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Commentary By Chris Pope

Medicare's Single-Payer Experience

Health Healthcare

The past few years have witnessed an intense struggle over the structure of American health care, and the debate seems far from over. America still spends more than twice as much per capita on health care as most other developed countries, and costs continue to rise. While opposition to the Affordable Care Act remains fierce in many quarters, other influential voices have begun to argue that the legislation did not go far enough — suggesting that American health care would be better administered by a single payer, with direct government management replacing insurance companies altogether.

These thought leaders believe that single-payer health care could replicate the cost-control enjoyed by other countries, while preserving the quality and access to care Americans expect. They argue that the government could negotiate better rates with providers and eliminate administrative costs incurred by insurers. New York Times columnist Paul Krugman has endorsed this vision: "[W]e don't have to imagine such a system, because it already exists. It's called Medicare, it covers all Americans 65 and older, and it's enormously popular. So why didn't we just extend that system to cover everyone?"

Yet, rather than offering a solution to the inefficient and costly fragmentation of American health care, Medicare's structure is responsible for much of the current situation. While it is known to voters as an entitlement for seniors and the disabled, the program's purchasing power has been prized by policymakers as an instrument for controlling and shaping the delivery of American health care. But rather than promoting the coordination of care and efficient purchase of services, it is too easily forced by the most politically powerful providers into subsidizing their operations and protecting them from competition. The result has been the gradual consolidation of American health care, often creating local hospital monopolies — able to impose excessive fees and deferential contracting arrangements on insurers required to pay for their services.

Hamstrung competition and regulated prices curtail incentives to enhance the quality of care. Medicare's rigid payment structures and artificial targets for thousands of different procedures are also too easily abused by providers seeking to maximize their revenue from the government. Yet recent attempts to reform Medicare away from mechanistic fee-for-service payments are ill-suited to a single-payer system, whose resistance to special pleading and aggressive lobbying by powerful provider interests depends on its payment structure being simple, transparent, and rule-based.

Amid these challenges and fears about the long-term solvency of the program, the increasingly well-demonstrated efficiencies and rapid growth of the multi-payer Medicare Advantage (MA) alternative offers grounds for optimism. MA allows beneficiaries to choose Medicare plans managed by private entities, in whose administration the government is largely prohibited from interfering. These plans have developed payment methods and innovative care strategies that reward holistic attention to patient health, rather than merely tying profits to the volume of services sold to the sick. Efforts to further expand MA therefore represent an opportunity to enhance the coverage available under Medicare, while allowing the American health-care delivery system a chance to emerge from the politicized micromanagement of single-payer dominance.


In 2012, Americans spent $2.8 trillion on health care, of which Medicare was responsible for $573 billion. By comparison, the individual market, which covers younger and healthier individuals and was revolutionized so controversially by the Affordable Care Act, accounted for only $91 billion — a mere 3% of the total. Since public payers account for 61% of hospital revenues, and others tend to follow Medicare's lead in structuring payments, Medicare's preferences and priorities do much to determine the shape of America's health-care delivery system.

A public payer is inevitability a politicized payer, as every detail of its financing is accountable to legislators, rather than dependent on attracting consumers. Politicization necessarily favors those most interested in mobilizing to dispute each of thousands of arcane operational questions — which is to say it favors providers and vendors rather than beneficiaries. While beneficiaries have little means or ability to fight countless minor battles for savings and efficiency, providers often depend on single fees for much of their income, so they lobby hard to monitor and protect them.

For the past three decades, the Medicare program has been designed around the principle of "prospective payment," whereby the federal government essentially provides a voucher for each medical service that beneficiaries need, allowing them to choose to receive care from any provider that accepts the program's basic terms and fee schedule. To administer this, the Centers for Medicare and Medicaid Services (CMS) sets fees for thousands of medical services and procedures.

Since Medicare rates must effectively serve both as a ceiling and a floor on prices, lobbyists can play on the fear of provider shortages to ensure that these reimbursements overshoot. Seniors, many of whom are in poor health or live on fixed incomes, are highly sensitive to perceived threats to their Medicare benefits and greatly fear alterations to costs or access to care. Both political parties understand this, and neither wants to be blamed for impeding benefit delivery, leaving physicians unpaid or seniors without the services they expect.

