The cost of privatization: extra payments to Medicare Advantage plans

The recently enacted Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) includes a broad set of provisions intended to enlarge the role of private health plans (called Medicare Advantage plans) in Medicare. This issue brief examines the payments that private plans are receiving in 2004 relative to costs in traditional fee-for-service Medicare, using data from the 2004 Medicare Advantage Rate Calculation Data spreadsheet. The authors find that, for 2004, Medicare Advantage payments will average 8.4 percent more than costs in traditional fee-for-service Medicare: $552 for each of the 5 million Medicare enrollees in managed care, for a total of more than $2.75 billion. In some counties, extra payments by Medicare are more than double this amount. Although the stated objective of efforts to increase enrollment in private plans is to lower costs, the policies of MMA regarding private plans explicitly increase Medicare costs in 2004 and through 2013.