Develop into a distribution channel for personal insurance coverage

When Medicare first started, it was essentially defined benefit health insurance — meaning healthcare providers were reimbursed for the specific services they provided.

There was Medicare Part A, which focused on inpatient hospital care (although it also includes aspects of skilled nursing, hospice care, and home nursing) and Medicare Part B, which focused on medical services (although it also included outpatient care, some durable medical home appliances, some mental health care and other services). But there is an obvious problem with paid care: the delivery of health care is shaped by the needs of the patient, but also by local practice patterns and the economic incentives of health care providers. Although Medicare is a national program and payroll taxes to support Medicare are the same across the country, Medicare prices and services offered can vary significantly by location (see, for example, here).

So the next big change to Medicare’s original structure didn’t follow a fee-for-service approach. In 1997, President Bill Clinton signed legislation introducing Medicare Part C, allowing Medicare patients to elect to receive direct payments from the government to a private health insurer, instead of receiving fee payments through Medicare A and B — in effect , the government has take out health insurance for you. This innovation was not entirely new: as early as the 1970s, some people had obtained their Medicare through private insurance. But in the late 1990’s, the Medicare Advantage option, as Part C is often called, became available to everyone.

In a study conducted for the Kaiser Family Foundation, Meredith Freed, Jeannie Fuglesten Biniek, Anthony Damico, and Tricia Neuman review “Medicare Advantage in 2022: Enrollment Update and Key Trends” (August 25, 2022). They point out that the proportion of Medicare participants who have enrolled in Medicare Part C is nearly half and growing rapidly. They cite projections that Medicare Advantage could cover more than 60% of all Medicare patients in 10 years.

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Why do people choose Medicare Advantage plans? The main reasons are that the insurance plan must cover everything in Medicare Parts A and B, but it can also provide additional benefits – at no additional cost to the patient. Some common add-ons include certain vision, hearing, and dental benefits, and sometimes benefits like transportation to the doctor and grants for joining a gym. In addition, Medicare Advantage plans can be adjusted to provide more coverage (such as lower co-payments) for the services you know you’re more likely to use. In some areas, you can even make a fairly seamless transition from your employer’s health insurance through a particular company to Medicare health insurance through the same insurance company.

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Most Medicare Advantage plans are open to everyone, although there are also special plans organized by certain unions and employers, as well as some “special needs” plans that are limited to low-income older people who also have certain chronic diseases or disabling diseases.

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The rise of Medicare Part C poses some conundrums for proponents of national health insurance programs.

For example, different versions of the Medicare for All legislation have been proposed. In some versions, this would be a universal national health insurance plan run by the government. Regardless of the merits or demerits of such a proposal, in the real world, Medicare is shifting to a choice of plans operated by insurance companies and funded only by the government. Older people have a choice to have their health insurance administered by the US government or by a private insurance company – and they choose the private company.

An obvious follow-up question is: How can the private insurance companies offer these Medicare Advantage plans—with limited but real coverage choices along with additional services? Keep in mind that most plans are open to everyone, so insurance companies don’t “skim the cream” by only enrolling the healthier older people. Private insurance companies must make a profit, while Medicare Part A and B do not.

I don’t have a fully convincing answer here. It’s true that on average the government pays a little more for Medicare Part C than for Part A and B, but it’s only about $300 per person per year, so that’s probably not the main reason. My guess is that large insurance companies are better at managing healthcare costs and maybe no worse at managing paperwork and administrative costs. After all, insurance companies receive a flat fee per patient rather than a fee for the service like traditional Medicare A and B do. One can of course raise concerns about how private insurance might control healthcare costs. But again, the key point is that older people are increasingly showing through their actions that they prefer the Medicare Advantage plans, which are funded by the federal government but operated by private insurance companies.

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