Does Medicare Advantage also known as Medicare Part C) cost too much? If the answer is yes, as mounting evidence suggests, then Congress may consider trimming it as it strives to reduce the long-term costs of Medicare.

When Congress set up the Medicare Advantage program, it funded it through a complex set of subsidies. If the plans, provided by private companies, met certain cost guidelines, they would receive government payments, which they then could use to offer more benefits or to attract more enrollees.

Some of the government payments to MA plans have been controversial. A recent GAO report suggested that Medicare has wasted some $8 billion over 10 years on payments to providers in an experimental program designed to improve quality of care. The nonpartisan accounting branch of Congress urged Medicare to cancel the program. In response, Medicare officials told The New York Times they had no plans to end the program.

At the heart of the GAO report is a long-running struggle to find ways to improve quality of care while reducing costs. Several demonstration programs have been seeded through the Affordable Care Act to determine whether varied incentives to providers make a difference. Part of that effort identified and rated MA plans, providing subsidies to those plans that improved care, although GAO auditors claim that even the most mediocre-rated providers are receiving government cash.

GAO analysts also noted that the size of the MA bonuses were far out of proportion to other demonstration projects, that is, Medicare was spending too much and seeing little relative improvement in care:

"The MA Quality Bonus Payment Demonstration dwarfs all other Medicare demonstrations — both mandatory and discretionary — conducted since 1995 in its estimated budgetary impact and is larger in size and scope than many of them. Our review of CMS (Centers for Medicare & Medicaid Services) and OMB (Office of Management and Budget) data shows that the estimated budgetary impact of the demonstration, adjusted for inflation, is at least seven times larger than that of any other Medicare demonstration conducted since 1995 and is greater than the combined budgetary impact of all of those demonstrations."

Medicare Advantage plans are managed-care options that Congress inserted into the program in 2003 as part of the Medicare Modernization Act. At the time, it was seen as a way to introduce innovative private-sector approaches to reducing costs. Those who signed up for up for Medicare Advantage plans understood they were an alternative to traditional fee-for-service Medicare. In exchange for paying variable premiums, beneficiaries were offered additional services, such as vision care, and they had capped out-of-pocket expenses.

Although it was hoped that Medicare Advantage could reap large cost savings for the overall program, it has actually been a drain on Medicare. In 2011, about a quarter of all beneficiaries were enrolled in approximately 3,300 MA plans sponsored by 175 MA organizations. In 2010, Medicare payments to MA plans totaled nearly $115 billion, or roughly 25 percent of all Medicare spending for Medicare Hospital Insurance (Part A) and Medicare Medical Insurance (Part B), the Government Accountability Office (GAO) reports.       

This isn't the first time the GAO has been critical of MA plans. Earlier this year, the GAO estimated that diagnostic coding used by providers resulted in up to $6 billion in higher payments to MA providers compared to the fee-for-service program. A report published in 2008 found that despite receiving rebates from Medicare for lowering costs, the savings didn't necessarily go to enhanced patient benefits or lower premiums.

The GAO also found that 87 cents of every dollar paid to MA plans went for medical care, 9 cents for administrative costs and 4 cents for profits. In contrast, 98 cents of every dollar that goes into traditional Medicare (Parts A and B) is spent on medical care.

While it's not fully known how much private providers are overbilling Medicare or if it's a widespread problem, what does that mean for the proposed radical reforms that will partially privatize Medicare? Reformers are proposing "premium-support" models that would give private insurers a major role in providing care. Beneficiaries would essentially be given public subsidies to pay for private policies, which in many ways could be an expanded version of Medicare Advantage.

The group Physicians for a National Health Program, which advocates a single-payer program, is not optimistic about the impact of expanded privatization:

"We now have considerable experience with risk adjustment between the private Medicare Advantage plans and the public fee-for-service Medicare program. The experience is not good. As Medicare has refined the risk adjustment tools, the private Medicare Advantage plans have found new ways to game the system, which have resulted in even greater overpayments for their patients who are healthier than the data submitted by the insurers would indicate."

A large question, however, is whether MA plans make sense within Medicare. As an alternative to fee-for-service plans, Medicare Advantage plans still have yet to prove that they are saving taxpayers money while improving care and expanding benefits. To date, a strong case hasn't been, although more study is needed.

An even larger concern, as the Medicare reform debate unfolds, is whether subsidies to providers offer sufficient carrots to lower their costs over time. Both Medicare Advantage and the Medicare Prescription Drug Plan (Part D) were funded with generous payments to private companies. Would the program be better off if the government reversed the model and forced providers to bid to be part of Medicare without the subsidies to participate? That's an essential question that needs to be asked as Congress mulls over long-term changes to the program. 

John is the award-winning author of 13 books and is a personal finance columnist/blogger for Reuters. His columns have been published in newspapers on five continents and he has appeared on various broadcast outlets including NBC, CNN and Bloomberg TV. He has earned 18 awards for his columns and investigative reporting, including the National Press Club award for Consumer Journalism.