By John C. Goodman, Ph.D., Heartland Institute

The American health care system has two distinguishing characteristics.

First, similarly situated individuals pay the same premium, regardless of their medical conditions. Put differently, no one who acquires health insurance ever pays an actuarially fair price.

Second, insurers invariably lose money on people who are known to be relatively sick and make money on people who are known to be relatively healthy before they ever enter the insurance pool.

As a result, no health plan wants a sick enrollee – especially one who requires expensive drugs. No employer. No commercial insurer. No (Obamacare) marketplace insurer. And if the truth were known, no government-run system wants a high-cost enrollee either – including Medicare and Medicaid.

Avoiding the Sick

Health plans respond to these conditions in three ways.

First, the plans try to attract the healthy and avoid the sick. They can do this by making their plan designs attractive to the former and unattractive to the latter, and /or by overproviding to the healthy and underproviding to the sick.

Second, the plans avoid creating specialized products for people with special needs. In a free market for health insurance, you would expect one type of insurance plan to meet the needs of diabetics, another for people with congestive heart failure, another for respiratory disease. Instead, we tend to get one-size-fits-all: same deductible, same coinsurance, etc., regardless of medical condition.

Third, the plans help create a health care system that is incredibly bureaucratic. Prices don’t serve the function they serve in other markets. In fact, most of us never see a real price for anything. Competition also doesn’t serve the function it serves in other markets.

Competing on Quality

In general, health care providers do not compete on price, and when they don’t compete on price, they don’t compete on quality either.

There is one exception: the Medicare Advantage (MA) program. This is the only place in our health care system where a doctor who discovers a change in a patient’s health condition can send that information to the insurer (in this case, Medicare) and receive a higher premium, reflecting the higher expected cost of care.

Because of a highly sophisticated risk adjustment system, MA plans not only do not try to avoid the sick, but they also actually try to attract them. There are “special needs plans” for diabetics, for heart disease, for respiratory ailments, etc. By specializing in a particular type of care, these plans have the potential to evolve into what Harvard Business School professor Regina Herzlinger calls “focused factories,” or centers of excellence.

There is risk adjustment in the Obamacare marketplace, but it is highly imperfect.

The MA program is also one of the few places in the health care system where health plans find it profitable to keep people healthy.

Taxpayer Savings

Do MA plans save taxpayers money?  It may surprise you know no one really knows for sure. There has never been a true apples-to-apples comparison between the cost of traditional Medicare (TM) and the cost of the MA program.

In the meantime, a more rigorous study by Millman, updated January 12, 2026, estimates that taxpayers save $576 per enrollee per year when an enrollee joins an MA plan. This is consistent with an industry-financed study by Elevance.

The Elevance study also found that as MA penetration in a market increases, all doctors in the area begin to practice more efficient medicine. Owing to these “spillover effects,” a 10 percent increase in market share by MA plans leads to an average decrease in spending on all Medicare beneficiaries of between $105 and $127 per person, per year.

Senior Savings

MA plans can also save seniors money.

To get comparable coverage, enrollees in TM must enroll in parts A, B, and D plus purchase Medigap insurance (averaging $2,604 in 2023). By contrast, many MA plans have zero premiums and offer extra benefits (hearing, dental and eye care) that TM does not offer.

An analysis (commissioned by a MA-advocacy group) found that MA enrollees with 3 or more chronic conditions spent on average, about $3,165 less per year out-of-pocket than those in TM.

The bottom line is most analysts agree that not only does MA save seniors money, but MA plans are delivering more efficient health care.

More Quality Care

Numerous studies have found that MA plans are providing higher-quality care at a lower cost. A 2012 analysis in Health Affairs finds MA enrollees experience 20-25 percent fewer hospitalizations and make 25-35 percent fewer emergency visits. The analysis found there are better outcomes for knee and hip replacements, strokes, and heart failure.

On diabetes care, Kaiser Permanente’s former CEO, George Halvorson notes MA enrollees with diabetes had fewer amputations and lower incidence of blindness due to uncontrolled blood sugar levels.

MA Hampered by Regulation

Good as Medicare Advantage is, the program would be better if there were fewer regulations.

For example, if an MA plan gets its amputation rate down to 2 percent, it cannot advertise that fact during open enrollment. Similarly, if a plan has fewer pre-authorizations or if pre-authorizations are cleared up faster than in other plans, consumers don’t get to learn about those facts either.

Every communication from an MA plan to potential enrollees must have the government’s approval! And CMS appears to really not like quality comparisons among plans. This is not the way a normal market works.

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John C. Goodman, Ph.D., (johngoodman@goodmaninstitute.org) is co-publisher of Health Care News and president and founder of the Goodman Institute for Public Policy Research.

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