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Medicare Advantage Bends Cost Curve the Wrong Way

Blog | 
Economics | 
Policy | 
System Dynamics | 

Everyone sees what they want to see in the latest figures on national health expenditures released by the Centers for Medicare and Medicaid Services earlier this month.

Most people see good news: The rate of increase in NHEs dropped by nearly a full percentage point to 3.9 percent in 2017 from 4.8 percent in 2016.

That’s the lowest annual increase in NHEs since 2013, when NHEs rose 3 percent. And it’s the third-lowest increase in NHEs in decades stretching back to 1960*, according to CMS’ much-beloved Table 1, which hangs on the cubicle walls of health policy wonks and healthcare journalists everywhere.

(Yes, efficient people still print things out and put them where they can see them with a quick glance rather than trying to remember where they put that damned URL.)

In terms of dollars, NHEs reached about $3.5 trillion in 2017 from about $3.4 trillion in 2016. And they consumed slightly less of the GDP: 17.9 percent last year compared with 18 percent a year earlier.

Pretty much across the board were smaller increases in spending and much joy from the thought that incumbent industry segments tamed their unbridled spending habits. For example, spending increases by the three usual suspects were lower in 2017 compared with 2016:

  • Spending on hospital care rose 4.6 percent compared with 5.6 percent
  • Spending on physician services rose 4.2 percent compared with 5.6 percent
  • Spending on prescription drugs rose 0.4 percent compared with 2.3 percent

It was curious then that Medicare spending didn’t enjoy the same fate, especially when you consider that spending by the public health insurance program for seniors represents about 20 percent of NHEs. CMS said Medicare spending rose 4.2 percent in 2017 to $705.9 billion compared with a 4.3 percent increase in 2016.

CMS said Medicare spending didn’t change much in 2017 because what the program saved in Medicare fee-for-service programs was “offset” by “faster growth” in spending by Medicare private health plans, more commonly known as Medicare Advantage plans.

CMS said Medicare FFS spending rose 1.4 percent in 2017 compared with 2.6 percent in 2016. At the same time, Medicare spending on enrollees in Medicare Advantage plans jumped 10 percent in 2017 compared with 8.1 percent in 2016.

“The trends in Medicare FFS and Medicare private health plan spending are attributed in part to an increasing share of all Medicare beneficiaries enrolling in Medicare Advantage,” CMS said.

Ho-hum. Keep moving. Nothing to see here. That’s why we put those figures near the bottom of the CMS press release and on the page two of the three-page CMS 2017 NHE “highlights” document.

So, I decided to look at those Medicare spending tables on the CMS website to see for myself. But none of the tables on the site had those figures. So I asked CMS’ press office, and the press office to its credit and without hassle sent the missing table to me with the explanation: “The information is not published on the CMS website, but is given out on request only.” And for that, I say thank you.

And the table, called the Medicare Review Table, which includes a FFS tab and a private plan tab, tells an interesting story. Medicare Advantage, which is supposed to save the program money, is so costly that not only is it not saving money but is spending so much more that it’s erasing the savings from slower growth in Medicare FFS payments.

Here are the numbers from the Medicare Review Table that lead me to this conclusion:

  • Of the $705.9 billion in Medicare spending in 2017, about $462.4 billion, or 65 percent, was from FFS payments, and about $243.5, or 35 percent, was from Medicare Advantage payments.
  • A year earlier in 2016, the ratio of FFS to Medicare Advantage spending was a little higher: 67 percent to 33 percent.
  • Yet, the $462.4 billion in Medicare FFS spending was a 1.4 percent increase from 2016 while the $243.5 billion in Medicare Advantage spending was a 10 percent increase from 2016.

It’s true that more people are enrolled in private-sector Medicare Advantage plans. In 2017, about 18.5 million seniors were in Medicare Advantage plans, up 7.7 percent from the approximately 17.2 million enrolled in 2016, according to figures from the Kaiser Family Foundation.

Those numbers jive with figures from CMS. In December 2017, about 18.9 million seniors were enrolled in Medicare Advantage plans, up 7.9 percent from the approximately 17.6 million enrolled in December 2016.

Now, if we divide total Medicare Advantage expenditures by the number of Medicare Advantage enrollees, using the Kaiser Family Foundation enrollment figures, here’s what we come up with:

  • CMS spent $13,177 per Medicare Advantage enrollee in 2017
  • CMS spent $12,902 per Medicare Advantage enrollee in 2016
  • That’s an increase of 2.1 percent from 2016 to 2017

In short, CMS spent more on more—a double hit to a privatized government program that’s supposed to save taxpayers money and control Medicare spending. If my math is correct, Medicare spending will rise even faster as more beneficiaries enroll in Medicare Advantage plans.

What did you think was going to happen when you turned over the program to investor-owned health insurance companies? Healthcare is a business like any other business. If you want to control Medicare spending, incent private Medicare Advantage plans to reduce spending per enrollee.

For ideas on how to do that, read “Amplifying Transformation: Addressing Medicare Advantage’s Disadvantage” on

David Burda is a columnist for 4sight Health and news editor of 4sight Friday, our weekly newsletter. Follow Burda on Twitter @DavidRBurda and on LinkedIn. Read his bio here

* Year when author joined this world as a 6-pound, 8-once bundle of joy at the now-closed Columbus Hospital in Chicago. Credit/blame goes to Judith and Bernard Burda.

About the 4sight Health Author
David W. Johnson
David Johnson CEO 4sightHealth

David Johnson is the CEO of 4sight Health, a boutique healthcare advisory and investment firm. Dave wakes up every morning trying to fix America’s broken healthcare system. He is a frequent writer and speaker on market-driven healthcare reform. His expertise encompasses health policy, academic medicine, economics, statistics, behavioral finance, disruptive innovation, organizational change and complexity theory. Dave’s book, Market vs. Medicine: America’s Epic Fight for Better, Affordable Healthcare, is available on