Not only does this make it difficult to enact changes that trim costs (and hence provider incomes), but Congress reliably emerges from gridlock to increase spending whenever fresh legislation is needed to maintain existing access to care. In a 1999 article reflecting on his tenure running Medicare under Bill Clinton, Bruce Vladeck charged hospitals and doctors with turning the Medicare program "from one that provides a legal entitlement to beneficiaries to one that provides a de facto political entitlement to providers."

Many of the program's payments are hidden in a web of attached unfunded mandates and cross-subsidies, and so their real adequacy is hard to assess. Policymakers do not view Medicare fees simply as reimbursements for Medicare services, but as a vehicle for subsidizing all sorts of health-care services and as a soft instrument with which to regulate the practice of medicine or to promote change in the delivery system. It is politically easier to make Medicare payments contingent on the performance of specific tasks, such as the provision of free care to the uninsured or compliance with safety standards, than it would be to establish stand-alone mandates or appropriations specifically designed to advance these objectives.

The process of setting and altering fees therefore owes as much to nebulous public-health objectives, indirect attempts to support charity care, and politicized conceptions of equity as it does to considerations of efficient supply. While the Medicare fee schedule was originally designed to reimburse the standard cost of care, these rates have been subject to innumerable discriminatory adjustments and qualifications. Considerations (of geography, beneficiary need, cost of living, cost of travel, and so on) are advanced as cause for special subsidies, often contradictorily, according to the ingenuity of lobbyists. In 2013, the Government Accountability Office estimated that 91% of hospitals were either eligible to receive further upward payment adjustments to prospective payments or exempt from prospective payment entirely.

During times of acute budgetary strain, policymakers often attempt to shift the costs of providing services off-budget by imposing unfunded mandates on providers. In 1986, seeking to prevent hospitals from diverting indigent emergency patients to their competitors, Congress required that Medicare-participating hospitals screen and stabilize the condition of any patient presenting, regardless of ability to pay. Inadvertently, this made hospital emergency rooms a magnet for uninsured patients needing costly treatments and imposed a huge burden on facilities serving low-income populations.

The dependence of communities on hospitals to provide uncompensated care has made hospital lobbyists the most powerful players in the politics of Medicare, allowing them to leverage their obligation to fund uncompensated care into an open-ended entitlement to an array of subsidies in order to protect themselves from insolvency. Members of Congress are acutely protective of local hospitals, which are also major employers in their districts and treasured by voters from across the political spectrum.

In 2012, Medicare paid a $12.4 billion bonus on fees to hospitals designated as treating a disproportionate share of low-income patients. Yet 81% of hospitals were able to claim these upward adjustments in 2013. Medicare provides a further payment bonus to hospitals that provide Graduate Medical Education to medical residents, even though residents are often undercompensated for the valuable services they provide. In practice, the $10 billion-per-year Medicare GME payments are structured to provide a boost to the general financial situation of hospitals, rather than distributed to residents as a voucher to ensure that they receive the highest quality training at the lowest possible cost. As 97% of federal subsidies for GME go to hospitals, this misaligns the training needs of the health-care workforce by pulling medical residents into hospital emergency departments, even though their future careers will be dominated by the treatment of patients with chronic conditions.

Hospitals also receive huge subsidies for providing the exact same services that are offered more cheaply elsewhere. Medicare pays 81% more for outpatient procedures to be provided through hospitals than through dedicated ambulatory surgery centers, and it reimburses an additional "facility fee" for consultations and services when they are provided in hospitals rather than physician offices. In cardiology, payment disparities are similarly vast ($180 on average for an electrocardiogram in a hospital, versus $34 in a physician office; $1,954 for myocardial perfusion imaging in a hospital compared with $532 in a physician office). This has created a huge incentive for provider consolidation. As a result, the proportion of cardiologists working in private practice fell from 59% in 2007 to 36% in 2012, and many of those left are in talks to sell.

Under the 340B Drug Pricing Program, drug companies are forced to give substantial discounts to safety-net hospitals focused on low-income and uninsured patients. Yet, as these hospitals are still allowed to claim undiscounted reimbursements for providing these drugs to Medicare-insured patients, they are able to keep the profits (averaging 22.5%). As a single oncologist might use up to $4 million of drugs during a year, a 25% discount potentially offers $1 million more revenue for the same work, simply by merging his practice with a covered hospital. As a result, community cancer clinics are disappearing, and the proportion of all chemotherapy administered by hospitals increased from 14% to 33% between 2005 and 2011.

