Payment Reimbursement and Managed Care

Susan Dentzer: Perspectives differ on Medicare’s 2 houses

April 28, 2023 9:54 am

Drive through rural New England and you’ll see them: “connected farms,” cobbling together houses, sheds, barns and outbuildings in disjointed structures. Often centuries old, they are at once unlovely, yet exude charm. To me, they’re a perfect metaphor for the jumble of Medicare.

How else does one describe a program that baffles new enrollees as they sort through Medicare Parts A, B, C and D? Parts A (hospital insurance) and B (physician services and outpatient care) were the main structures when the program went live in 1966, but there was also a small annex attached, in which private health maintenance organization (HMO) plans were paid on a “reasonable cost” basis to provide Medicare benefits.

Successive congressional overhauls created the program that paid private plans on a capitated basis, eventually dubbed Part C. The version now called Medicare Advantage (MA) was shaped by a 2003 law that also produced the outpatient drug benefit, Part D.

A mixed reception for MA

Today, what was once an afterthought is now an edifice whose scope is nearly co-equal to the traditional program, because almost half of all Medicare beneficiaries who are signed up for both Parts A and B are now in MA plans. As with farmstead architecture, MA draws mixed reviews. Traditional Medicare purists decry the shiny construct of private health plans as of questionable value, since per-beneficiary costs in MA exceed those in traditional Medicare. Meanwhile, MA’s enthusiasts point to evidence that enrollment in MA health plans leads to better quality and less low-value care for beneficiaries. In any case, MA seems to be edging ahead in a popularity contest among enrollees.a

A more objective view required

The battle between the purists and the MA enthusiasts often seems based more on beliefs than on sober reality. Consider the purists’ tendency to overlook the fact that traditional Medicare still pays physicians on a fee-for-service (FFS) basis according to the Medicare fee schedule. Such payment traditionally was unrelated to costs or service quality, although that lack of accountability is changing due to legislation and the growth of value-based care models.

Although that pace of change has been glacial, many purists advocate extending traditional Medicare to the entire nation — e.g., through “Medicare for All.” They are apparently oblivious to what is still just a partial link in traditional Medicare between payment and quality or costs — as well as to compelling arguments from their own ranks that FFS payment has helped to create a healthcare system that isn’t sufficiently “safe, effective, patient-centered, timely, efficient, and equitable.”b They ignore the reality that MA is held much more accountable for the quality of care via Star Ratings, whereas nothing like this rigorous system of measurement — tied to clear financial carrots and sticks for health plans — exists in traditional Medicare.

The purists especially despise elements of the “risk adjustment” system that ensures that MA plans don’t discriminate against older, sicker patients and are compensated appropriately for their care. This system, which the government by statute periodically retools — as it has moved to do recently — is based on adjusting a portion of payments to plans by linking them to beneficiaries’ diagnoses, as captured in diagnostic codes.c

The purists insist it is wrong for diagnostic coding to deviate from traditional Medicare, and that MA is thus “over coded,” citing fraud or abuse as the cause. They omit the fact that physician billing in traditional Medicare doesn’t rely on diagnostic coding; that care unlinked to diagnoses is, if anything, “under coded”; and that outside of hospital care, the government has no comprehensive understanding of patients’ diagnoses in traditional Medicare, aside from data collected through a beneficiary survey.d

The purists’ final beef is about MA’s costs relative to the traditional program. The Medicare Payment Advisory Commission (MedPAC) says MA’s costs to the federal budget will be 6% higher per beneficiary in 2023. But focusing only on federal budget costs neglects the fact that beneficiaries in traditional Medicare often must pay private Medigap plans to plug coverage gaps, at out-of-pocket costs of $3,600 or more annually.

On average, one study showed, MA beneficiaries spend nearly $2,000 less in out-of-pocket costs and premiums annually compared with those in traditional Medicare.e MA plans also offer supplemental benefits such as dental and vision care not covered in the traditional program and, increasingly, assistance with beneficiaries’ health-related social needs, such as lack of transportation or nutritious food.f Medicare purists argue plausibly that benefits could be equalized across the two programs, but they haven’t advanced any plans for offsetting the additional costs by demanding greater efficiencies in traditional Medicare.

The need for a fairer assessment

A rational discussion requires more even-handed comparisons of these two structures, as would suit a prudent buyer shopping for a home. How much of MA’s higher costs constitute truly greater value to enrollees, versus simply big margins for health plans? How much do the different economic incentives between the program’s parts translate into higher-quality care or greater efficiencies? How could MA plans be even more efficient and competitive to capture even greater savings for beneficiaries and the government? How much do Medicare beneficiaries prefer dealing with health plans versus navigating a chaotic world of indemnity health insurance with no coordination behind their care?

In the meantime, purists and MA enthusiasts should call a truce — and in particular, the purists should stop misleading the public by implying that all is perfect in the creaky old farmstead of traditional Medicare. 


a. Jacobson, G., et al., “Medicare Advantage vs. traditional Medicare: How do beneficiaries’ characteristics and experiences differ?” The Commonwealth Fund, issue brief, Oct. 14, 2021.
b. Institute of Medicine (US) Committee on Quality of Health Care in America, Crossing the quality chasm: a new health system for the 21st Century, 2001.
c., “Fact Sheet: 2024 Medicare Advantage and Part D rate announcement,” March 31, 2023.
d. See AHRQ Medicare Expenditure Panel Survey, page last revised April 22, 2019.
e. ATI Advisory, Data Brief: Medicare Advantage outperforms fee-for-service Medicare on cost protections for low-income and diverse populations, Analysis for Better Medicare Alliance, April 2022.
f. Murphy-Barron, C., Buzby, E.A., and Pittinger, S., “Overview of Medicare Advantage supplemental healthcare benefits and review of Contract Year 2022 offerings,” Milliman Issue brief. commissioned by Better Medicare Alliance, Feb. 1, 2022.


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