Trump and Biden, the two oldest US presidents, have watched Medicare costs skyrocket — soon it will cost more to fund than Social Security

“The bottom line here is not new — we’re using too much of our national and personal resources to pay for healthcare,” said CRR senior advisor Alicia H. Munnell in a report on its website.

This doesn’t just matter to the government budget. Medicare users could also continue to see prices go up as government costs rise.

“Healthcare is arguably one of the most underestimated expenses in retirement,” said Richard Chan, CEO of digital insurance platform CoverRight, in an email to Moneywise. “It seems reasonable, that under current law, consumers should expect to likely bear a growing share of Medicare costs over time.”

Here’s what the report says lies at the heart of Medicare’s increasing costs.

Medicare Advantage costs more despite attracting healthier beneficiaries

Medicare coverage can be confusing to navigate because plans are made up of several different parts:

• Medicare Part A: Covers inpatient procedures, and is by default a part of Original Medicare;
• Medicare Part B: Covers outpatient procedures, and is by default a part of Original Medicare; and
• Medicare Part D: Covers prescription medication, and must be purchased in addition to Original Medicare.

There’s also Medicare Part C, also known as Medicare Advantage. Unlike Parts A, B and D, Medicare Advantage isn’t offered by the government. It’s offered by Medicare approved private insurance companies.

Medicare Advantage must cover everything that Parts A and B of Original Medicare cover, and most generally cover Part D. They might also come with extra benefits that Original Medicare doesn’t offer, such as vision and dental insurance. In exchange, there are more limits to which doctors you can see with a Medicare Advantage plan.

Even so, Medicare Advantage has become increasingly popular with older Americans, thanks to its extra benefits and frequently better coverage. But according to CRR, it’s also more expensive — in ways a redesign could fix.

A $76 billion question

Original Medicare pays per service each beneficiary receives, but Medicare Advantage pays a flat fee for each beneficiary on a plan. Exactly what Medicare Advantage pays depends on where each beneficiary lives, how healthy each beneficiary is and how highly rated the specific Medicare Advantage plan is.

The Medicare Payment Advisory Commission says Medicare will spend around $76 billion more on its Medicare Advantage enrollees than it would if they were enrolled in Original Medicare.

CRR argues that the overpayment stems from three main causes. First, Medicare Advantage reports more health conditions per comparable enrollee than Original Medicare does.

“A lot of it comes down to how each system gets paid,” Chan said. “In Medicare Advantage, plans receive a fixed monthly payment for each enrollee that’s adjusted for a number of factors, including how sick that person appears on paper based on their documented health conditions.”

Some documented diagnoses can raise the enrollee’s ‘risk score,’ which typically means a larger payment for that beneficiary from the government, Chan added. So Advantage plans have a pretty direct incentive to ensure relevant conditions are documented accurately, Chan noted, “while Original Medicare providers might have less of one.”

At the same time, the system doesn’t account for selection bias, as Medicare Advantage enrollees tend to be healthier than Original Medicare enrollees. Chan says this might be because healthy people are more willing to accept Medicare Advantage’s narrower service networks, while less healthy people might prefer Original Medicare’s broader provider access.

A bonus system

Medicare Advantage also gives monetary bonuses to highly rated plans, theoretically to reward high-quality plans.

“Every MA contract is rated one to five stars on measures like clinical outcomes, screenings and customer service,” said Chan. “Plans at four stars or higher generally get a 5% boost to their benchmark.”

“In theory, this is a pay-for performance system designed to reward quality. In practice, it’s more of a blunt instrument, and aspects of the program’s payment design may result in these payments being much more broadly distributed than originally intended,” he added.

He says that roughly two-thirds of Medicare Advantage enrollees are enrolled in plans rated four stars or higher.

All of this leads to higher government costs for Medicare Advantage users.

“While the federal government has taken some steps to rein in the costs of Medicare Advantage plans, efforts to date have not gone far enough,” Munnell said.

Munnell did not respond to a request for comment from Moneywise by publication time.

Healthcare in the U.S. is just too expensive

Munnell says Medicare has another, more fundamental problem: Healthcare in America is just too expensive.

“U.S. healthcare costs as a percentage of GDP are the highest in the developed world and almost twice as high as the average of all the other countries in the OECD [Organisation for Economic Co-operation and Development],” said Munnell in the report.

Healthcare costs in the U.S. are outpacing inflation. Private insurance especially has gotten expensive — per-beneficiary spending for those on private insurance grew by 80% between 2008 and 2023, per healthcare policy research organization KFF.

In comparison, per-beneficiary spending grew by 50% for Medicare users and 30% by Medicaid users. Medicare puts lower caps on how much individual healthcare services cost compared to private insurance — which means Medicare might have to get even more expensive for doctors to continue to accept it.