Medicare also reimburses hospitals for cost sharing that they have been unable to collect from beneficiaries, even though independent practices are obliged to absorb unpaid bills for the same services without compensation. While hospital fees are automatically increased every year in line with rising medical costs, payment updates for independent surgical facilities are updated using a lower general inflation index.

These various implicit site-specific subsidies resulting from federal policy amount to a total of $73 billion per year, making it increasingly hard for small institutions to compete with and challenge dominant hospital systems. As a result, the proportion of physicians with an ownership stake in their practices fell from 57% in 2000 to 33% in 2013.

As independent medical practices merge into ever-larger hospital systems, they become "must-have providers," able to insist on inflated reimbursements when bargaining with private payers. A 2013 report for the Center for Studying Health System Change demonstrated this relationship by examining prices across 13 different metropolitan areas. Prices for primary-care physicians vary little from provider to provider and market to market, as they are unable to charge more than competitive market rates and are prohibited by regulation from setting "usual charges" for their services to private payers below what Medicare pays. However, hospitals in consolidated markets were able to charge rates for outpatient procedures that were three times higher than those in cities with relatively competitive markets, as insurers were unable to credibly threaten to exclude them from their networks.

Although the American Hospital Association claims that hospitals treat Medicare beneficiaries at a 12% loss, very few hospitals have elected not to serve Medicare patients, even though many are willing to be left out of private networks. This may be explained by MedPAC's estimate that 10% to 30% of hospital costs are fixed costs, depending on the size of the facility — but it does not justify public subsidies to support the provision of outpatient procedures in hospitals when they could be provided at half the cost elsewhere.

As urban areas have become dominated by consolidated hospital systems, small rural hospitals have developed their own market power. The 1997 Balanced Budget Act established the category of Critical Access Hospitals (CAHs), allowing institutions to gain exemption from prospective payment and receive reimbursement according to whatever costs they claimed. But this proposition proved so attractive that a third of all hospitals claimed the designation before Congress was able to move to restrict the entry of new institutions to the program. As Medicare patients account for 65% of inpatient days at CAHs, the program has been able to gain compliance with rules limiting each facility to 25 beds each — preventing well-managed facilities from competing to expand at the expense of less-efficient neighbors, and all but crippling provider competition in these markets for public and private payers alike. Since CAHs have no longer been threatened with closure, costs at these facilities have increased three times faster than at other hospitals.

While the provision of various subsidies and protections from competition has succeeded in assuring the solvency of essential hospitals, it has obscured costs and inflated prices, often doing more to impede than to expand access to affordable care. Although 36 states have certificate-of-need laws, which restrict the creation of facilities by new, competing medical providers to protect hospital profits needed for uncompensated care, scholars have found no evidence that hospitals protected by these laws do in fact provide more indigent care as a result.

Unless funds are provided quid pro quo, in return for specific services, they will tend to get absorbed into providers' general pool of revenues. When hospitals are given special subsidies for treating Medicare patients, it strengthens their incentives to secure Medicare patients, rather than to expand their services for the uninsured. Indeed, the disbursement of subsidies according to volumes of Medicare inpatient care poorly meets the needs of the uninsured. Although monopoly pricing power is often justified by the need to cross-subsidize from private patients to uncompensated care, hospitals in consolidated markets become unable to fill beds, which drives up operating costs, without providing significantly more indigent care.

The local market power and local political clout of hospitals tend to reinforce each other. Hospitals in consolidated markets are able to wield their position as "must-have providers" to inflate fees, while their "too big to fail" status can be leveraged to insist that politicians protect them from emerging competition. Politicians often propound the need for public subsidies to maintain the solvency of their local hospitals, while simultaneously advocating regulatory price controls to check their pricing power — seemingly unaware of any logical inconsistency.

While some have suggested that regulated pricing is a solution to rising hospital costs, it is important to recognize that the market for medical care is not a natural monopoly but rather one where competition has artificially been hobbled by policy. Instead of checking rising health-care costs, Medicare's single-payer structure has empowered providers to inflate prices above the competitive level.

