of it, and therefore more and more people are getting it.”

Enrollment is also bolstered by the fact that it’s easy to switch from Original Medicare to Medicare Advantage, but not as easy to switch back. Plus, beneficiaries aren’t guaranteed access to a Medigap plan after their initial eligibility period ends.

“There are some issues around. If you’re in Medicare Advantage, it can be challenging to move back to traditional Medicare,” Hoadley said. “You don’t have guaranteed enrollment in a supplement plan, so that tends to keep people in Medicare Advantage once they join.”

Following years of rapid growth, Medicare Advantage is likely to cross the 50% threshold and become the primary way that seniors receive health care within the next year.

Less than 10 years ago, the average beneficiary had access to just 17 plans. In 2022, an additional 228 plans became available to beneficiaries nationwide. KFF estimates that the average beneficiary will have access to 43 unique plans in 2023.

Access to more options than ever before has continued to spur growth, but the plans themselves have also grown more affordable.

KFF found that, in 2011, the average Medicare Advantage beneficiary paid a monthly premium of $39. CMS projects the average monthly premium to be $18 a month in 2023, with 66% of plans charging no additional premium and 17% of plans even offering a rebate on the standard Part B premium that all Medicare beneficiaries pay.

With the number of options increasing every year and the cost of those options dropping, growth has come easily.

“The numbers, in many cases, are getting better,” Arroyo said. “You’re more and more likely to find a $0 premium plan.”

While the options continue to expand, available plans remain concentrated among several giants of the insurance industry. When originally introduced, a theorized benefit of Medicare Advantage was the positive impact of competition between different carriers — but several dominant forces have emerged to control most of the marketplace.

In 2022, only six companies claimed over 1 million beneficiaries in their plans. Humana, UnitedHealthcare and CVS Health/Aetna alone accounted for 57% of all Medicare Advantage beneficiaries.

So, while Medicare Advantage’s rise to dominate senior health care is impressive, only a handful of companies hold a significant stake in that growth.

Medicare Advantage’s explosion in popularity means major benefits to beneficiaries. But there have been notable drawbacks as well.

“It’s been really beneficial for some beneficiaries — for people who are healthier, who are enrolling in good plans,” Meyers said. “There are some Medicare Advantage plans that do a great job of providing additional benefits and keeping out-of-pocket costs under control. But, at the same time, a lot of people have really challenging experiences with these plans.”

Deciding whether a health care space where Medicare Advantage dominates is good or bad largely depends on the specific circumstances of the beneficiary.

An obvious perk for seniors with private coverage is the availability of additional benefits. The private plan boom allowed for much wider access to included plan benefits like dental, vision, hearing and drug coverage. Original Medicare covers none of these services.

The competition of a private marketplace further helps to grow benefit offerings, with various companies vying for customers by upping what their plans offer.

Medicare Advantage plans also introduce more compact options. Beneficiaries now have a single coverage alternative to paying for Original Medicare, Medigap and Part D plans separately.

“Medicare Advantage has the potential to coordinate care better,” Hoadley said.

One of the largest benefits felt by Medicare Advantage consumers is price. From $0 premiums and rebates to out-of-pocket caps, private plans offer many ways to help seniors keep their costs down.

“The out-of-pocket maximums can be a big part of this, particularly for people who use more care in a year,” Meyers said. “Knowing their Medicare Advantage plan has a maximum out-of-pocket that you have to pay each year can often be attractive. Traditional Medicare does not have that unless you get a Medigap plan — but many Medigap plans are actually quite expensive.”

One of the biggest controversies facing Medicare Advantage surrounds the government’s payments to the private companies offering the plans.

According to The New York Times, many major Medicare Advantage plan providers have been accused of overcharging the federal government by representing patients as being sicker than they are. These practices may have increased profits by billions of dollars.

Plan providers allegedly overcharging the government creates two potential issues for beneficiaries.

The first is that these practices could stretch how much the federal government can reasonably spend on Medicare, which is already a massive expense. The New York Times found that the overbilling amounts alone may eclipse the entire annual budgets of programs like NASA and the FBI.

The second concern surrounds the implications of these private plan providers suddenly seeing billions less in revenue and how much the market might change if this alleged overbilling was corrected.

In this scenario, it’s unclear if the motivation would still exist for insurance companies to continue expanding plan offerings and providing them at lower costs.

On top of these potential overpayment issues, the limitations set by Medicare Advantage plans are detrimental to some beneficiaries.

Private plans typically require the patient to remain within a network to receive care. Specialist care usually requires referrals, and prior authorization rules are common.

Kelly Anderson, an assistant professor at the University of Colorado Skaggs School of Pharmacy and Pharmaceutical Sciences, recently completed a study on the use of prior authorization in Medicare Advantage. While the practice can help to reduce overall spending and direct patients toward cheaper options, there are serious potential drawbacks.

