Traditional Medicare is Part A plus Part B plus Part D plus the possibility of a supplemental policy. A+B+D will give an acturial value of roughly 82% for the typical Medicare beneficiary. Beneficiaries have unlimited maximum liability as co-insurance for the doctors and the drugs are not capped. Claims are paid predominately on a fee for service basis so the provider incentive is to do more for Part A and Part B. The hospital and provider network is extremely broad in traditional Medicare.
The Part A+Part B structure was pretty much the only configuration for Medicare until the late 70s when Medicare HMOs were created. These were renamed in 1997 as Medicare Choice HMOs. This later got rebranded into Medicare Part C or Medicare Advantage plans. These plans are privately run HMO plans. They have significant operational differences.
Medicare Advantage (MA) programs require participants to continue to pay their Medicare Part B monthly premium. Most MA plans will have an additional monthly premium. That monthly premium covers administrative overhead as well as services that look more like Medicare Supplemental plans as annual expenses are capped and those caps require some additional funding. Furthermore, MA plans tend to offer additional vision and dental benefits. As a marketing and risk selection tool, some Medicare Advantage plans will offer health club memberships to cherry pick younger and healthier Medicare beneficiaries.
Insurance companies receive a risk adjusted capitation payment. The Center for Medicare/Medicaid Services (CMS) calculates a risk score (which I talked about here) based on diagnostic history of an individual and applies a suitable multiplier to the base rate. A perfectly healthy 65 year old will have a much lower base rate than a 97 year old on chemo. Once the insurance company receives the money, they are free to do with it as they wish with some limitations.
Cost sharing is common. A shared deductible that pools in-patient, outpatient and drug expenses is common. Co-pays and co-insurance tend to be universally applied. Higher premium plans will have lower out of pocket expenses. Cost sharing however is capped. Under traditional Medicare, a beneficiary with Hep-C, cancer and rheumatoid arthritis that led to a broken bone requiring surgery is in far worse shape financially than a member with a capped out of pocket Medicare Advantage plan.
Plans are based on either PPO or HMO designs. Most Medicare Advantage plans are HMOs which force members to go through their primary care providers before they get specialist care. Networks are more limited than traditional Medicare. The more someone pays in Medicare-C premiums, the wider the network tends to be.
So far this sounds all good, or at least closely indifferent from traditional Medicare.
The biggest problem with Medicare Part C is that it was ridiculously expensive. Before PPACA was passed, Medicare Advantage plans were getting paid 14% more for the same member as it would have cost for traditional Medicare to cover. This was a combination of excessively high cost floors put into place by Congress, and then aggressive upcoding of disease burden. Aggressive upcoding makes someone look and bill sicker (and thus higher) than they otherwise would have been.
Traditional Medicare is not risk adjusted so CMS is not sending thousands of coders/educators to physician offices to make sure every potentially valid diagnosis is on a claim. Medicare Advantage plans do that. It is legal to make sure that every valid diagnosis is on a claim. It is illegal to create claims with invalid, nonsensical or false diagnosis levels. Upcoding probably costs the government $10 billion dollars a year.
PPACA has changed Medicare Advantage. The three biggest changes were on benefits as preventative services are now cost-sharing free, base line capitation rates as the base has decreased, and a re-adjustment of the risk adjustment model that attempts to adjust for the upcoding trend. These last two changes are the source of $700 billion dollar first decade savings in Medicare that were used to pay for the coverage expansion components of PPACA. Between improving quality of Medicare Advantage plans and the much smaller price gap, it is highly probably that Medicare Advantage plans provide roughly the same value (cost/Effectiveness/quality) as traditional Medicare now.