A look at Medicare Advantage: Why it was created, and how it’s performed

Most people know Medicare is the government-run insurance program that provides healthcare coverage to those over age 65 in the US. But many don’t understand its counterpart, Medicare Advantage.

Medicare Advantage is the private-run, government-funded alternative to traditional Medicare, which allows commercial insurers to offer plans to seniors. While it follows many of the same rules as traditional Medicare, the private version offers extra benefits like dental, vision, and possible lower cost-sharing.

Enrollment in the program has increased significantly in recent years, and more than half (51.6%) of all Medicare beneficiaries are now enrolled in Advantage plans.

It was created in part to lower government spending. Instead, the program has turned out to be extremely expensive.

The Medicare Payment Advisory Commission (MedPAC)—an independent congressional agency that advises Congress on issues relating to Medicare—estimated the program will spend an additional $76 billion on Medicare Advantage beneficiaries compared to traditional Medicare enrollees in 2026.

Due in part to this excessive spending, the Trustees for Social Security and Medicare expect that by 2033, the government won’t be able to pay for all beneficiaries’ Medicare Part A costs, which cover hospital care, anymore.

A brief history lesson

Also called Medicare Part C, Medicare Advantage was formally created in 1997 as part of the Balanced Budget Act, and was known as Medicare+Choice until 2003. However, the origins of the program date back to 1982, when the Tax Equity and Fiscal Responsibility Act made private insurers an official part of Medicare.

The program was created in response to concerns over increased government healthcare spending, Steven Lieberman, a nonresident senior scholar at the University of Southern California’s Schaeffer Institute, told Healthcare Brew.

“There was a very significant concern about the pace of Medicare spending and trying to slow its growth,” Lieberman said.

The theory was that introducing competition into the Medicare program would keep costs down, improve care efficiency, and give beneficiaries more choices, Jeah Jung, a professor in George Mason University’s Department of Health Administration and Policy, said.

How we got here

There are two primary reasons why Medicare Advantage spending has run rampant, according to Lieberman: upcoding and favorable selection.

Upcoding is when health plans record more diagnosis codes than necessary. The payment system incentivizes upcoding for patients enrolled in Medicare Advantage plans. Reimbursement is based on risk scores instead of individual services, and plans with higher risk scores get more money.

“The more you upcode, the more extra revenue you get. The more extra revenue a plan generates, the greater its ability to offer extra benefits. Offering extra benefits attracts more beneficiaries,” Lieberman explained.

In 2021, Medicare Advantage beneficiaries had 11% higher risk scores compared to traditional Medicare beneficiaries. Those higher risk scores added up to an additional $17 billion in revenue for insurers, according to the Medicare Rights Center, a nonprofit that works to ensure older people and those with disabilities can access healthcare.

Favorable selection means that beneficiaries in Medicare Advantage typically spend less on medical costs compared to traditional Medicare enrollees, as Healthcare Brew has previously reported. People with more complex health needs tend to stay in traditional Medicare because there’s a wider selection of physicians to choose from, while healthier people tend to choose Advantage plans because they’re less concerned about access to specific physicians.

Sicker patients tend to cost more, so traditional Medicare beneficiaries tend to be pricier than those with Advantage plans. But Advantage plans are paid, in part, based on the average cost of providing care to traditional Medicare enrollees.

“That means plans are getting higher payments than what it costs them to provide Medicare covered benefits,” Jeannie Fuglesten Biniek, deputy director for the Program on Medicare Policy at KFF, explained.

Some of those savings have been passed on to consumers, according to Jung. Medicare Advantage enrollees often pay less in Part B premiums, and plans have lower cost-sharing as well as out-of-pocket maximums, which traditional Medicare doesn’t, Jung explained. But studies are mixed on whether Medicare Advantage plans reduce overall out-of-pocket costs for beneficiaries compared to traditional Medicare, she added.

The quality of Medicare Advantage plans compared to traditional Medicare is also unclear. A 2022 study from Harvard Medical School found “little evidence” that healthcare access and affordability varied between the two.

Politics put a pause on reform

Despite knowing that upcoding and favorable selection are largely responsible for Medicare Advantage’s steep costs, there have been no real efforts to address them, according to Lieberman.

“There isn’t what I would think of as a systematic effort—and certainly not a politically likely effort—to reform how Medicare Advantage is paid,” he said.

The health insurance lobby has long framed Medicare Advantage reform as putting beneficiaries’ coverage at risk, and disputed claims of upcoding and favorable selection.

America’s Health Insurance Plans (AHIP), a trade group representing health insurers, spent $17.2 million lobbying Congress in 2025, according to data from Open Secrets.

“The effectiveness of the insurance industry lobby, which for years has basically said if you cut $1 of our premiums, you’re cutting the benefits going to beneficiaries,” Lieberman said. “That’s become an effective way to stop, politically, serious Medicare reform.”

Chris Bond, a spokesperson for AHIP, the largest trade group representing insurers, told Healthcare Brew that “health plans welcome reforms that strengthen the program, but we have consistently opposed proposals grounded in flawed data and methodology that could lead to higher costs or reduced benefits for the seniors who count on it.”