Heritage Foundation Leadership for America

Medicare Advantage, the new Medicare program of competing private health plans, is a success. The main reason: Seniors enjoy an unprecedented level of personal freedom in choosing health care options. Record numbers of senior and disabled cit­izens are enrolling in private health plans of their choice and securing better value for their health care dollars than is available to those enrolled in tra­ditional Medicare.

Congress enacted Medicare Advantage as part of the Medicare Modernization Act of 2003. It is supe­rior to previous private health plan experiments in Medicare because of its improvement in financing and a greater level of market penetration and stabil­ity. Most important, it gives senior and disabled cit­izens new private health plan options, more affordable care, and broader and better benefits, including care management programs and prescrip­tion drug coverage. Its key features:

• Broad Access to Private Health Plans. More than 9 million Medicare beneficiaries (roughly one of every five) are enrolled in private health plans under Medicare Advantage. While the heaviest enrollment is in urban areas, Medicare Advantage plans are available in every region of the United States, including rural areas where private plans have been sparse and difficult to get. Total enrollment in Medicare Advantage plans has already surpassed Medicare's previous private plan enrollment.
• A Variety of Health Care Options. Seniors have a variety of options, including health mainte­nance organizations (HMOs); local and regional preferred provider organizations (PPOs); private fee-for-service health plans; medical savings accounts (MSAs); and "special needs plans" (SNPs) that serve Medicare enrollees with chronic ill­nesses and disabilities. As of 2007, on average, seniors had a choice of 20 different plans.
• Broader Health Benefits. The health plans cover all of traditional Medicare's benefits and much more. Seniors can choose plans with higher premiums and lower cost-sharing or lower premiums and higher cost-sharing. Beyond prescription drug coverage, the plans offer preventive-care services and provide coor­dinated care or care management programs for enrollees with chronic conditions. Plans also offer routine physical examinations, additional hospitalization and skilled nursing facility stays, routine eye and hearing examinations, and glasses and hearing aids.
• Superior Value for Health Care Dollars. Under Medicare Advantage, seniors are getting better value for their health care dollars in an integrated system that is clearly superior to traditional Medi­care. Based on an analysis of additional health benefits, including prescription drugs, hospital stays, and physician services, as well as premium savings in the Medicare Advantage system, the Centers for Medicare and Medicaid Services (CMS) estimates that Medicare beneficiaries have secured, on average, additional monthly benefits valued at $96 by enrolling in a health plan in the Medicare Advantage program. CMS findings of additional value are in accord with independent private analyses.

While there are problems with the payment methods for Medicare Advantage plans, most of these problems stem from basing Medicare Advan­tage payment on traditional Medicare's flawed pay­ment system. Traditional Medicare payments do not reflect real market conditions of supply and demand, but are the product of a highly politicized administrative pricing mechanism, replete with price controls. At the same time, Congress should recognize that the criticism of government "over­payment" for Medicare Advantage is a criticism of payment for additional benefits and that cutting Medicare Advantage payment amounts to cutting these additional (and often necessary) benefits, thus forcing seniors to lose private coverage and buy supplemental coverage.

The Next Stage of Reform. While Medicare Advantage is an integrated system of health insur­ance, it is only the first stage of serious Medicare reform. Given the enormous fiscal challenge of Medicare's $36.3 trillion in unfunded liabilities, Congress must start the process of building on the success of the program's robust competition while controlling costs for current and future taxpayers. This can only be done through a comprehensive reform of the entire Medicare program.

The best option for such a comprehensive reform is a new system of premium support in which gov­ernment makes a defined payment to a health plan of a beneficiary's choice. This would not only build on the positive experience of market competition in the Medicare Advantage program, but also would also achieve parity in payment for different health care options, including traditional Medicare itself.

In designing a new premium support system for Medicare, Congress should make sure that govern­ment payments are based on real market condi­tions, not arbitrary payment formulas; that they are not open-ended, thus encouraging serious cost con­trol; that they encourage beneficiary savings; and that they are adjusted for such factors as age, income, or health condition.

Conclusion. The Medicare Advantage program is a success. Medicare patients are choosing health care options they like; they are getting superior benefits at affordable prices, and health plans are competing to provide value for health care dollars. Through the purchase of an integrated health plan, seniors are not forced to pay an additional premium for additional supplemental coverage to cover the needed benefits that traditional Medicare does not provide.

Medicare Advantage can serve as the first stage of reform. To ensure affordability for future genera­tions, Medicare will have to be restructured, and for reform to be successful, Congress will have to change the existing payment system and provide a generous but predictable government contribu­tion—a system of premium support, properly adjusted, for each beneficiary. At the same time, Congress should make sure that Medicare enters into a reliable partnership with private-sector health plan providers—and soon. The government will have to prove itself a good business partner.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.