Ask the Advisor: March/April 2020

Ask the Advisor: March/April 2020

Do Healthcare Costs Grow Faster Under Medicare Than Under Private Insurance?

Q:  Which type of insurance has been better at controlling healthcare costs?  Medicare or Medicare Advantage?  How does this affect my healthcare costs?

A:  The cost of private health insurance is growing far more rapidly than Medicare.  According to Drew Altman of the non-partisan Kaiser Family Foundation, per capita spending for private insurance has grown by 52.6% over the last decade while per capita spending for Medicare grew by 21.5% over the same period.  Private insurance generally pays higher prices for care than does Medicare.

These trends are affecting private Medicare Advantage health plans and the federal government’s reimbursements to the plans.  Recent studies are finding that this program, which was originally intended to save taxpayers money, is actually costing the federal government more to provide the same benefits as traditional Medicare.

Medicare beneficiaries have the option of receiving their healthcare coverage through private Medicare Advantage plans as an alternative to federally administered traditional Medicare.  While all enrollees pay a monthly Part B premium, many Medicare Advantage plans charge no or only a very low premium, saving enrollees premium costs for supplemental coverage.  Many enrollees also save money on prescription drug plan premiums, because most Medicare Advantage plans include that coverage as well.  The plans are popular for providing additional benefits that are not covered by traditional Medicare, such as vision services and dental care.  Little wonder that federal spending on Medicare Advantage plans accounts for one-third of total federal spending on Medicare.

Studies indicate, however, that Medicare Advantage plans are spending less to provide care than traditional Medicare.  Medicare Advantage plans receive capped payments from the federal government to provide all Medicare-covered services for each enrollee.  Studies have found that Medicare Advantage enrollees are more likely to go home after a hospital visit rather than to receive care at a skilled nursing facility.  Medicare Advantage patients see specialists less often, receive fewer inpatient operations, and more outpatient services, which cost less.

Because the plans cost more, this affects Medicare Part B premiums for everyone, even for people who aren’t enrolled in a Medicare Advantage plan.  Medicare Part B premiums are determined by the total estimated per - person cost of providing Part B services for the year, including the cost of all federal payments to Medicare Advantage plans.  Higher than necessary payments to Medicare Advantage plans means higher Part B premiums.

A new study in 2019 by the Rand Corporation found that private health plans paid more than three times more than Medicare does for the same services.  Some policy experts say that private plans have lost the ability to negotiate with health care providers on the same level as Medicare, in part because many hospital systems and doctors’ practices have merged, giving healthcare providers greater leverage.

More than 75% of participants in TSCL’s Senior Surveys think Congress should establish limits on the maximum amount of profit that Medicare private insurers may earn.  What do you think?  Send us your comments at


Sources: “Private Insurance’s Costs are Skyrocketing,” Drew Altman, Kaiser Family Foundation, December 16, 2019. “Market Muscle: Study Uncovers Differences Between Medicare and Private Insurers,” Shefali Luthra, Kaiser Health News, May 9, 2019.  “Medicare Advantage Spends Less on Care, So Why Is It Costing So Much?” Austin Frakt, The New York Times, August 7, 2017.