We can see how important this payment system has been in driving medical consolidation by considering dentistry — a service specifically excluded from the Medicare program by statute. Few dentists are integrated with hospitals, and the largest 20 Dental Service Organizations together control less than 4% of the market.


While payments to hospitals for inpatient admissions are expected to cover drugs, diagnostics, and lab services within three days of admission, Medicare's architects were careful not to constrain the ability of doctors to gain separate reimbursement for whatever services they chose to provide through their own medical practices. Physicians therefore find themselves rewarded for inflating volumes of medical tests, procedures, and equipment provided — or "unbundling" interactions with patients into multiple claims.

Medicare's payment system fixes physician fees according to a formula that combines an expert panel's assessment of the relative effort, stress, and time involved in performing each of over 10,000 procedures with a premium for the qualifications of the doctor expected to perform them. Although CMS is charged with reviewing fees over time, interest-group pressure is asymmetric. Physicians in specialties whose jobs have been made easier and more lucrative over time by labor-saving technological improvements are not quick to disclose that fact, nor are they forced by competition to lower their prices. In a March 2006 review of physician-fee adjustments, MedPAC noted that physician specialty societies aggressively lobbied for upward payment adjustments, recommending upward revisions for all but a handful of the 1,500 codes subject to comment.

A 2013 Washington Post investigation noted that Medicare prices colonoscopies on the assumption that the procedure takes 75 minutes of a physician's time, yet appointments are now usually scheduled for 30 minutes. It found CMS seven times more likely to adjust estimates of work value up than down. Since the mid-1980s, the high profit margins of ophthalmologic services have been notorious as a driver of Medicare spending. Yet Medicare's payment rates still have not caught up with the fact that modern surgical methods allow cataract removal to be performed quickly and safely in 10 to 15 minutes at a fraction of the price Medicare pays. More generally, the March 2015 MedPAC report found that the time assumed in the fee schedule exceeded actual hours worked by amounts ranging from 24% in primary care to 92% in orthopedics.

Fee-for-service billing categories allow physicians the scope to define their services in the manner most profitable to themselves. From 2001 to 2010, the proportion of physician visits billed as the highest-paying evaluation and management codes rose from 25% to 40%, with the broader phenomenon of "upcoding" adding $11 billion to the annual cost of the program.

Building on earlier failed attempts to check the ever-inflating cost of Medicare physician services, Congress in 1997 enacted the Sustainable Growth Rate. The SGR automatically instituted across-the-board cuts in physician fees if cumulative payments exceeded a target growth path. As a result, after rising rapidly during the 1980s and early 1990s, growth in physicians' real incomes across medical specialties has stalled over recent years, lagging well behind wage trends in other high-skilled professions.

Unfortunately, because SGR cuts were tied to aggregate total program spending, they did little to discourage excessive resource-use by individual practitioners, and they led some doctors to make up lost income by inflating volumes. As a result, the automatically scheduled cuts to fees became so severe that they were routinely overridden by Congress, before being repealed entirely in April 2015. Although physician fees were reduced by 5% between 1997 and 2005, a 2007 CBO study found that this had been outweighed by increased volumes, such that per-beneficiary Medicare spending on physician services had actually risen overall by 35% over this same time period.

By reimbursing for services regardless of cost-effectiveness or the availability of cheaper alternatives, Medicare's physician payment system does little to encourage physicians to be thrifty. In many cases the opposite is true. Medicare reimburses medical practices 106% of the average sales price for physician-administered drugs, implicitly providing a commission for using an expensive drug when a cheaper alternative is available. A 2011 report from the Office of Inspector General (OIG) at the Department of Health and Human Services found wasteful spending of $1 billion as a result of Lucentis (priced at $1,600 per dose) being prescribed as often as Avastin ($40 per dose), even though both are practically identical treatments for macular degeneration, a common form of blindness.

As laboratory services are exempt from cost-sharing and often painless for patients, fee-for-service reimbursement accommodates doctors' willingness to order tests to show patients they are "doing something" to help, even when the tests may be of little use. A 2013 OIG report found that Medicare was paying 18% to 30% more than private insurers for 20 of the most common lab tests, spending a total of $8 billion per year on diagnostics. Only in 2014 did legislation require Medicare to purchase lab services at a weighted median of the rates available to private payers. Whether this will drive Medicare lab payments down, or private fees up, remains unclear.

