In 2012, about 13 million seniors participated in Medicare Advantage (MA) managed care plans—about 27 percent of the Medicare population and twice as many as were enrolled just seven years ago.

This rapid shift to managed care by seniors may be just a first step towards a fundamental change in the way Medicare is delivered and financed. And it has the potential to transform the way long-term supports and services are provided as well.

Medicare managed care comes in many forms. Almost two-thirds of MA enrollees participate in HMO-type plans, such as Kaiser Permanente, where treatment is delivered by employed staff. A rapidly growing alternative is offered by preferred provider organizations (PPOs) where community physicians and nurses are under contract with insurers. Among other versions are Special Needs Plans (SNPs) that provide care for people with complex medical requirements, including those who are  very poor and very ill and who are eligible for both Medicare and Medicaid (dual eligibles).    

Typically, Medicare pays these plans a fixed monthly fee per patient. In return, managed care companies provide their patients with all necessary care, including all-important care coordination. These firms are at risk for costs, so if they can manage expenses, they may keep the extra payment as profit but if  their costs of care exceed the Medicare payment, they will lose money.  

Managed care is especially important for seniors with chronic diseases. It holds the potential for far better care than traditional fee-for-service Medicare, which is often chaotic, disorganized, and duplicative. Yet, MA plans carry their own risks for patients. Unless financial incentives are correctly designed, the firms that operate these plans can be rewarded for discriminating against the sickest patients or denying care to high-cost participants.

Do MA patients use less health care than traditional Medicare enrollees? And is that a good thing, or a potential problem?

So far, the experience is mixed. A December, 2012 study  for the journal Health Affairs found that MA patients were one-quarter to one-third less likely to visit hospital emergency departments, likely to spend less time in the hospital, and less likely to receive outpatient surgery. On the other hand, rates of doctor visits were about the same as in fee-for-service Medicare.

MA patients were less likely to have elective knee and hip replacements but more likely to have heart bypass surgery. A separate insurance industry study found MA patients were less likely to be readmitted to the hospital within 30 days of discharge.  

Medicare also measures quality and safety for both MA plans and fee for service providers. By these standards, MA quality is improving. For several key outcome measures, such as controlling high blood pressure and managing diabetes, HMOs scored significantly higher than PPOs. Starting in 2012, Medicare began paying high quality MA plans a bonus.  

Medicare uses a star rating for MA plans (1 is the lowest, 5 is the highest). In October, it reported 127 plans had 4 or 5 star ratings.

For now, MA plans do not necessarily save Medicare money. In fact, for several years MA plans have been getting higher Medicare subsidies than fee for service providers. The 2010 health law will gradually reduce the level of these subsidies and plans will have to find ways to provide high quality care for less money—the challenge that fee for service Medicare providers already face.

MA plan have enormous potential to better coordinate care for seniors and others with chronic disease. Someday, they may also become the basis for a system that integrates medical care with long-term supports and services. For now, MA plans in all their forms remain a work in process. They have some real benefits, including premiums that are substantially lower than for fee-for-service. But consumers need to consider these plans very carefully. And so do policymakers.