Since the 1970s, Medicare beneficiaries have had the option to receive their Medicare benefits through private health plans, mainly health maintenance organizations (HMOs), as an alternative to the federally administered traditional Medicare program. The Balanced Budget Act (BBA) of 1997 named Medicare’s managed care program “Medicare+Choice” and the Medicare Modernization Act (MMA) of 2003 renamed it “Medicare Advantage.” Medicare payments to plans are projected to total $156 billion in 2014, accounting for 30% of total Medicare spending (CBO April 2014 Medicare Baseline).

Over the past decades, Medicare payment policy for plans has shifted from one that produced savings to one that focused more on expanding access to private plans and providing extra benefits to Medicare private plan enrollees. These policy changes resulted in Medicare paying private plans more per enrollee than the cost of care for beneficiaries in traditional Medicare, on average (MedPAC 2010). The Affordable Care Act (ACA) of 2010 produced another shift in payment policy by reducing federal payments to Medicare Advantage plans over time, bringing them closer to the average costs of care under the traditional Medicare program. It also provided for new bonus payments to plans based on quality ratings, beginning in 2012, and required plans beginning in 2014 to maintain a medical loss ratio of at least 85%, restricting the share of premiums that Medicare Advantage plans can use for administrative expenses and profits.

Medicare Advantage Enrollment

In 2014, the majority of the 54 million people on Medicare are in the traditional Medicare program, with 30% enrolled in a Medicare Advantage plan (Exhibit 1). Since 2004, the number of beneficiaries enrolled in private plans has almost tripled from 5.3 million to 15.7 million in 2014.

Exhibit 1. Total Medicare Private Health Plan Enrollment, 1999-2014

Enrollment in private plans varies by state, ranging from 51% in Minnesota to less than 1% in Alaska, and vary within states, by county (Exhibit 2).

Exhibit 2. Share of Medicare Beneficiaries Enrolled in Medicare Advantage Plans, by State, 2014