The need to defray the steep up-front costs of capital equipment also pushes physicians to seek higher volumes. Use of an MRI scanner, which costs $2 million to purchase, was reimbursed at $1,000 per service by Medicare, even though each additional scan costs a fraction of that. As a result, Medicare spending on imaging doubled from $7 billion to $14 billion per year between 2000 and 2006, before legislation was enacted to reduce payment rates.

Similarly, pieces of durable medical equipment (DME), such as power wheelchairs and oxygen tanks, are reimbursed at fixed fees substantially above costs, allowing providers to reap lavish profits by expanding volumes. Medicare spent $11 billion on DME in 2013. When trials to price DME according to competitive bidding were established, costs fell by 42%. But a bipartisan group of 34 Senators, concerned that rural manufacturers would lose on a level competitive playing field, called on CMS to postpone the nationwide implementation of the program. The fact that DME poses little or no risk to healthy patients ensures that medical providers face a particularly great temptation to offload DME to patients that don't need them. DME is therefore a notorious hotbed of fraud, with CMS estimating an astonishing improper payment rate of 53% in 2013.

In 2014, HHS estimated that 13% of all Medicare claims were improperly paid, costing over $1,000 per beneficiary. Under most health insurance, this temptation to inflate volumes is checked by patient cost-sharing, the provision of incentives to providers to manage utilization, and administrative oversight to identify fraudulent and abusive claims. Each of these instruments is blunted within the Medicare program: Supplemental insurance exempts 88% of beneficiaries from cost-sharing; providers have a right to receive reimbursement for providing additional services regardless of the value they add; and the desire to minimize administrative costs ensures that the validity of 98% of reimbursement claims are never examined by auditing contractors.

For services of ill-defined sufficiency, the open-ended nature of fee-for-service reimbursement is particularly prone to fraud, waste, and abuse. Medicare makes standardized payments to over 12,000 Home Health Agencies for homebound beneficiaries needing nursing care, with only loose requirements for adherence to a pre-established plan of care and few certification requirements on agencies seeking to accept patients and bill the Medicare program. Profit margins are estimated to average 15% to 20%, with a 1997 OIG report finding that 40% of claims reviewed in states with the largest expenditures (California, Illinois, Texas, and New York) did not meet program reimbursement requirements.


Title III of the Affordable Care Act is a concerted attempt to cut the cost of the Medicare program, most famously through the creation of the Independent Payment Advisory Board. IPAB is a 15-member committee empowered to keep Medicare spending below certain targets by proposing cuts to reimbursement rates that automatically go into effect unless Congress specifically acts to override them. Since payments to hospitals are statutorily protected from IPAB for the first few years of its operations, these cuts can be expected to focus on medical products, potentially undermining reimbursement for the most innovative drugs and the rewards for generating future life-saving treatments.

Furthermore, the limits of what can be achieved by tightening reimbursement rates alone is clear from past experience, and many expect IPAB to be overridden as SGR was in the past. The ACA therefore includes additional tools for CMS to address the problem of excess volumes of low-value services in Medicare, and to use the purchasing power of the Medicare program to radically reshape the American health-care delivery system as a whole.

For example, the legislation establishes "value-based purchasing" for Medicare services, adjusting payments up to 2% up or down based on a ranking of hospitals that depends on how they meet various metrics for clinical-care quality, patient satisfaction, safety, costs per capita, and population health. Unsurprisingly, low-ranking providers have been quick to claim that these scores fail to appropriately adjust for variations in the severity of patient illness and costs of providing care between facilities.

As regulatory objectives encourage providers to target administrative metrics rather than market demand, an increasingly prescriptive attitude to the provision of care could easily do more to augment bureaucracy than to enhance quality. Indeed, MedPAC has cautioned that Medicare's "quality measurement approach is becoming 'over-built,'" relies on "too many clinical process measures that are, at best, weakly correlated with health outcomes," and "is overly burdensome on providers to report, while yielding limited information to support clinical improvement or beneficiary choice." Although prospective payment placed hospitals (at least initially) on a level, competitive playing field, the proliferation (and arbitrary aggregation) of metrics is likely to move payment away from independent economic criteria and toward more political, malleable ones.

