For a majority of Medicare and Medicaid recipients, the government program is paying a private health insurance company to provide the service from a private firm. In the Spring 2026 issue of the Journal of Economic Perspectives, Tim Layton, Luca Maini, and J. Michael McWilliams tell the story of Medicare in “Substitutes for Success? Public versus Private Competition in Medicare Advantage.” Mark Shepard and Jacob Wallace tell the story of Medicaid in “Understanding Medicaid Managed Care: The Procured Competition Model.” (I work as Managing Editor of the JEP.)
In general, the hope of both programs is that having private health insurance companies competing with each other will provide higher quality and/or lower costs for recipients of Medicare and Medicaid. But of course, the two programs have quite different focuses.
Medicare is primarily focused on over-65 Americans. Layton, Maini, and McWilliams describe traditional Medicare program like this:
Medicare, the program that provides publicly- financed universal health insurance coverage for nearly all Americans over the age of 65, is typically characterized as a single-payer health insurance system, with government officials administratively setting fee-for-service prices and cost-sharing levels for every medical procedure and service that physicians and hospitals can provide, actuaries setting premium rates, and essentially all private healthcare providers accepting Medicare patients and payment from the program. As such, it is quite similar to single-payer health insurance systems in many European countries. It is also a simple, relatively easy-to-understand program and one of the most popular government programs in history, with over 80 percent of Americans having a favorable opinion of the program.
However, 57% of Medicare recipents are not in this traditional program. Instead, they are enrolled in what is technically Medicare Part C, commonly known as Medicare Advantage. For them, Medicare buys a health insurance policy from a private company. In theory, the idea was that Medicare would spend about the same amount on a person, no matter which option they chose. In this case, the benefit from getting private insurance through Medicare Advantage would arise if the private insurance companies could run more efficiently, use some of those efficiencies to offer additional benefits and also to earn a profit.
One natural concern is that Medicare Advantage would find ways to attract healthier people, and “save” money in that way. This seems to have been a real issue in the past, but not so much in the last decade or so. One piece of evidence compares mortality rates. As the figure shows, Medicare Advantage had lower mortality rates (plausibly becuase they were a healthier group) in the past, but this gap was narrowing from about 2010 to 2019 (perhaps because the expansion of Medicare Advantage was causing less-healthy people to shift over), and has now largely gone away.
However, in fact, the goverment still seems to pay more for a patient in Medicare Advantage than it would for the same patient in traditional Medicare, according to an in-house group called the Medicare Payment Advisory Commission. Thus, Medicare Advantage can avoid charging the co-pays and deductibles of traditional Medicare, and often provide larger benefits as well, because it has more money to do so. A likely underlying reason is that the Medicare Advantage firms have an incentive to find ways to “code” the medical treatments they provide in a way that keeps their costs higher, while benefits for traditional Medicare have not moved much in the last 15 years.
Indeed, Layton, Maini, and McWilliams suggest that given the financial problems of traditional Medicare, Congress has been unwilling to expand benefits for the traditional program. For example, the trust fund for Medicare Part A hospital insurance, funded by payroll taxes, is scheduled to go broke in the next few years. However, Congress has in effect raised Medicare benefits through the back door, by using the formulas that determine what private health insurance companies would receive under Medicare Part C.
The Medicaid program is aimed at low-income families, as well as low-income elderly and disabled. But as Shepard and Wallace write in their JEP article:
Over the past several decades, Medicaid has undergone a major institutional transformation. Historically, states administered the program directly, paying doctors, hospitals, and other providers through a state-run fee- for-service system. Today, about 85 percent of beneficiaries are enrolled in Medicaid managed care, under which states contract with private insurers to provide coverage and manage care. This shift toward outsourcing has been driven by concerns about rising costs, program complexity, and the limits of states’ capacity to administer insurance efficiently. …
Medicaid covers a broad set of benefits, encompassing a wider range of services than most other health insurers. In addition to mandatory coverage of hospital and physician care, states may include “optional” benefits such as dental and vision care for adults (all children receive dental and vision benefits). Medicaid also finances a large share of long-term services and supports for individuals with complex medical or functional needs, including care in nursing homes and home-based care. Coverage is provided with little to no patient cost- sharing, and beneficiaries generally do not pay premiums. …
States specify detailed provisions via managed care contracts that are often hundreds of pages long. These contracts define covered services, patient cost-sharing (essentially zero), rules for provider networks, insurer compensation arrangements, and provisions for quality reporting and oversight. They also specify insurer prices (payments per enrollee) and other compensation provisions, such as risk adjustment. Insurer flexibility is limited to a few features like provider networks and care management rules. Additionally, Medicaid insurers each offer a single plan…
The classic problem here is that states want on one side to assure that private health insurance firms provide access to the full range of Medicaid services, which explains all the rules about what must be provided. On the other hand, state are often expressing hope that that competition between the health insurance companies (and the contracts that the health insurance companies have with health care providers) will lead to cost-cutting pressures.
However, the health insurance companies have a quite limited number of ways that they can compete. In this situation, health insurance firms cannot compete on attracting patients by offering a lower price, or by offering additional health care services. service. The state government controls the amount of entry by other health insuance firms. Shepard and Wallace call this “procured competition.”
The two articles offer much more about the details of how Medicare and Medicaid are intertwined with private health insurance companies, along with discussions of how the contracts and arrangements might be tweaked and renegotiated. Here, I will end by touching on another subject. One sometimes hears advocates of a single-payer national health insurance program in the United States advocate Medicare-for-all or Medicaid-for-all. After all, the argument goes, these programs already provide health insurance for 40% of all Americans. Why not the rest.
However, advocates of this approach often seem to have in mind the old-style traditional versions of Medicare and Medicaid, with government making payments directly to health care providers–and health insurance companies being eliminated. But given the modern form of these programs, supporting Medicare-for-all or Medicaid-for-all means, yes, supporting private health insurance companies under a different set of rules.
Indeed, when when you read about low administrative costs for Medicare and Medicaid, it’s worth remembering that they are outsourcing many of their administrative costs to private health insurance companies. It’s also worth remembering that neither Medicare nor Medicaid is self-supporting. For Medicare, there is a widespread belief that that program is funded by a combination of payroll taxes and the premiums paid by the elderly, but those cover only about 55% of total Medicare costs, and the rest is general federal tax revenues. Medicaid is funded by a mix of federal and state tax money. It would seem peculiar to advocate a sweeping national health insurance reform that sought to re-allocate the insurance premiums now paid by employers on behalf their employees into Medicare, so that Medicare could turn aorund and pay the money to the same private health insurance companies that would have received it anyway.
