Medicare Advantage Is Costing Taxpayers $76 Billion More Than It Should

Published July 2026 · 12 min read

The Promise vs. The Reality

Medicare Advantage was built on a compelling premise: let private insurers compete for Medicare beneficiaries, and market forces would deliver better care at lower cost than the government-run fee-for-service system. It's the kind of idea that should work — competition driving efficiency, innovation, and value.

Instead, the opposite happened. According to MedPAC's March 2026 Report to Congress, MA plans are paid 114% of what Traditional Medicare would spend on the same beneficiaries. That 14% premium — multiplied across ~35 million enrollees — amounts to $76 billion in additional federal spending per year.

To put that in perspective: $76 billion is more than the entire budget of the Department of Homeland Security. It's roughly what the federal government spends on veterans' healthcare. And it's growing every year as more beneficiaries enroll in MA plans.

How We Got Here: From $24B to $76B

A decade ago, when roughly one-third of Medicare beneficiaries were enrolled in MA, excess payments totaled about $24 billion per year. That was already a problem. But the combination of surging enrollment and persistent per-person overpayments has tripled the taxpayer cost.

Where the Money Goes: Market Concentration

The Medicare Advantage market is dominated by a handful of massive insurance conglomerates. UnitedHealth Group — the largest health company in the world — holds 26% of MA market share (down from 29%, partly due to regulatory scrutiny and DOJ investigations into its coding practices). Humana has climbed to 20% (up from 17%), making it the second-largest MA insurer.

Together, just two companies control 46% of the entire Medicare Advantage market — serving roughly 16 million beneficiaries and receiving hundreds of billions in federal payments. The top five insurers (adding CVS/Aetna, Elevance Health, and Centene) collectively control about 67% of MA enrollment.

This is not what "market competition" is supposed to look like. When two companies control nearly half the market and all of them are paid more than the government alternative costs, taxpayers aren't getting the benefit of competition — they're subsidizing an oligopoly.

The Coding Game: How Insurers Inflate Payments

A significant driver of MA overpayments is coding intensity — the practice of documenting more diagnoses per patient than providers typically do under Traditional Medicare. CMS pays MA plans based on "risk scores" that reflect how sick their enrollees are. Sicker patients = higher risk scores = higher payments.

MA plans have powerful financial incentives to make their patients look as sick as possible on paper. They send nurses to patients' homes for "health risk assessments," hire coding specialists to review charts for undocumented diagnoses, and use AI tools to identify coding opportunities. The diagnoses may be real — but they're often conditions that wouldn't have been documented in a normal clinical encounter.

MedPAC estimates that coding intensity adds 3-4% to MA payments beyond what health status alone would justify. CMS applies a coding intensity adjustment to partially offset this, but critics — including MedPAC itself — have long argued the adjustment is too small. On ~$534 billion in total MA payments in 2026, even 3% coding inflation represents $16 billion in excess payments.

The Libertarian Case Against MA Overpayments

Here's the irony: Medicare Advantage was designed as the free-market alternative to government-run healthcare. Private companies, competing for customers, would deliver better value. That's a sound principle. But MA in practice has become something very different from the free-market ideal.

In a real market, companies compete on price and quality. Consumers choose, and inefficient providers lose customers. But MA plans don't compete on the price they charge the government — those rates are set by CMS benchmarks. They compete on the benefits they offer enrollees, funded by the excess payments they receive from taxpayers. The supplemental dental, vision, and hearing benefits that attract seniors to MA? They're paid for by you.

This isn't market competition — it's a subsidy with extra steps. Taxpayers pay 14% more, insurers pocket the margin, and beneficiaries get "free" benefits that are actually funded by federal overpayments. No business would survive paying a contractor 14% more than doing the work in-house while the contractor reported record profits. Yet that's exactly what Medicare does, year after year.

What Would Reform Look Like?

MedPAC has proposed several reforms to reduce MA overpayments:

• Set MA benchmarks at 100% of Traditional Medicare costs — eliminating the built-in premium that funds excess payments
• Strengthen the coding intensity adjustment — increasing it from the current level to fully offset documented coding inflation
• Require MA plans to return a percentage of savings to CMS — ensuring taxpayers share in any genuine efficiencies
• Increase transparency — requiring MA plans to report encounter data with the same rigor as fee-for-service claims

The insurance industry, predictably, has fought these reforms aggressively. MA insurers spend more on lobbying than almost any other healthcare sector, and they've been remarkably effective at maintaining favorable payment rates regardless of which party controls Congress.

The C-SNP Surge: A New Revenue Frontier

One of the most notable trends in 2026 is the 45% surge in Chronic-condition Special Needs Plan (C-SNP) enrollment between 2025 and 2026. C-SNPs are MA plans designed for beneficiaries with specific chronic conditions like diabetes, heart failure, or chronic lung disease. They receive higher risk-adjusted payments from CMS — and insurers have aggressively expanded into this space.

Overall, 23% of all MA enrollees are now in some form of Special Needs Plan. While SNPs can provide genuinely better-coordinated care for complex patients, the financial incentives are clear: these plans attract the highest-acuity (and highest-payment) beneficiaries. The question is whether the higher payments translate to meaningfully better outcomes — or simply higher insurer revenue.

Looking Ahead: $100B+ by 2030?

If current trends continue — MA enrollment reaching 57% by 2030 and per-person overpayments persisting — annual excess payments could exceed $100 billion within four years. Over a decade, cumulative overpayments could top $1 trillion.

That's $1 trillion in taxpayer money paid to private insurers above what it would cost to provide the same beneficiaries with Traditional Medicare. Whether you view that as a necessary investment in better care or a massive waste of public funds depends on whether you believe MA is genuinely delivering superior value — and the MedPAC data suggests it isn't.

The numbers are clear. The question is whether anyone in Washington has the political will to do something about it.