Elon Musk and Vivek Ramaswamy recently announced their intention to cut $500 billion in federal spending through their new Department of Government Efficiency. As they look for ways to trim waste, one program that deserves immediate attention is Medicare Advantage (MA).
This is the component of Medicare that allows seniors to opt-in and purchase privately run government-subsidized health plans. It's a popular program that typically bundles medical, hospital, and drug coverage, often including extras like vision and dental. MA produces better health outcomes than traditional Medicare, making it a good deal for both patients and taxpayers.
And yet for all these benefits, the program sorely needs reform.
As a mounting body of research makes clear, it currently wastes billions of dollars each year as a result of perverse incentives, inefficient procedures, and misguided policies. Rethinking the most dysfunctional aspects of MA could dramatically lower costs while improving quality of care.
One of the program's most glaring inefficiencies concerns a practice known as "upcoding" or "over-coding." This is when a health plan deliberately diagnoses patients with additional ailments in order to make them appear sicker, and thus riskier and more expensive to insure.
Misrepresenting a patient's health may seem like the exact opposite of what an insurance provider is supposed to do. But for the company, increasing the number of diagnoses means more money from the federal government. That's because, under current rules, the government reimburses plans more generously for patients with higher "risk scores." In recent years, risk-score inflation has become rampant.
In 2021, for instance, patient risk scores in MA were 12.1 percent higher, on average, than for patients in traditional Medicare, according to analysis from the Medicare Payment Advisory Commission. A 2022 report from the Congressional Budget Office found that this kind of risk-score disparity happens "in part because Medicare Advantage plans have an incentive to record more health conditions."
The upshot of all of this is that the government is overpaying MA health plans -- because of an inducement baked into the program's rules. Fortunately, there are relatively straightforward ways to fix the problem.
Currently, Medicare is required to reduce payments to MA insurance plans by at least 5.9 percent to reflect differences in coding across different populations. By increasing this figure -- known as the "minimum risk reduction" -- to 8 percent, the government could remove the incentive for plans to overstate how sick patients are. According to an estimate from the Congressional Budget Office, this would save at least $47 billion over a nine-year period.
The government could reduce MA waste even more significantly by rethinking MA's system of "quality bonuses."
Right now, Medicare pays bonuses to MA plans that perform well on measures of customer satisfaction. Plans in certain urban areas are even eligible for "double bonuses." The aim is to encourage the insurance providers to improve quality -- but that isn't how the arrangement has worked out.
The bonus program has had only a questionable effect on plan quality while substantially driving up overall MA costs, according to an analysis by the Urban Institute. Meanwhile, the double-bonus payments have increased racial disparities in how Medicare funds are distributed. And none of this has improved patient care.
The Congressional Budget Office estimates that eliminating double bonuses alone would reduce MA spending by $18 billion over seven years. The office also looked at another, more technical reform, which would do away with so-called "benchmark increases" tied to quality bonuses, and estimated the savings at more than $94 billion.
Add it all up, and ending MA quality bonuses could save taxpayers huge sums, with no negative impact on patients.
Medicare Advantage offers enormous value to seniors, and should be preserved. But it deserves scrutiny from the new Department of Government Efficiency for ways to reduce waste. Reforming the program could put Musk and Ramaswamy well on the way to their savings goal.
Drew Johnson is a budget policy analyst and government watchdog who was the Trump-endorsed Republican nominee for Congress in Nevada’s 3rd congressional district in 2024.
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