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Republicans in Congress are on the hunt for budgetary savings to ease passage of reconciliation legislation that would extend and enhance the 2017 Tax Cuts and Jobs Act. Unsurprisingly, there is no widespread agreement on the size and nature of these savings. Yet it appears that one particularly irresponsible idea is picking up steam: dramatic cuts to one of Washington’s most successful health insurance programs, Medicare Advantage.
Medicare Advantage enrolls the majority of Medicare beneficiaries and offers an all-in-one, value-based package of services for seniors that moves away from the high-spending, fee-for-service system of traditional Medicare.
If cutting Medicare Advantage seems perverse, consider how the debate has evolved. First, the largest federal entitlements — Social Security and Medicare — are the greatest drivers of future debt and must be reformed, if only for their own survival. But President Trump has declared these programs — and most recently, Medicaid, which has grown by $263 billion since the start of the COVID-19 pandemic — off limits for cuts.
Second, Trump specified that the budget savings must come from program “waste,” not “benefit cuts.”
Third, a misguided line of thinking has concluded that there is such waste in Medicare Advantage. In 2024, the Medicare Payment Advisory Commission reported, “We estimate that Medicare spends 22 percent more for [Medicare Advantage] enrollees than it would spend if those beneficiaries were enrolled in [fee-for-service] Medicare, a difference that translates into a projected $83 billion in 2024.”
Multiply $83 billion for 10 straight years and you have the makings of great temptation. Then add to it some recent media accounts of “mismanagement” in Medicare Advantage plans, which are alleged to have failed to provide value-based care and inflated enrollee diagnoses to pad their money from the government.
Armed with these stories, it was budgetarily convenient for Medicare Advantage opponents to rationalize the Payment Advisory Commission finding as “23 percent of Medicare Advantage spending is waste,” and argue that cuts will not reduce actual benefits or violate the president’s pledge to make no substantive changes to the major entitlement programs.
But there is no foundation for this argument, and there are three main problems with its logic.
The first is that such critiques suffer from data and methodological shortfalls. A key piece of the logic is the notion that Medicare Advantage plans use clever benefit designs to lure only healthy, low-cost seniors away from traditional Medicare. At a basic level, the problem with this argument is that Medicare Advantage now covers the majority of Medicare beneficiaries, regardless of health status. Plans do not have a quota of “healthy” beneficiaries they seek to enroll — rather, they enroll those who desire quality health outcomes. The number of seniors that enroll directly into Medicare Advantage and never touch the fee-for-service program is rising rapidly, thanks to the same design of benefits that its critics so frequently deride.
The second flaw with the 22 percent estimate is that it seeks to compare health care spending between fee-for-service Medicare and Medicare Advantage. But we can’t make that comparison because the methods for calculating costs in each program differ so greatly. Since the focus is on budget saving, what matters is federal payment amounts to Medicare Advantage plans. Cutting payment rates would endanger supplemental benefits (vision and dental care) and reduced out-of-pocket costs. These are desirable features of Medicare Advantage, but they don’t exist in traditional Medicare. So, while the cuts might not reduce benefits as measured by fee-for-service, they would certainly undercut the structure of Medicare Advantage that enrollees increasingly seek out.
Finally, the essence of finding waste is identifying spending that does not improve the quality of care. Unfortunately, it is also difficult to compare the quality of care in Medicare Advantage with the quality in traditional Medicare. While Medicare Advantage has a comprehensive quality measure (MA Star Ratings), fee-for-service measures quality in myriad, fragmented ways.
But in those instances where we do have some insight into a comparison, Medicare Advantage is superior. Among Medicare enrollees with complex care needs, those in Medicare Advantage have lower acute care utilization than those in fee-for-service, which shows that Medicare Advantage is superior in addressing enrollees’ health needs before they become too severe.
In sum, there is no analytic case for the existence of large, systemic waste in Medicare Advantage.
The announcement in April that Medicare Advantage plans will receive a 5 percent boost in payments has whetted the appetites of the offset-hungry crowd. But this is misleading, at best. After accounting for changes to risk-adjustment, the net increase is only 2.7 percent — roughly the rate of inflation — and comes on the heels of budgetary deprivation under the Biden administration.
There is a place — even a need — for Medicare reform, especially to maintain its solvency. But real, thoughtful reform will reflect that the majority of Medicare beneficiaries now choose Medicare Advantage over traditional Medicare and that it is a better foundation on which to build the future of health care for the Medicare-eligible population.
That must be done with an eye to delivering the highest value care. It should not be done in haste and with the sole objective of reducing the outlays from Medicare.
Douglas Holtz-Eakin is president of the American Action Forum and was director of the Congressional Budget Office from 2003 to 2005.
