Commentary: Reform Medicare Advantage

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Elon Musk recently announced his intention to cut $1 trillion in federal spending through the new Department of Government Efficiency. As the department looks for ways to trim waste, one program that deserves immediate attention is Medicare Advantage.

This is the component of Medicare that allows seniors to opt in and purchase privately run government-subsidized health plans. It’s a popular program that typically bundles medical, hospital and drug coverage, often including extras like vision and dental. MA produces better health outcomes than traditional Medicare, making it a good deal for both patients and taxpayers.

And yet for all these benefits, the program sorely needs reform.

It currently wastes billions of dollars each year as a result of perverse incentives, inefficient procedures and misguided policies. Rethinking the most dysfunctional aspects of MA could dramatically lower costs while improving quality of care.

One of the program’s most glaring inefficiencies concerns a practice known as “upcoding” or “over-coding.” This is when a health plan deliberately diagnoses patients with additional ailments in order to make them appear sicker, and thus riskier and more expensive to insure.

Misrepresenting a patient’s health may seem like the exact opposite of what an insurance provider is supposed to do. But for the company, increasing the number of diagnoses means more money from the federal government. That’s because, under current rules, the government reimburses plans more generously for patients with higher “risk scores.” In recent years, risk-score inflation has become rampant.

In 2021, for instance, patient risk scores in MA were 12.1% higher, on average, than for patients in traditional Medicare, according to analysis from the Medicare Payment Advisory Commission.

Fortunately, there are relatively straightforward ways to fix the problem.

Currently, Medicare is required to reduce payments to MA insurance plans by at least 5.9% to reflect differences in coding across different populations. By increasing this figure — known as the “minimum risk reduction” — to 8%, the government could remove the incentive for plans to overstate how sick patients are. According to an estimate from the Congressional Budget Office, this would save at least $47 billion over a seven-year period.

The government could reduce MA waste even more significantly by rethinking MA’s system of “quality bonuses.”

Right now, Medicare pays bonuses to MA plans that perform well on measures of customer satisfaction. Plans in certain urban areas are even eligible for “double bonuses.” The aim is to encourage the insurance providers to improve quality — but that isn’t how the arrangement has worked out.

The bonus program has had only a questionable effect on plan quality while substantially driving up overall MA costs, according to an analysis by the Urban Institute. Meanwhile, the double-bonus payments have increased racial disparities in how Medicare funds are distributed. And none of this has improved patient care.

The Congressional Budget Office estimates that eliminating double bonuses alone would reduce MA spending by $18 billion over seven years. The office also looked at another, more technical reform, which would do away with so-called “benchmark increases” tied to quality bonuses, and estimated the savings at more than $94 billion.

Add it all up, and ending MA quality bonuses could save taxpayers huge sums, with no negative impact on patients.

Medicare Advantage offers enormous value to seniors, and should be preserved. But it deserves scrutiny from the new Department of Government Efficiency for ways to reduce waste. Reforming the program could put Musk well on the way to his savings goal.

Drew Johnson is a budget policy analyst in Las Vegas.