To more directly address the problem of excessive volume, the ACA allows Accountable Care Organizations (ACOs) to receive "Shared Savings" in return for reducing the aggregate costs of providing care to pre-defined populations of patients through bundled payments. The rates at which savings are split between providers and CMS are established in negotiated agreements, using an array of quality metrics and cost benchmarks for the different sets of beneficiaries. CMS has established a target of distributing half of all payments through such "alternative payment models" by 2018 — declaring that they are intended to revolutionize not just the terms on which providers are paid under the Medicare program but "the health care system at large."

To facilitate coordination among providers for such purposes, CMS has been empowered to waive the anti-kickback statute and prohibitions on self-referral for providers participating in ACOs. Yet this obscure process represents a further step away from a level competitive playing field for providers; it tempts administrators to favor large medical systems that are easier to monitor and less disrupted by unpredictable competitive forces, and it does much to reward independent providers for integrating with them. Indeed, former HHS Secretary Kathleen Sebelius acknowledged that attempts to integrate payments were in "constant tension" with antitrust laws. Considering such practices, a 2014 study by a team of Stanford researchers estimated that the cost of increased provider pricing power that results from the tightest form of integration outweighed savings from reductions in unnecessary volumes by a factor of five.

Yet, as shared-savings programs incentivize providers to limit access to care, there is little reason for beneficiaries to forgo additional services from specialty providers opting to remain outside of these payment arrangements. Indeed, a 2014 study of ACO patient "leakage" found that 67% of visits were to specialists outside of the assigned organization. The share of savings that providers expect to gain is dwarfed by the profits they stand to lose by shrinking volumes. In the first year of operation, virtually no savings were generated by 190 of 220 shared-savings program participants, despite the hundreds of millions of dollars spent establishing them. As CMS has also retained the authority to unilaterally adjust payment benchmarks and performance metrics after ACOs have made substantial capital investments, many provider groups have been scared away from the program.

Although this may lead one to expect that ACOs may fade away harmlessly, the recent SGR repeal legislation included a provision that attempts to force providers into these alternative payment models by cutting fees for those remaining outside. This may do more to advance the objective of making providers responsible for the spectrum of care, but only by suppressing the ability of rivals to compete to provide particular services.

While the integrated provider systems that dominate local markets pose certain well-publicized economic risks, the political power such institutions are likely to accumulate must also be considered. When integrated providers are no longer held accountable by competition, the political process will have little capacity to challenge them either. Rather than leading providers to accept more rational payments from private payers, Medicare's clout as a single payer is inadvertently used to prevent competition from forcing them to do so.


A health-care system optimized for equity and efficiency therefore requires a Medicare benefit design that can operate without politicized micromanagement. Thankfully, such a structure already exists in the form of the multi-payer Medicare Advantage option. MA allows Medicare beneficiaries to choose among a range of competing private plans, which must deliver at least the standard Medicare package of benefits in return for a federal subsidy at a similar level to the single-payer Medicare benefit.

Since these plans bear overall responsibility for providing care to their enrollees, their profits depend on keeping patients healthy and satisfied, rather than on inflating the volumes of billable services provided to the sick. While the costs of provider-driven integration (reduced competitive options for participating patients and non-participants alike) through ACOs may outweigh the benefits, there is no such disadvantage to the coordination of services by health-care plans (which can be freely embraced only if they yield value). Being able to procure services without political interference at every stage, these plans are able to achieve better outcomes at lower costs — leaving funds to fill notorious gaps in the standard Medicare benefit, such as catastrophic hospital costs or preventive dental care.

Whereas Medicare has traditionally paid for procedures without regard to their appropriateness or effectiveness in particular circumstances, MA plans have the capacity to reduce cost-sharing for particularly valuable services, the ability to compensate providers for cost-effective practice styles, and the authority to substitute prior authorization and utilization review for cost-sharing as more appropriate methods of preventing inappropriate claims for the most expensive procedures. This allows them to fully bundle payments, giving providers responsibility for all costs associated with a course of treatment, which means the incentive to be sparing in the use of check-ups, diagnostics, and equipment is not undermined by the ability to bill separately for services.

