How Much Selection Is Left in Medicare Advantage?

The Medicare Advantage program – the private plans offered to beneficiaries as an alternative to traditional fee-for-service Medicare – has grown to comprise 30% of beneficiaries but has been troubled by favorable selection since its inception more than 30 years ago. To address the selection issue Medicare drastically changed its risk adjustment program starting in 2004 and subsequently imposed longer lock-in periods on beneficiaries. Surprisingly, some previous work has argued that favorable selection actually increased following these changes. In other words, Medicare paid more than if all Medicare Advantage enrollees were in Traditional Medicare and the policy changes increased the excess payment even more. In this paper we re-examine the amount of favorable selection between Medicare Advantage and Traditional Medicare during the years 2001-2010. We use a much larger data set and extend the time period of prior work. We find that far from being exacerbated, favorable selection was markedly reduced by the policy changes. We interpret our findings in light of the main economic theories about selection in health insurance.