“We’ve seen an increase in the use of prior authorization in Medicare Advantage plans in recent years,” Anderson told RetireGuide. “There are potential concerns that this adds workload burden to clinicians and that this can delay access to care for patients who need it.”

While Medicare Advantage plans make sense for many beneficiaries, there are groups significantly less suited for private plans.

Because of how CMS rates private plans, rural beneficiaries may not realize that the plans available in their area are not actually the strongest options for their health care.

“Most Medicare Advantage contracts span many counties, urban and rural,” Abigail Barker, Ph.D., a research assistant professor at Washington University in St. Louis’ Center for Health Economics and Policy, explained to RetireGuide. “Your Medicare Advantage plan could be, let’s say, 80% urban people who might live in a handful of urban counties and states. And then there might be 20% of rural people who live in outlying rural areas. That contract might get a score of four stars or five stars. But that doesn’t necessarily mean that the rural people in that plan are getting the same quality experience as the urban people.”

In general, private plans are simply not as widespread in rural communities and parts of the country that do not feature major metropolitan areas. Requirements to remain within a network also present concerns outside of urban areas. This is poised to grow into an even bigger problem for people living in rural communities as Medicare Advantage becomes the dominant force in senior health care.

“Medicare Advantage is absolutely compelling in more heavily urban areas. Out-of-pocket maximums are just so much lower,” Arroyo said. “In San Diego, almost everyone takes Medicare Advantage, even the affluent people. In South Carolina, which is considered to be more of a rural state, the out-of-pocket maximum is at least twice as high as it is in San Diego.”

For a system that has seen multiple revisions and major slumps — and experienced its fair share of challenges — Medicare Advantage soon accounting for over half of all beneficiaries’ health care is a major milestone.

But there are no signs that the growth will stop there. We may look back on the modern era of the program as an early step in the journey as private plans continue to grow and become a larger, perhaps eventually dominant, share of senior health care.

“The idea that you have some kind of Original Medicare plus a Medicare Supplement — which used to be the standard for people — where you have almost no out-of-pocket spending is not something people are familiar with these days,” Arroyo said. “People who have been working for the last 20 years expect to pay copayments. There’s less demand for that 100% coverage that comes with Medigap plus Original Medicare.”

As Medicare Advantage continues to grow and the way seniors get health care continues to evolve, problems that seem small now may move to the forefront as private plans proliferate.

One such concern surrounds the set rates for services. Payment rates for Medicare Advantage are based on Original Medicare’s prices. This made sense when private plans represented a small share of beneficiaries, but may grow into a larger problem as market dynamics shift.

“When it gets not just to 50%, but to up to 75%, 80% or 90% [in private plans], then we’re going to have to take a fresh look at what’s the right formula,” Hoadley said. “You probably can’t look at the typical cost of treating somebody in traditional Medicare when it’s only 10% or 15% or 20% of the population. It just may not be a typical population.”

And as Medicare Advantage grows into new communities, the plans themselves may also have to adapt.

Medicare Advantage plans have found a new market for rapid growth among Black and Hispanic beneficiaries, for example. With this recent growth, plans likely need to do more to understand the equity of the care that they’re delivering in order for the quality of plans to remain the same for those communities.

“Are some beneficiaries experiencing disproportionately worse or better outcomes than other beneficiaries? They need to start thinking more about the cultural competency of care,” Meyers said. “For a lot of Hispanic beneficiaries where maybe English isn’t their first language, they need to ensure that they have provider networks that can meet the needs of patients that are now enrolling in these plans.”

Medicare Advantage has been growing steadily for 20 years. As of now, experts see no reason for the growth to stop. The senior health care space may eventually see the vast majority of beneficiaries enrolled in a private plan.

But there are several potential policy changes that could tip the scales away from Medicare Advantage.

An often-discussed policy shift that could impact Medicare Advantage’s popularity is the addition of more benefits to Original Medicare. In the current market, private plans are the only way to get vision, dental or hearing coverage.

“I do think it’s going to continue to grow. Dental, vision and hearing being added to Original Medicare… If that happened, I think that would probably, potentially, slow the growth. At least initially,” Arroyo said.

A change to the rules for Medigap enrollment could also negatively impact Medicare Advantage enrollment. If supplement plans could accept any beneficiary coming off of a Medicare Advantage plan, we’d likely see more beneficiaries switching between the two options instead of the current, one-way stream.

But Medicare Advantage has a compelling case for continued growth. With little policy change on the horizon and private plans continuing to offer more affordable alternatives to pairing Original Medicare and Medigap, beneficiaries may simply continue to go private, regardless of potential drawbacks.

For Craig, there were no downsides that could outweigh the savings.

“I’m willing to deal with a little bit of restriction, in terms of requiring a referral sometimes, to get the lower prices.”