Statutory fee-for-service payment structures are ill-suited to innovative services that perform better and save money as a whole but cut across rigid (and politically well-defended) payment silos. For instance, Optune, a device manufactured by Novocure to treat brain tumors using electromagnetic fields, yields better clinical outcomes than chemotherapy without subjecting patients to similarly painful side effects. Yet, after its approval by the FDA, CMS classified Optune as Durable Medical Equipment and priced it equivalent to the closest existing product on its fee schedule (a bone-growth stimulator). As a result, proposed reimbursement rates were set at 3% of cost, and Novocure is no longer available under the single-payer Medicare program — even though it is cheaper than a course of chemotherapy treatment and may prevent hospitalizations. Coverage of Novocure is almost standard under Medicare Advantage plans.

Enrollees in the single-payer Medicare plan are similarly deprived of cutting-edge tele-health services and online medical consultations. These can allow the conditions of chronically ill beneficiaries to be monitored at home, make it easier for those in remote areas to see specialists, allow doctors to see more patients per day, and relieve the frail from needing to travel to facilities crowded with the sick. One demonstration project showed that tele-medicine was able to reduce the cost of caring for chronically ill beneficiaries by around 10% ($2,000 per year), but, because of fears that the open-network Medicare fee-for-service system has no capacity to constrain fraudulent and needless claims for remote services, tele-health services are only broadly available through Medicare Advantage plans.

More generally, by taking full responsibility for services provided to patients, MA plans are uniquely able to optimize the provision of care across episodes, providing preventive care and management services to keep patients healthy and out of the hospital. Unmanaged gaps in care frequently exacerbate and escalate underlying conditions. The most innovative plans provide a full range of care-coordination services, including case management for chronic conditions, integrated electronic health records, medication-adherence support, and planning to integrate services post-discharge from the hospital. Although CMS introduced an option for reimbursement of chronic-care management as a fee-for-service physician visit, it has not proved popular, as the payment structure would require patients to incur additional costs for these services through co-insurance without entitling them to any specific additional services.

Kaiser Permanente has paid particular attention to integrating services for the sake of assuring the continuity of care and managing chronic disease. A 2003 study in the British Medical Journal, comparing similar Medicare beneficiaries in the state of California, found that those enrolled in the traditional Medicare fee-for-service plan were 47% more likely to be admitted to the hospital for stroke, 91% more likely to be admitted for COPD, and 69% more likely to be admitted for heart failure than those in Kaiser Permanente's Medicare plan.

Similar advantages extend across MA plans. For instance, Humana has been able to reduce hospital re-admissions by 56% by employing predictive analytics to target patients at the greatest risk of being re-admitted to the hospital; those patients are then provided with supplemental transition management, chronic-disease assistance, medication coordination, and tele-health monitoring services at home. This move toward integrated care has reduced Humana's total per-capita claims costs by 19%.

MA enrollees use the emergency room 20% to 30% less frequently than other Medicare beneficiaries, and home-based care-coordination services also make them less likely to be hospitalized after entering the emergency room. They were also more likely to receive more appropriate and effective treatments, such as coronary bypass surgery rather than percutaneous coronary intervention. Beneficiaries enrolled in HMOs under Medicare Advantage are consistently more likely to get more appropriate diabetes care, breast-cancer screenings, and testing for cardiovascular disease. As a result, according to a 2012 report by a team led by Jeff Lemieux, patients admitted with similar diagnoses were 13% to 20% less likely to be re-admitted to a hospital within 30 days if they were MA-plan enrollees.

In its March 2015 report to congress, MedPAC found that MA plans bid to deliver the standard package of Medicare benefits for 6% less than the single-payer benefit, with the subset of HMO plans doing so 10% more cheaply. With these savings, plans are then able to attract beneficiaries by providing supplemental benefits.

Even though dental care is specifically excluded from the standard Medicare benefit by statute, 55% of MA enrollees receive coverage for preventive dental services — which are valuable to help avoid the costs of infection and malnutrition arising from untreated gum disease and tooth loss. A majority of MA enrollees also receive supplemental coverage for eyewear upgrades or hearing-aid fittings — mitigating problems that routinely accompany the aging process.

