Does Medicare’s public option still serve a purpose?

Medicare was originally operated as a single-payer health care system, with the federal government directly purchasing medical services for elderly and disabled beneficiaries. Yet, the proportion of beneficiaries opting to receive those healthcare benefits through privately managed Medicare Advantage plans has increased from 25 percent in 2010 to 49 percent in 2023 and could be close to 70 percent by the end of the decade.

Because they are not subject to political micromanagement, medicare advantage plans can attract enrollees by cutting wasteful expenditures and using the savings to reduce out-of-pocket costs, waive premiums for prescription drug coverage and add coverage for dental care.

But Medicare’s traditional public option can still serve a valuable purpose by focusing on a new role: guaranteeing a safety net of access to essential services from a broad network of providers and quantifying the public subsidy that is needed to ensure this.

Under the traditional Medicare benefit, the federal government pays medical providers directly for each service they deliver to elderly and disabled beneficiaries, regardless of cost-effectiveness. Alternatively, beneficiaries can opt to receive benefits through Medicare Advantage, which pays private insurers a pre-fixed amount to purchase whatever medical services enrollees need during the year.

This has encouraged Medicare Advantage plans to provide additional preventive services to enhance the management of chronic conditions, avoid costly hospitalizations and improve clinical outcomes. It also enables them to reduce costs by establishing networks of preferred providers, ensuring that the most cost-effective therapies are employed and cutting out fraudulent reimbursement claims. As a result, Medicare Advantage plans bid to deliver the basic Medicare benefit at 14 percent less cost than the traditional federally managed benefit — generating savings worth around $2,000 per beneficiary, which they have been able to use to attract enrollees. 

Whereas the traditional Medicare benefit requires beneficiaries to pay 20 percent of Part B costs out-of-pocket (typically exceeding $20,000 for new cancer drugs), Medicare Advantage plans capped total out-of-pocket costs at an average of $4,972 in 2022. Whereas traditional Medicare enrollees must pay additional annual premiums averaging $478 for prescription drug coverage and between $564 and $617 for dental insurance, Medicare Advantage makes free drug coverage available to 99 percent of beneficiaries, while 94 percent receive dental benefits as part of their plans.

Some politicians have argued that Medicare Advantage’s larger benefits result from plans being “overpaid” relative to traditional Medicare, and estimates suggest that Medicare Advantage plans receive 5 percent more from taxpayers to cover beneficiaries with equivalent medical needs. But Medicare Advantage plans must also do more work to qualify for payments, with 2.4 percent of their revenues contingent on compliance with a host of process regulations.

Nonetheless, overpayments to Medicare Advantage plans are dwarfed by those resulting from traditional Medicare supplemental insurance plans, which beneficiaries can purchase to eliminate cost-sharing designed to control inappropriate utilization of Medicare services. One study estimated traditional Medicare supplemental plans increased the cost of Medicare by 22 percent; another found they drove up costs by 24 percent, with the spending increase concentrated among healthier beneficiaries. 

Whereas most Medicare Advantage enrollees pay no additional premium, supplemental Medigap plans typically charge an additional $2,000 per year. The additional cost to taxpayers resulting from traditional Medicare supplemental enrollment, therefore, goes largely to wealthier seniors. Unlike Medicare Advantage plans, traditional Medicare supplemental insurers can, in 46 states, refuse to cover individuals with preexisting conditions. 

A simple principle of parity in subsidy and regulatory burden across Medicare coverage options is clearly appropriate, and Medicare Advantage provides the appropriate framework for this. To the extent that richer beneficiaries wish to purchase supplemental coverage to reduce their out-of-pocket cost exposure while maintaining access to a broad network, they should pay the full additional associated cost through a Private Fee-For-Service plan. Firms purchasing supplemental coverage for retired workers should do similarly with an Employer Group Waiver Plan.

So, does Medicare’s traditional public option still serve a purpose? 

Some scholars have suggested making the highest quality Medicare Advantage plans the default source of coverage. But this would likely distort competition in Medicare Advantage, by making plans compete for the favor of bureaucrats rather than that of beneficiaries. It could also likely invite a regulatory blowback upon Medicare Advantage, as enrollees find they are in narrower networks than they expected. Furthermore, it would likely provide large windfalls to insurers assigned beneficiaries who (for unanticipated reasons) consume few or no Medicare services.   

The relative merits, benefits and costs of alternative Medicare plans should certainly be made clearer to beneficiaries signing up, but the traditional public option therefore remains appropriate as a default.

While it doesn’t make sense for the government to micromanage the procurement of medical care for most beneficiaries, traditional Medicare can still play a valuable role in determining the benchmark payment for the basic package of Medicare benefits which are to be funded by taxpayers. By setting prices at levels needed to maintain access to essential healthcare services, traditional Medicare can ensure that Medicare continues to guarantee a robust benefits package while checking whatever tendency Medicare Advantage plans may have to unduly narrow access to care.

In the long run, the role of defining and guaranteeing a core package of benefits is likely to become increasingly important. The federal government cannot afford to keep expanding the program to every new medical service that is developed, regardless of its additional cost or effectiveness. 

By maintaining the current benefits package and selectively adding high-value new services, a public option can ensure that Medicare’s benefit expands without absorbing all available federal revenue, even while Medicare Advantage can allow beneficiaries who wish to pay more for broader access to less-effective new services to do so. 

Chris Pope is a senior fellow at the Manhattan Institute.