Medicare Versus the Insurance Industry: A Privatization-Driven Arms Race

Forty years of gaming the system

If DOGE, President Musk’s not-really-a-government-agency charged with cutting spending by eliminating waste, were serious, the costly, ongoing privatization of Medicare would almost surely be its highest priority target.

Why do I strongly suspect that they’ll go after programs that help poor people instead?

Some background: In the 1990s the libertarian Cato Institute created what it called the Project on Social Security Privatization. Its goal was to gradually convert Social Security from its traditional role of providing guaranteed income to seniors into something like a giant 401(k). This idea became highly influential among conservatives, and in 2005 George W. Bush tried to turn it into reality.

I’ve always seen this, by the way, as a classic case of misreading the meaning of an election. Bush won in 2004 mainly on national security, with a side of social issues; as I put it at the time, he portrayed himself as America’s defender against gay married terrorists. Then he declared that his election victory gave him a mandate to privatize Social Security; as it turned out, it didn’t.

But Bush didn’t say privatization. By the time Bush made his bid, Cato — having found that “privatization” played badly with focus groups — had renamed its venture the Project on Social Security Choice, and tried, ineptly, to conceal the fact that it had ever been called something different. During the privatization push Bush and other Republicans lashed out at journalists who called what he was doing privatization, claiming that they were repeating Democratic propaganda when they were simply using Republicans’ own former language.

Bush’s attempt to privatize Social Security failed, but efforts to ban the word “privatization” from public discourse had considerable success. Google Ngrams tells us that use of the word has declined sharply since its peak in the 1990s:

But while conservatives stopped talking about privatization, they’ve been doing it on an ever-widening scale. Not, admittedly, on Social Security; even Project 2025 doesn’t seem eager to try that gambit again. (Famous last words?) But Medicare is increasingly becoming a system in which public money flows through private insurers, who game the system in ways that hurt both taxpayers and patients.

First things first. Many people believe that the private sector is more efficient than the public sector, and few now want the government to, say, operate factories. But the key driver of efficiency in such cases is competition, not private ownership per se.

It’s much less clear why you would want to privatize when competition isn’t practical, for example where there are natural monopolies — e.g. electricity and water supply. I guess private companies might be more ruthless in controlling costs than government agencies, for example by being willing to fire underperforming employees. But such efficiencies, if they exist, are often outweighed by asset stripping and degradation of service.

In fact, let’s talk about municipal water supply. New York gets its water from a government agency, the Department of Environmental Protection, which rarely makes news — that is, it doesn’t seem to have big problems.

London’s water supply, however, was privatized by Margaret Thatcher. And Thames Water is constantly in the news over sewage spills caused by inadequate investment and crippling debt, both largely the result of diversion of funds to pay dividends to investors.

And it’s really, really hard to justify running taxpayer money through private companies when it’s paying for essential services. Yet we’re doing just that with Medicare. Only a minority of seniors still have traditional Medicare, where the government pays bills directly. A majority have Medicare Advantage plans, in which the money flows through private insurers. That is, Medicare has been largely privatized.

Why do people choose Medicare Advantage? Typically because the plans offer benefits not provided by traditional Medicare, such as vision or dental care, without charging extra premiums. But how are they able to do that? Is it the superior efficiency of the private sector?

As far as anyone can tell, no. Instead, private insurers game the system.

On one side, seniors attracted by the extra benefits of a Medicare Advantage plan may not be fully aware that they’re also agreeing to extra restrictions, such as limited provider networks and requirements for prior authorization — not to mention the insurance industry’s growing propensity to hold down costs by delaying or denying coverage whenever possible, a practice highlighted by the killing of United Healthcare’s CEO.

Indeed, despite the extra benefits MA typically provides, satisfaction with coverage isn’t significantly higher than under traditional Medicare:

Which is a bit odd, because Medicare Advantage costs taxpayers much more than traditional Medicare.

How so? There’s a long history here, which goes back to Ronald Reagan, who allowed insurance companies to offer managed care plans to Medicare recipients. The idea was to save money through the purported efficiency of the private sector. What actually happened was that insurers engaged in “cream skimming”: they signed up seniors in good health, leaving less healthy Americans with traditional Medicare. The result was that insurers received more taxpayer money than they paid out for health care.

The program we now call Medicare Advantage was created in 1997, and made an effort to crack down on this practice, “risk adjusting” patients based on their medical history so as to pay less for those with low expected health care costs. This curbed some of the worst abuses, but it turns out that there are still ways for insurers to game the system.

For one thing, the risk adjustment is coarse enough that insurers still engage in some cream skimming, doing their best to recruit customers likely to have lower medical bills than the government formula predicts.

More important, insurers have worked the other end, pressuring doctors and nurses to provide diagnoses that make their clients look sicker than they really are. This means that Medicare pays them more under the risk adjustment formula, even though their costs aren’t higher. Ten years ago the federal government developed a plan to crack down on this practice — but backed off under industry pressure. The Biden administration finally made a small dent in overpayments for 2025.

We’re talking large sums here. The Medicare Payment Advisory Commission, which, um, advises the government on Medicare payments, estimates that last year Medicare Advantage cost taxpayers $83 billion (!) more than those enrolled would have cost under traditional Medicare.

But the bigger question should be, what are we even doing here? Medicare is supposed to provide older Americans with the health care they need. Yet instead of focusing solely on how best to achieve that goal, we have an arms race between insurance companies trying to game to system to charge more and deliver less and government officials trying to rein them in.

So what purpose do these private insurers serve? Why are they even part of the picture?

Somehow, I don’t think those are questions DOGE, or for that matter Republicans who complain about excessive spending, will ask.

MUSICAL CODA

I’m constantly amazed at how broad my musical tastes have gotten. A hard-rock sister act from Mexico