As 78% of Medicare beneficiaries had the option of enrolling in an MA plan with zero additional premium, they need not purchase Medigap (costing an average of $2,200 per year) to be adequately protected from catastrophic hospitalization and cancer-drug costs, which the standard Medicare benefit fails to cover. Indeed, given that treatment costs are astronomical (ipilimumab for melanoma, for instance, costs $120,000) and that beneficiaries are responsible for covering 20% of the cost under the single-payer benefit, the out-of-pocket caps under MA (which can be set no higher than $6,700) are essential to assuring both beneficiary financial security and continued rewards for drug development. As a result, MA plans have proven disproportionately attractive to lower-income beneficiaries. While some beneficiaries may wish to pay more for open networks and unconstrained access to specialists, the choice of plans ensures that this expensive preference is not imposed on more cost-conscious individuals.


While there is merit in the bipartisan Ryan-Wyden proposal to assure the long-term solvency of Medicare by moving it toward a system of "premium support," it risks provoking needless controversy by potentially increasing the premium significantly for some beneficiaries who want to stay in the traditional fee-for-service Medicare program. Rather than forcing people onto more cost-effective plans by restricting access to the single-payer Medicare option, Congress should instead look for ways to enhance the efficiency and appeal of Medicare Advantage so that people opt into it by choice. This is already happening at a rapid pace: A decade ago, 16% of Medicare beneficiaries opted for Medicare Advantage plans; today, 31% do so. Time alone will gradually take us to a better system, but we can speed up the transition.

Although MA plans were until recently subsidized substantially more per beneficiary than the single-payer option, they are now subject to an implicit 30% to 50% tax when using funds to provide supplemental benefits or to reduce premiums. A 2014 NBER study found that exogenous increases in payments to plans led to them hiking spending on advertising rather than reducing premiums or enhancing the services provided to beneficiaries. These implicit taxes should be repealed so that plans are fully rewarded for returning efficiencies to beneficiaries as supplemental benefits.

Congress could also loosen the requirement that MA's cost-sharing be actuarially equivalent to that accompanying the single-payer benefit, to bring it in line with rules for other private insurance plans under the ACA. If those purchasing insurance through the exchange were similarly forced to purchase insurance with cost-sharing capped at 24%, rather than allowed to select bronze plans with a 40% cap, their premiums would be an average of $1,500 a year higher. Plans should also be allowed more flexibility to tailor cost-sharing according to the value of care, so that they can waive out-of-pocket payments for additional preventive services where such care is most clinically appropriate.

In urban and suburban areas, MA plans are already highly attractive, with beneficiaries having access to plans that fill in gaps in the standard Medicare benefit for no extra premium. But the competitiveness of MA plans reflects their ability to negotiate good deals with hospitals, which is easier to do in local areas where there are more provider options. While 46% of Medicare beneficiaries in Hawaii have enrolled in MA, only 0.24% of those eligible in Alaska have opted to do so. In the most rural states, where local markets are dominated by Critical Access Hospitals with protected market shares, these are able to receive reimbursement for whatever costs they claim under the single-payer Medicare benefit. As a result, such hospitals have little desire to displace this open-ended source of funds by offering reasonable terms to entice MA plans into the market. Plans could therefore be allowed to cover beneficiary travel costs, to give them a chance to save thousands of dollars by receiving elective treatment from more competitive facilities.

Even though they may wish to do so, politicians are unable to leave experts to manage a single-payer system by dispassionately administering prices, managing volumes, and implementing innovations according to objective metrics of program efficiency. Despite the attention paid to the Affordable Care Act, the real revolution in American health care has been the steady growth of Medicare Advantage. While Medicare's fee-for-service payment structure inadvertently fragmented the health-care delivery system, enrollment in Medicare Advantage has changed practice styles to be more cost conscious, yielding beneficial spillover effects to the rest of health care. Rather than inhibiting competition throughout American health care, the emerging multi-payer Medicare Advantage system offers fertile soil for enhancements to care and cost-saving innovations alike.

This piece originally appeared in the Winter 2016 Issue of National Affairs


Chris Pope is a senior fellow at the Manhattan Institute.

This piece originally appeared in National Affairs