Adam Gaffney, Danny McCormick, Steffie Woolhandler, David Himmelstein

Health Affairs
Medicare And Medicaid Privatization

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President Donald Trump and Elon Musk’s Department of Government Efficiency (DOGE) have taken a chainsaw to the US federal government, slashing programs, personnel, research, and global aid. The recently enacted One Big Beautiful Bill Act (OBBBA) budget reconciliation package, meanwhile, cuts nearly $1 trillion from Medicaid and the Affordable Care Act over the next decade—adding more than 10 million to the ranks of the uninsured. The OBBBA also slashes nearly $290 billion from food subsidies for the poor and could trigger $490 billion in cuts from Medicare.

The president and his congressional allies claim these cuts are needed remedies for waste, fraud, and abuse. Yet, they turn a blind eye to the trillions of dollars that private insurers drain from the public Medicare and Medicaid programs. Indeed, one of the administration’s first health financing actions—augmenting payments to Medicare’s private-insurance subcontractors—will add $25 billion to that waste in the coming year alone. If the administration were serious about curbing waste and inefficiency, it would start by reducing the diversion of public funds to these corporate intermediaries.

Medicare Advantage Overpayments

Medicaid and Medicare, established in 1965 as publicly administered health insurance programs for the poor and elderly, respectively, have since the 1980s increasingly subcontracted coverage to private health insurance firms (ostensibly to improve efficiency); government pays them premiums, and the firms pay the providers. For decades, the Medicare Payment Advisory Commission (MedPAC)—Medicare’s official monitor—has warned that such privatization raises costs. Yet, today, more than half of Medicare beneficiaries are covered by private Medicare Advantage (MA) insurers, lured by ubiquitous ads promising lower out-of-pocket costs and extra benefits (for example, dental care and eyeglasses). Meanwhile, state governments, which run Medicaid, now consign 75 percent of Medicaid beneficiaries to private, mostly for-profit, managed care plans.

MA insurers use various maneuvers (some legal and some not) to extract overpayments (that is, payments exceeding the costs that Medicare would have incurred had MA enrollees been covered under publicly administered Medicare). Those maneuvers fall into two categories: “upcoding,” that is, exaggerating enrollees’ severity of illness to collect higher premiums from Medicare (from which, according to MedPAC, insurers in MA garnered overpayments of $38 billion in 2024); and favorable selection, that is, avoiding (or ejecting) unprofitably ill enrollees, which raised taxpayers’ cost by an additional $41 billion.

Combined, upcoding plus favorable selection boosted taxpayers’ costs for MA by more than $600 billion between 2007 and 2024; during that period, MA plans’ overhead (a category encompassing profits as well as expenditures for marketing, executives’ salaries, and the managed care bureaucracy that deters care) totaled $592 billion, or 97 percent of the overpayments. For 2025, MedPAC estimates that MA overpayments will boost taxpayers’ cost for MA enrollees by 20 percent. As shown in exhibit 1, that figure suggests that overpayments could total $1,386 billion over the next decade. (The figures in exhibit 1 do not represent peer-reviewed findings and are intended to provide rough estimates of the magnitude of increased costs from MA overpayments and Medicaid managed care payments, not to precisely quantify these amounts.)

Exhibit 1: Projected savings from eliminating Medicare Advantage overpayments and Medicaid managed care organization excess overhead, 2025–34

Source: Authors’ analysis of data from the Centers for Medicare and Medicaid Services’ National Health Expenditures Accounts, Congressional Budget Office, KFF, Medicare Payment Advisory Commission (MedPAC), and Medicaid and CHIP Payment and Access Commission.

Notes: To calculate Medicaid managed care organization (MCO) excess overhead savings, we used official data on total projected Medicaid spending under current law from the Centers for Medicare and Medicaid Services’ National Health Expenditures Accounts, which provides projections through 2032. We extrapolated these figures to 2033 and 2034 using the 2031–32 growth rate of 6.11 percent. We calculated annual Medicaid MCO spending by using the share of total Medicaid spending that went to Medicaid MCOs (56.9 percent) in 2022. We then calculated Medicaid administrative spending under current law separately for Medicaid fee-for-service and MCO spending components. The fee-for-service Medicaid administrative share was calculated as administrative spending divided by total Medicaid spending, aggregated across the five US states that the KFF (based on its annual state survey of Medicaid officials) describes as having “no comprehensive MMC [Medicaid managed care].” This yields an aggregate fee-for-service administrative share of 4.9 percent (equivalent to averaging the five states’ administrative shares weighted by their total Medicaid spending). Medicaid MCO administrative share (12.54 percent) was, in turn, drawn from the KFF’s analysis of 2023 health insurance financial performance. This permitted calculation of projected annual non-administrative Medicaid spending. Finally, we estimated administrative spending under a scenario in which the total Medicaid program had the administrative costs of fee-for-service Medicaid (4.9 percent) while holding annual non-administrative Medicaid spending constant, equal non-administrative spending/(100.0–4.9 percent). To calculate savings from the elimination of Medicare Advantage overpayments, we used projections for Medicare managed care spending from the Congressional Budget Office (June 2024 baseline; gross outlays for total expenditures). MA overpayments of 20 percent are overpayments of MA plans compared to traditional Medicare plans for 2025 from coding intensity and favorable selection as estimated by MedPAC. A 20.00 percent increase translates to a 16.67 percent reduction, which we applied to annual MA expenditures to calculate potential savings from a Medicare Advantage to fee-for-service transition as shown.

Medicaid Managed Care Payments

No official estimates of overpayments to private Medicaid managed care plans are available. However, reliable figures allow calculation of the waste attributable to those plans’ high overhead, which averages 12.54 percent. In contrast, Medicaid overhead across the five states that eschew Medicaid subcontracting is 4.9 percent; the 7.64-percentage-point difference implies that eliminating subcontracting to Medicaid managed care could cut Medicaid expenditures for overhead by $40 billion this year and by $534 billion over 10 years (exhibit 1).

Together, MA overpayments and excess Medicaid managed care overhead will likely cost US taxpayers about $1,920 billion over the next decade. Ending that waste would inflict losses on private insurers’ shareholders and executives (the CEO of the largest MA firm made $26.3 million last year). But patients, not just government coffers, might gain. MedPAC found no evidence that MA coverage leads to better quality care, (a conclusion also applicable to Medicaid managed care according to MedPAC’s sister Medicaid-monitoring commission), while MA plans’ promises of better financial protection and extra coverage have proven mostly empty. Meanwhile, MA’s managed care restrictions limit patients’ care, for example, precluding care at specialized centers (even for patients needing complex surgeries), increasing delays, and apparently increasing mortality.

Waste abounds in US health care. In fact, it far exceeds the $205 billion in savings on waste, fraud, and abuse claimed by DOGE. (That claim is backed by no evidence; most of the savings enumerated on DOGE’s “Wall of Receipts” appear illusory.) Even Congress’ trillion-dollar cuts to Medicaid and food assistance amount to little more than half of the potential savings from de-privatizing Medicaid and Medicare. Reclaiming those funds would require reversing the decades-long trend of outsourcing to profit-seeking intermediaries and restoring Medicare and Medicaid as efficiently administered public programs.

Authors’ Note

Adam Gaffney is a former president of Physicians for a National Health Program.

 
 
 

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